It’s a simple concept: A group of investors makes small bets relative to one another based on trends or current events, then tries to replicate the results by buying in bulk at different points in the market.
“We use a proprietary algorithm that compares stocks to price forecasts and makes trades based on that,” he wrote. “It is far from perfect, and its predictions are often wrong, but since it was created in the ’70s, this strategy has been incredibly accurate at predicting the market every day.”
The theory is that by buying and selling stocks at different times, an individual can create multiple outcomes if the market moves in the right direction.
In particular, traders can win up to 80 percent of their total bets if the market moves in a right direction. If you bet 100 percent of your portfolio, the market move will push them up 75 percent.
The reason the strategy works so well, Bogle argues, is that “it’s much easier for you to remember which way the markets are going than which way they are going for a variety of reasons,” including investors’ memories of long periods when the market has moved in the exact opposite direction.
The biggest flaw is that “we need to know what’s going on for that to really matter,” he said.
The algorithm was created for trading, not predicting, but Bogle argues that it can predict many things based on its history. A good example of that was in 2005, when the market was down and “nobody thought it would get this bad. Everyone thought it was all going to go back up, but it didn’t, and so it was a huge miss,” he said.
Because it’s based on history, it can also pick up patterns that a single observer may miss. For example, in 1999, the Nasdaq was down by 60 percent after the collapse of Enron but the algorithm picked up that there were big shorts in telecom stocks, Bogle said.
Still, it’s not foolproof. It just uses how good the returns are in comparison to the average.
“If you’re buying 30 stocks and getting 80 percent of its returns, you can guess that there are going to be some crazy events,” Bogle said. “But if you bought 2 percent of everything and a big trend comes along and beats your return, you’re not going to be happy. You may just decide, ‘I’m getting a piece of the pie.'”
The good news, he argues,
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