Tsaklanos his 1/99 Investing Principles is a set of rules to help investors make the right decisions. Stated differently, this set of rules helps investors become more aware of wrong decisions which are primarily the result of emotional and impulsive action. Bottom line it is meant to align investors to the asymmetric success formula of markets.
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 more ways in which Tsaklanos his 1/99 Investing Principles apply. Let’s break this down and apply it to the 3 major distinct phases that every investor knows: in the orientation phase, in the decisioning phase of buying or selling a security, in the post-transaction phase.
1. How to apply the 1/99 Investing Principles in the 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 decisions to buy or sell based on news articles as they are designed to sell advertising, not to be relevant data points for investors. 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 (99% of news is the opposite).
- Only 1% of price points on a chart are relevant while 99% is irrelevant. In a world of chart overload you have to go back to the core, and realize that only 1% of price points on a chart do matter. It is 1% of price points that help you identify dominant trends which is what it is all about for successful investing. One of the many cases is seen here, here, here.
- Only 1% of hedge funds and analysts are successful (hence, worth following) while 99% is average or below average (not worth following). There may be thousands of hedge funds but scientific research has proven that only 1% of them are outperformers, so you better ignore all news and results from all 99% of hedge funds, traders and other gurus. Identify only the 1% successful guys, and only use their activity and viewpoints as relevant. This site, GoKinfo.com, 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 guru Warren Buffet’s publications you would underperform significantly the S&P 500! You heard this very well. Stay away from the news, it hurts financial health. Exactly 1% of the analyzed 2000 hedge funds had consistent great results.
- Only 1% of the blockchain investment opportunities as well as and crypto investment opportunities are really attractive. The whole world is looking to find these ‘special’ blockchain investment opportunities. Some pretend they have access to restricted blockchain investment opportunities, and ask you to participate in some sort of funding. However, nothing is further from the truth. As explained in Why Ripple Is The Number One Blockchain Investment For 2019 And 2020 the number of blockchain investments that is open to the public and that has strong fundamentals is very (very) limited. The blockchain and crypto space is as asymmetric as can be when it comes to really juicy blockchain investment opportunities.
- Only 1% of times are specific markets running fast. It takes a long time before a major rally takes place. However, a market can run very fast if and when once “it” starts. That’s because markets run fast just 1% of the time. Anecdotal evidence of this in the precious metals stock market as well as silver market is there on the chart (also this gold article): the number of months in which there was a very strong run up is limited, less than 10 months in 20 years, which comes very close to our 1% rule.
- Only 1% of times is a trend changing. It determines 99% of the time that markets move in a certain direction (trend), see here.
- Only 1% of the time should investors be doing trades while 99% of time they should follow / research / 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 or the same stocks you continuously follow, you must evaluate intermarket dynamics / effects, upcoming sectors or markets, but also identify exit points.
- Only 1% of indicators have a real leading indicator significance/value, see here.
- Only 1% of the this-stock-will-make-you-rich is accurate while 99% is worthless. How many times did you hear or see the ‘become rich with this stock’. Just a tiny 1% is accurate over time, so you better carefully analyze first the probability and you’ll end up ignoring 99% of these stories. These are just some of the many cases: here, here.
2. How to apply the 1/99 Investing Principles in the decision making phase?
- Only 1% of the time should investors be doing trades while 99% of time they should follow / research / analyze. The surprising result of this is that investors should do trades a couple of days per year. It this this scarcity that will make investors think before they act, as opposed to act fast or impulsive.
- Only 1% of times will investors be able to make asymmetric returns while 99% of time returns will be average or below average. One specific and rather extreme case is market crashes: those are typically events in which 99% of investors lose money while 1% of investors make big money. So what is the way to play a market crash.
- Only 1% of stocks is worth buying while 99% will yield average or bad results. Remember, “less is more” in markets. As there are 50,000 stocks and assets to trade you must realize only 1% is worth following, and another 1% is worth trading and/or holding. That’s indeed 500 stocks and assets to follow, and some 5 (maximum 10) to hold. One of the many cases is here.
- Only 1% of stocks or assets or markets has a clear and outspoken chart setup that is worth a trade in while 99% is not. One of the common pitfalls is that investors choose a stock or asset because of fundamentals and/or because a guru told a nice story. The opposite defines success: when a stock or asset has a clear chart pattern that reflects a (new) bull market it is worth the investment. If no pattern is visible the answer is “no I don’t take this trade or investment.”
- Only 1% of time on the chart defines great entry and exit points while 99% is meant to follow and/or prepare the trade. Let’s apply this to a 5-year weekly chart: 1% of it coincides with 3 weeks in the 5 year time period which is optimal to take a trade (buy or sell). As a wise investor once said: “timing is not everything, timing is the only thing.”
- Only 1% of investors earn money with an IPO while 99% lose money. IPOs are not meant for you nor for me. The number of investors that really earn big money with IPOs are early investors, insiders, banks, etc. Many will try to get in right during the IPO but 99% will lose money. The vast majority of IPOs declines thoroughly in the 2 years that follow. In that period of time most investors give up, and sell with losses, only to see the IPO’ed stock go up after some 2 years. IPOs are a big trap if you don’t take this rule into account.
3. How to apply the 1/99 Investing Principles in the post transaction phase?
- Only 1% of the time should investors be doing trades while 99% of time they should follow / research / analyze. The surprising result of this is that investors should spend 99% of their time analyzing and researching which also includes working out their exit plan of the trades / investments they did. When exactly to exit, apply a phased exit approach or not, where would capital flow into after the exit, etc.
We will continuously add items to this list of 1/99 Investing Principles.