Emotional Arbitrage

These days, it honestly feels like no one knows what the hell is going on anymore.

At least that’s what I’m seeing in my own personal bubble as of late. Maybe you’re feeling it too…

The big tech algos that feed me an endless stream of “relevant news” each day have at least one thing straight: I follow the stock market. That’s easy enough.

But my feed could best be described as a schizophrenic who just got their first blogging gig straight out of undergrad — ill-informed and all over the place.

One article proclaims the stock market is set to explode in 2024 as the U.S. skirts a recession…

The next warns that the floor is about to collapse, advising me to clutch my purse.

Of course, it’s great to hear different perspectives, but at this point it’s starting to feel a bit meaningless and shallow. Every day I see the same story play out.

One guy says one thing. Another says the opposite… They both get quoted by the same publication and my monkey brain feeds the machine with some clicks.

At the end of the day, these articles are designed to do just that: get clicks, and that’s pretty much it. CNBC doesn’t give a rat’s ass if whoever they’re quoting gets it right or not; they just want your attention so they can get the ad money and fill their pockets.

If we’re to consume this information obediently and without much introspection, it’s ultimately all — just noise… at best. At worst, it’s a distraction that paralyzes us — and, from an investor’s perspective, prevents us from making money.

Some would say that this is what they really want: to confuse you. And maybe that’s true. But I’m more of a Hanlon’s razor kind of guy; that is, never prescribe to malice what can otherwise be explained by stupidity (or perhaps in this case, greed).

So what can we all take from the directionless hodgepodge of financial forecasts we’re seeing right now? Well, perhaps the idea that if anything is certain at this pivotal moment of history, it’s that people are uncertain.

I know, that probably sounds like something you would read on a lazily written fortune cookie, and it’s a pretty useless sentiment on its face, but I assure you there is a benefit to recognizing that no one really knows what the hell is going on… that there is no real consensus anymore.

Amid Chaos, Opportunity Beckons

Whenever I tell people I predict stock movements for a living, the follow up, nine times out of 10, is, “Did you study that in college?” to which I often reply, “Yes, I studied psychology.”

Most people are perplexed by this response because they think the stock market is all about numbers. It is, of course, to a degree, but at the end of the day you can rarely find alpha in numbers alone. Hedge funds spend billions on quantitative analysis each year to try to do just that.

But if the market were dictated by some grand, objective math equation determining “true value,” then there would be no need or reason for human participation. We’d know exactly what everything was worth and there would be zero inefficiency to take advantage of.

Any good speculator understands, though, it is primarily the human factor that allows us to find alpha in the market. Emotions and naivete are our best friends… as long as they are being exercised not by us but by everyone else.

No one is entirely immune to either of these pitfalls, of course, but those of us who dare to believe we are capable of being more informed and in control of our emotions than the overwhelming majority, well, we thrive in the face of uncertainty rather than cower from it.

In short, you can get some conviction or get the hell out until the dust settles. I, for one, choose the former.

Here are a few specific ways I’m taking advantage of this emotional arbitrage right now…

Earlier this week I bought a considerably large stake in Alibaba (NYSE: BABA), which has had its share price decimated over the last couple of years. This has some to do with broader economic concerns about the Chinese economy, but also with the rise of competing companies like Temu.

These considerations are not to be ignored, of course, but they seem completely overblown given the current pricing for what is effectively China’s Amazon.

For perspective, you can pick up shares of Alibaba right now for cheaper than you could have when it first IPO’d in 2014. The company is also now valued at less than Temu, despite producing 5x the revenue.

On a price-to-earnings basis, this is literally the cheapest that $BABA has EVER been, with shares trading at a 30.25% discount to its historical valuation and roughly a 90% discount to earnings valuations seen as early as last year.

This kind of price movement can only be the result of stupidity, fear, or both:

Keep in mind that Alibaba is still the world’s largest online and mobile commerce company by gross merchandise volume. The company also just instituted a dividend yield of 1.3%, something that Amazon has still yet to grant its shareholders. 

BABA is also buying back shares like crazy, with $33 billion in cash on hand. This is NOT a company that you worry about going under; it is an e-commerce bellwether that, opposite to its American counterpart, is trading at a mouthwatering discount.

On the more speculative side, I’m also nibbling at EMCORE Corporation (NASDAQ: EMKR), which recently acquired KVH’s IMU (inertial measurement unit) segment. In short, this is a consolidated play on autonomous military technology, given that IMUs are a key component required for orienting and positioning missiles, drones, etc.

Of course, no one wants war or relishes it (with the exception of a few sadistic psychopaths), but it’s undeniable that conflicts are rising around the world, and one of the only ways to hedge against that chaos is to invest in the companies supplying ammunition to the “good guys.”

Another military supplier I’m big on right now can be found here. These guys are building the next generation of combat aircraft that will support the F-35, and eventually fifth-gen fighters, as loyal wingmen. It’s a big swing for the next Lockheed Martin, and if it hits, it’s going out of the park.

These are just a few of my recent convictions. Over the next few weeks, maybe I’ll share some more. In the meantime, let me know some of yours.

Turning progress to profits,

Jason Stutman

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