This Blackjack Dealer Changed How I Invest
Editor’s Note: We recently introduced you to Crowdability’s newest contributor, Andrew Zatlin. Andrew is known for being Bloomberg’s #1 Jobs Forecaster. We believe his “Moneyball” approach to data and investing can help you crush it. Today, he’ll tell you the story of how a Blackjack dealer from Atlantic City forever changed his trading strategy. Enjoy!
Once upon a time, back before the Weather Channel existed, fishermen were forced to rely on their powers of observation.
For example, maybe they’d notice that seagulls were gathering on shore. This was an indication that birds were getting the heck out of the water because a storm was brewing.
Who knows? Maybe ancient fishermen called this indicator the Seagull Statistic. And they “flocked” to it (hehe) because it had predictive abilities.
Well, my friends, this story nicely sums up what “alternative data” is all about: it’s all about using unconventional data to forecast what will happen in the future.
And that brings us back to my Vice Index — a way to use what’s happening in the world of sex, drugs, and gambling to predict future market moves.
Today, I’ll tell you about the origin of this predictive tool…
And then I’ll show you how I use it to get in (and out!) of the market at just the right time.
Enlightened by a Blackjack Dealer
Back around 2008, I found myself on a plane, chatting with a Blackjack dealer who’d recently moved from Atlantic City to Las Vegas.
He said Vegas was full of high-rollers who tipped well. In contrast, AC was filled with Wall Street “worker bees” — traders and bankers who came to blow off steam, get rowdy, and leave lousy tips.
Holy crap, I thought. This dealer just told me that AC is a big watering hole for Wall Street insiders. And since the livelihood of these insiders depends on how their firms perceive the future, I started to wonder:
Could gambling activity in Atlantic City be a reliable predictor of the financial markets?
Since I’m an economist, I decided to run some numbers — and what I found blew my mind.
Here it is in a chart:
As you can see, for almost three decades, Atlantic City gamblers had been accurately predicting interest rate movements with a 2-year lead.
Furthermore, this data passed multiple “sniff tests,” including:
- Statistically rigorous: it was based on millions of data points stretching back decades.
- Logically consistent: It made sense that Wall Streeters would be aware of — and base their behaviors on — interest rates. Interest rates affect their company’s fortunes, so interest rates affect their paychecks. And gambling is a way they can express those expectations today.
Then, to strengthen this trading signal even further, I expanded my data set to include other examples of vice spending, like prostitution and marijuana consumption. After all, vices are super-sensitive to personal finances: on the scale of wants vs. needs, a vice is pure want.
Today, I use my Vice Index in two ways:
First, to trade the overall stock market. And second, to trade specific stocks.
For now, let’s look at how we can use it to trade the overall market...
The Vice Index in Action
My Vice Index can be used to make two invaluable determinations:
- Timing: To determine when to get into the market, and when to get out.
- Conviction level: To determine how much capital to risk.
Here it is in action…
At first blush, this might look confusing. But it’s actually very straightforward:
When the Vice Index turns negative (i.e., below the dashed line), it’s time to exit the market.
And when it flips from negative to positive, it’s time to dive in.
Now, as you know, nobody can nail timing with 100% accuracy…
But as you can see above, the entry and exit points indicated by the Vice Index were absolutely spot-on. They gave perfect guidance for buying-the-dip, and for avoiding-the-falling-knife.
Furthermore, notice that the index turned negative towards year-end 2019…
Talk about a sell signal with amazing timing!
The All-Knowing Weatherman
Basically, the Vice Index is like an all-knowing weatherman…
It tells us whether we should get ready to enjoy some sunshine, or break out our umbrellas.
Right now, it’s telling us to be very bullish. Which means the party isn’t over yet!
In future columns, I’ll tell you even more about it…
And I’ll show you how to use it to trade specific stocks.
In it to win it,