Tsaklanos his 1/99 Investing Principles reflects the asymmetric nature of success principles in markets. Stated differently, it is a set of rules to help investors become more aware of ‘right vs. wrong’ decisions. In essence the 1/99 Investing Principles can help align investors to the success formula of markets which is highly (extremely) asymmetric.
Another way to think it is the “less is more” rule in markets. But what exactly does this mean, and how to apply this?
There are many ways in which Tsaklanos his 1/99 Investing Principles apply. Let’s break this down and apply it to the normal flow of the investor: every trade starts with orientation, followed by a decision to add a position to the portfolio and subsequent portfolio management.
1. How 1/99 Investing Principles Work When Investors Are In Orientation Phase
- Only 1% of news is relevant to investors while 99% is noise. In a world of information overload you must be aware that you should not make buy/sell decisions based on news. Financial news is primarily not designed to truly help investors with an entry or exit decision. Also, financial media outlets are in existence to sell advertisements. Hence, only 1% of news articles is relevant. Note as well that news is a lagging indicator, not a leading indicator. Smart investors want relevant + leading indicators, and the sad truth is that 99% of news lagging + irrelevant for decisioning.
- Only 1% of price points has relevance, 99% is irrelevant. Financial and social media offer are full of charts. Next time you visit Twitter or a news outlet please look at the charts realizing that only 1% of price points on those charts matter. It is 1% of price points that truly help you identify dominant trends and turning points which is the essence of analysis which leads to successful investing. Here are some examples that illustrate this point: check the following articles here, here, here.
- Only 1% of hedge funds and analysts are successful while 99% is average or below average. There may be thousands of hedge funds but scientific research has proven that only 1% of them are outperformers. You better ignore all news and results from 99% of hedge funds, traders and other gurus. Identify only the 1% successful guys, and only use their activity and viewpoints as relevant. GoKinfo.com analysts did an amazing job calculating the returns of following Warren Buffet, among 2000 other hedge funds. Their lead data scientist calculated all their transactions, and compared to the S&P 500. Guess what? By following Warren Buffet’s publications you would underperform the S&P 500 significantly. Stay away from the news, stay away from hedge funds and gurus. It hurts your financial health. Exactly 1% of the analyzed 2000 hedge funds realizes consistently great results.
- Only 1% of times are specific markets running fast. It takes a long time before a major bull run takes place. A market can run very fast but it does so only exceptionally. That’s because markets create big momentum just 1% of the time. Anecdotal evidence of this in the precious metals stock market as well as silver market: the number of months in which there was strong bullish momentum is less than 10 months in 20 years which comes very close to our 1% rule.
- Only 1% of the time should investors be taking trades, and 99% of time they should research and analyze. The surprising result of this is that investors should spend 99% of their time analyzing and researching. It does not make sense to continuously look at your account, intraday price changes, etc. Most of the time investors must be evaluating markets and opportunities.
- It is only 1% of indicators that have a leading indicator value. Any charting service is going to offer you hundreds of indicators. It’s all worthless. Most, if not all of them, are lagging indicators. What really matters is leading indicators, and there are only a handful of them for each market or stock. If there is no leading indicator for a market or stock you better be very careful.
- Only 1% of the advertisements you’ll find about this-stock-will-make-you-rich might have any relevance while 99% is pure fraud. How many times did you hear or see the ‘become rich with this stock’. Just a tiny 1% of all those advertisements are truthful. You better run for the hills when you see these stock promotions and this-stock-will-make-you-rich ads.
2. How 1/99 Investing Principles Work When Making Decisions
- Taking trades should take only 1% of the time of investors while 99% of their time should go to analysis and research. The surprising result of this is that investors should only take a handful of trades per quarter. By restricting yourself you will feel obliged to take the best possible decisions as opposed to acting in an impulsive way.
- It is just 1% of time in which investors can run big momentum trends while 99% of time the market is sort of trendless. One specific and rather extreme case is the market crash: those are typically events in which 99% of investors lose money while 1% of investors make big money. So most of the time there is not a whole lot happening in markets or individual stocks. The number of days in which a market or particular stock gets really exciting is really limited.
- It is less than 1% of stocks that is worth your capital, more than 99% is not worth your time nor capital. If we apply this to North American stock markets there are close to 9,000 distinct equities. InvestingHaven’s research time has empirical evidence of 0.25% of stocks qualifying as ‘beautiful investments’ which means they have all characteristics of a smooth chart setup which leads to a reliable outcome. When we apply 0.25% to 9,000 equities we get some 22 stocks that are worth your time and capital in a year. More about this rule is explained in this article Investing Secrets: Beauty Results In Profitable Investments.
- Only 1% of stocks or assets or markets has a clear and outspoken chart setup that is worth a trade. One of the common pitfalls is that investors choose a stock or asset because of fundamentals and/or because a guru told an attractive story. Here is the issue: if it’s not in the chart it’s not there. Stories are created for entertainment purposes, they are created to sell advertisements. The chart has the real story, the chart IS the real story.
- The number of great entries into a market is very limited, think of it as 1% of the time will the market give you a great entry. Let’s apply this to a 5-year chart: 1% of the time coincides with 3 weeks in a 5 year time period. What we mean by this is that great entries can be taken in 3 weeks spread over 5 years. This can be 3x one week or one 3-week period, depending the chart structure. The point is this: it may take months and even years until a great entry opportunity comes up so you better do whatever it takes to avoid missing those few entry opportunities.
- Those who get really rich from IPOs are 1% of investors. IPOs are not meant for you, they are not meant for me. The number of investors that really earn big on IPOs are early investors, insiders, banks, etc. Many will try to buy a hot stock on the day of the IPO or soon after but 99% of retail investors will lose money in doing so. The majority of IPOs tend to decline in the first month (up until 2 years) after the IPO date.
3. How 1/99 Investing Principles Relate to Portfolio Management
- 99% of time and effort should go to researching markets and opportunities as well as analyzing portfolio positions. When to exit a position? When to take profits? Where is the ideal stop loss? What is the sector doing? Are there sudden turnarounds in an individual stock or market? Are there signals hinting at a turning point? Those are the questions to solve, not constantly opening and closing positions.
We will continue to add insights to this list of 1/99 Investing Principles, as they come up in our research.