Find your alpha by reading the tape
In the spirit of hope for a better 2021, let’s focus this week on something that can make a significant difference for anyone who applies it: It’s finding your alpha, your edge—by reading the tape and using that to leverage opportunities.
I’ve spent a lot of time talking about the importance of reading the tape in this blog because I believe—in all aspects of life—this skill is a distinguishing factor for successful people and organizations (in whatever form success is determined). Better still, it’s something that anyone can learn to do over time and with experience.
In this post, we’ll look at why it’s important to find an alpha—an edge—to succeed and how reading the tape helps us do just that.
First, is it trading or investing?
I’m often asked what the differences are between trading and investing. As I like to say, traders aren’t interested in the outcome of a company—they’re interested in the outcome of the market.
That said, both are looking to make money from the markets, but in the most traditional senses, “investing” is more often correlated with a long-game approach, whereas “trading” is more active, with purchases and sales (also called entering and exiting) taking place over shorter time frames, sometimes just moments.
In addition, professional traders know that to succeed, they can’t be emotionally wrapped up in their trades. They don’t get into the weeds, either. Investors, especially new investors, don’t always manage to keep their emotions in check.
Why it’s imperative to find an edge
In the months since I started to post Plunk blogs, I have come to realize that our information—our data and algorithms—are our most valuable products.
It’s better for us to hold our information and our algorithms, because the combination of insights and experiences that we bring to the table as a team—real estate, trading and investing, finance, technology and data science, among others—and our collective ability to read the tape within our industries is a distinct advantage, particularly when combined with the computational and analytical power of artificial intelligence (AI).
How does this relate to you?
Your alpha—your edge—is what sets you apart in terms of your ability to read people and situations and to derive competitive advantages from your observations. For it to be effective, you also have to be willing to take action.
Alpha, then, is observing and executing. When you hone the ability to do both, in essence you become your own strategic advantage, no matter what your goals are: investing or trading or figuring out who to date or which job offer to take.
There are several ways in which I work this, just to give you an example. I read news constantly, print and online, to absorb what’s going on locally, nationally, and globally, so that I can find unseen trends and connections. Along with human observation, it’s where I learn the most and develop my edge.
And when you strengthen your skills to the point where you create your own alpha, then no one can exactly replicate it.
Let’s take a quick look at how this could apply in residential real estate, for example.
Home prices are based on closed-sales data, which as we know from this blog has a 30-60 day latency. So the alpha in housing is in the comparables (aka, “comps”). You look at comps to make determinations, because sellers will want to go with the highest sold-price comp that they can, while buyers will want to go with the lowest, both of which are outliers.
Effectively, then, your alpha/edge is the spread between the outliers. Keep in mind, too, that because you know that they’re working with latent data, you can read the tape and use information you’ve learned to further strengthen your position.
Read the tape: Insight is everywhere!
SOURCE: Wikipedia, “Ticker Tape,” original source unknown
Alan Farley published a great piece on Investopedia, “The Vital Importance of Finding Your Trading Edge,” regarding finding alpha. We converge on many of the same observations that I’ve made in 30+ years of trading (even down to a mention of reading the tape).
The thing is, though, that while the Investopedia articles (Farley’s and another on tape reading by James Chen) help to define tape reading in its most fundamental ways in relation to trading, I’m asking you to take it further. I’m saying that to find nuanced insights for success, apply a quest for alpha to all aspects of life. If you can read the tape—the people and situations and surrounding circumstances—you’ll find your edge.
And here’s a fact—most people don’t pay a lot of attention to the details around them (and this is becoming even more of a differentiator as our individual and collective attention spans grow shorter). The information is out there—find it, apply it objectively (rather than interpreting it to suit your desired outcomes), and you’ll find greater success.
Here’s the thing: you never know when a little ripple of information that you pick up on will grow into a tidal wave of insight into a trend or an opportunity that you can leverage. So, pay attention to ripples. Look for them. If you do, you’ll invariably set yourself apart.
And this relates directly to my next point: remember that to win overall, you only need to be right 51% of the time. That gives you a lot of leeway to try things, to take risks. [Of course, the risks involved with trading and investing are far different than the risks involved with asking someone out, so as with any gamble, only play with what you can truly afford to lose.]
