The Guts of a Data Driven Investment System

Adam O’Dell | Friday, March 28, 2014 >>

Shares of Las Vegas Sands Corp (NYSE: LVS) tumbled 6% in three days after the casino giant recently announced a rule change related to blackjack games at its Venetian and Palazzo casinos.

And it’s no surprise that the change benefits the house, not the player.

Instead of winning $15 on a $10 wager (a 3-2 payout), blackjack players will now take just $12 on a $10 wager (a 6-5 payout) when dealt a “natural blackjack,” which is 21 on the first deal.

In changing the payout, Las Vegas Sands effectively tripled its house advantage.

Regardless of their strategy, blackjack players at Venetian and Palazzo will suffer.

Now, at this point I should confess…

I have never gambled.

I’ve never bought a lottery ticket (although a former boss gave me scratch-offs for Christmas once… they were fun).

I’ve never played a single hand of online poker.

And I’ve never stepped foot in a casino.

But I understand their frustration because, as an investor, I use mathematically-sound strategies designed to fit within the rules of the “game.” So rule changes like that can be devastating.

And while I understand well how (and why) professional card players use math to consistently win money. I also understand that more than 95% of card players don’t use math and consistently lose money. AND, I see shoot-from-the-hip investors make the exact same mistake!

That’s a pity because it doesn’t have to be that way…

About a month ago, in a large hotel conference room in Delray Beach, I pitched an idea to two dozen of my Dent Research colleagues. I’d been researching short-term cycles and a newly-introduced investment vehicle that, by my estimates, is the perfect tool for consistently harvesting income from the market.

I can’t give away all the details just yet because I’m still in my testing phase, but I’ll tell you today why my entire pitch can be boiled down to just two numbers… the same two numbers blackjack players value as well…

“Win-rate,” I said, holding up a single index finger.

“Payout,” I continued, holding up a second finger.

“These two numbers hold the key to our edge… to putting the odds on the side of our subscribers.”

You see, success in both blackjack and investing comes down to those two, simple numbers. That makes them important for YOU to know.

Win-Rate: If you play 100 hands (make 100 trades), what percentage of them can you expect to win?

Payout: How many dollars do you make when you win? And how many dollars do you lose when the play goes against you?

It really is as simple as that.

A little basic math will show that some combinations of win-rate and payout are guaranteed to drain your bank account over time. For example, if you win 50% of your trades and earn 75 cents for every $1 you lose, after 100 trades you’ll have lost $12.50. The calculation looks like this: (50 x $0.75) – (50 x $1) = -$12.50.

Other combinations of win-rate and payout are guaranteed to build your bank account balance over time. For example, if you win 40% of your trades but earn $2 (on your winners) for every $1 you lose (on your losers), after 100 trades you’ll have earned $20. Here’s the math: (40 x $2) – (60 x $1) = $20.

Now, the beauty of investment systems – as I see them – is there’s not a single “right” answer. You have wide latitude in determining the approach that suits you– your account balance and risk tolerance – the best.

You may be one of those investors who needs a high win-rate to feel confident in their system. Or you may be fine with being “wrong” 60% to 70% of the time because you know you’ll hit it big on your winners.

Both approaches are valid, assuming the mathematical combination of win-rate and payout shows positive results over the long run.

Even better, using a proven investment system gives you the power to play YOUR game.

To put that in terms of card players and casinos: as an investor, you don’t have to play the house’s game. You don’t have to passively accept the house’s odds, or its payouts.

Instead, YOU choose when to put your money in the market, and when to park it on the sidelines.

YOU decide how much profit you’re happy to accept, and how much you’re willing to lose before cutting your losses.

There’s no one-size-fits-all answer… and that’s liberating!

And that’s exactly what the new investment service I’m building is designed to do: give us more control… to both put the odds in our favor and to limit our exposure to risk.

Specifically, I have set four criteria:

  1. A win-rate greater than 50%. The hundreds of hours of back-testing I’ve done on this strategy so far, shows a win-rate of 60% to 65% is achievable. And of the first 10 beta-test trades I’ve taken, six of them have produced winners.
  2. A payout greater than 1-to-1. My back-testing showed that my system has the potential to earn at least $1.65 for every $1 in losses (a 1.65-to-1 payout). And of the first 10 beta-test trades I’ve taken, I’ve earned nearly $2 on the winners, while losing only $1 on those that went against me.
  3. A short-term commitment of capital. My system is designed to hold each investment for no longer than two weeks. That gives us flexibility to change course if the market changes quickly.
  4. Superior risk control. The investment vehicle we use will allow us to precisely limit risk. No more sleepless nights!

For example, investing roughly $1,000 on each of these ten trades (or $9,733 total, due to rounding), would have resulted in a net profit of $5,515, for a 56% return. And that was achieved in just two weeks!

Of course, my use of data-driven investment systems is nothing new.

I employ the same approach with Cycle 9 Alert, where I use mathematically-based research to recommend investments in outperforming market sectors. The difference between the new service I’m developing and Cycle 9 Alert is that we usually hold investments in the latter for two to three months at a time. With my new service, we’ll hone in on much shorter-term trends. This means my two services will complement each other well.

I’m still slogging away at the fine-tuning and beta-testing, but am nearing the point where I’ll invite a group of subscribers to help me put the strategy and system through its paces.

I’ll be sure to share more as we get closer to a launch over the coming months.

In the meantime, if you want more details on Cycle 9 Alert, click here.

And remember: do the math before you invest… or play blackjack.


Adam

P.S. Harry is holding a live Twitter event on April 8, from 4 p.m. to 4:45 p.m. During this time, he will answer any questions you have regarding his latest book, The Demographic Cliff. Make a note of this on your calendar, write down your questions, and then on the 8, use #democliff to ask what you want @harrydentjr.

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Categories: Investing

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.