Game Is Rigged

Some traders and investors complain in social media that the game is rigged. This is true but it can work to their advantage.

In real life most games are rigged either intentionally or by nature itself. There are cases where casinos were caught rigging the roulette and slot machines. But the roulette may be rigged by natural forces because the table is not balanced well, offering an edge to certain numbers. In nature, big fish eats small fish, for example: game is rigged in favor of bigger fish. Solving complex math problems is a game rigged in favor of those who possess a mathematical mind. There are many examples of rigged games.

Since I joined Twitter in 2010 I remember people constantly complaining about the stock market being a rigged game. This is true because in recent years central banks have become major market participants driving stock prices higher.

The key idea is to turn a rigged game to your favor. I will give you first a trivial example of how I did that in a casino but I must point out that I dislike the casino environment and I only visit when I am on vacation and one happens to be close.

Some years ago I was on vacation to an exotic island and I visited a casino. I watched the results from about six roulette tables and based on my own metric I concluded that the game was rigged. I then waited for someone to make a large outside bet.

After 11 black in a row, someone made a $1000 outside bet on red. I immediately made a $100 outside bet on black, i.e., a bet in favor of a continuing streak for black. The rigged casino took the $1,000 and gave me $100. Only a stupid rigged casino would take $100 and pay $1000.

Now, you can try to induce from the above example some strategies for the markets. We know for example that the markets are rigged by central banks. We also know that every so often some traders and investors make some bearish calls or point to some supposedly bearish random patterns. For example, a tweet by someone with many followers on September 21 “warned” investors and traders about an “island reversal” in NVDA, as shown in the chart below:

It may be seen that algos and other savvy participants, investors and traders, were happy to take the money from the shorts. I warned in advanced about this random pattern. Yes, the game is rigged against naive chart pattern traders and in favor of algo traders and investors in growth stocks.

In general:

In trading

For now at least, the game is rigged in favor of shorting volatility, mean reversion and buying the dips. Anyone looking for negative momentum gets crushed. Mean reversion algos have been performing well this year and have generated good returns with proper leverage. Some machine learning algos have also done well.

In Investing

The game is rigged in favor of growth investing. Anyone looking at value factors lags behind.  FAANG stocks are up about 41% YTD based on equal allocation. In comparison, the DJIA is up 17%. The difference is large. Note that the ttm P/E of AMZN component in FAANG is about 252 but investors care about growth prospects and ignore overvaluations.

The game is rigged but there is plenty of room to profit from a rigged game. Those who complain do so because they insist in using failed strategies.

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Charting and backtesting program: Amibroker

Disclaimer

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