Keith Fitz-Gerald’s track record has been nothing short of impressive. In November, Modern Trader highlighted his 2013 projection for Twitter’s multi-year slump and his winning strategy to invest in companies that create “must own” products and services. Fitz-Gerald, the author and analyst behind Total Wealth Research and the chief investment strategist of financial research firm Money Map Press, has 34 years in the financial markets as an analyst, consultant and trader.
With the election in hindsight, Fitz-Gerald’s analysis in recent months has stood out given the surprising results that swept Donald Trump into office. The broader analyst narrative called for a sharp downturn should Donald Trump win the Nov. 8 election: Bank of America, Goldman Sachs and dozens of other financial institutions projected declines on the Dow Jones and S&P 500.
But Fitz-Gerald stood apart as the election approached. On Nov. 2, Fitz-Gerald laid out his risk assessment of the 2016 election. He explained that the risk that few people were counting on was the increasing possibility that a rally would take place as traders jumped back into the markets after the election.
On Nov. 5, Fitz-Gerald then laid out the increasing probability that a rip-your-face-off rally could take place the day after the election. Fox Business host Stuart Varney seemed surprised given the narrative that a major slump had dominated the news cycle. Sure enough, this scenario took place as investors jumped back into the markets.
With forecasting in focus this month, Fitz-Gerald sat down with Modern Trader to discuss where many traders go wrong in probability assessments, how to improve forecasting strategy and how a lifetime of martial arts discipline translates into being a better trader.
Modern Trader: Why are people not putting more time into their investment decisions and using the tools available to them?
Keith Fitz-Gerald: Most people make the fundamental error of trying to be right rather than trying to be profitable. On the surface, these sound like the same things, but they’re very different. If you’re trying to be right, that’s best reserved for the cocktail circuit at the country club. Because what you’re really trying to say is, “Hey, look at me, I got this one right.” Successful investors don’t care about being right. They care about what it takes to make money today.
They trade based on expectations; they make decisions based on expectations, they manage based on expectations, not predictions. Not even forecast, because they don’t want to worry about whether they’re right. The Internet has unfortunately compounded that problem. The Internet has done nothing more than arm millions of investors with a quadrillion bits of bad information.
Most investors operate on the Christopher Columbus school of management. They have no idea where they’re going when they embark on their journey. They don’t know where they are when they get there, and worse, they have no idea where they’ve been when they get back. So, again, they’re more concerned about [being] right than they are about being profitable.
MT: Where should somebody start to improve their forecasting?
KF: I start out with scenario analysis. I say, here’s the world around me. The following three or four scenarios are highly probable this year. If one of these scenarios comes to pass, I simply act like a football coach and adjust my playbook. You know if rates are starting to rise, I’m prepared for that.
If Putin makes a move, I’m prepared for that. If China blows up, I’m prepared for that. But I’m not worried about whether I’m correct or not with any of those assessments. What I’m concerned about is whether I have the right combination of holdings. Now, it’s fairly easy if you understand your scenarios because then you can say, if Donald Trump starts a trade war, here are the outcomes. Which companies will do well? It becomes an exercise in figuring out where your highest probability of return is, not your highest probability of loss.
MT: How do you go about selecting those scenarios?
KF: That gets into what’s important to individual
For example, if you’re an income-oriented investor, then obviously things like interest rates certainty will be of more concern. In my case, my personal goal is to make money with every single thing I own every single day. Now, it’s obviously not always possible. But I follow six unstoppable trends. Trillions of dollars back every one. I focus on must-have companies because I don’t like to lose money. I don’t want to take a bet based on some tech company that has nothing more than vaporware. I’d rather go with a company like Raytheon that has billions of dollars of contracts in defense that every politician in the world has to have. My thinking is on the one hand, very simplistic. But on the other hand, very elegant because it allows me to take a flexible approach. If a company misses a contract, or if a company makes an adjustment, I adjust to another play. It’s not a one-and-done decision, as a prediction is. That’s where people screw up. They go all in. Am I right or am I wrong? And if the answer is, you’re neither, then they don’t know what to do. They don’t have a means of adjusting.
MT: Raytheon is an interesting company, not just because of the military component, but also because of the cybersecurity component. Is it a must own product and service in the 21st century?
KF: I’ve considered cybersecurity to be a must have investment for nearly a decade now. The thing about cybersecurity is that hackers are getting more sophisticated. The nature of their attacks has become potentially more catastrophic. It’s moving from the simple stealing your credit card information to taking down and entire electrical grid. You’re moving into national security issues.
MT: Was there anything about 2016 that stood out the most to you when it came to markets and behavior?
KF: Having spent a lifetime in the martial arts, one of the things you realize when you get your first black belt is that you’re a student, not an expert. Everybody else looks at you and [believes that if you have a black belt,] you must be an expert. But ask anybody who has their first [black belt] and is working on a higher of level practice. You realize what a beginner you are. Now, the real learning starts. With 34 years in the marketplace as an analyst, consultant and trader, I was like many people filled with self-doubt about market conditions. I struggled with that. The advantage, of course, was I had all of those years of discipline and experience to override that emotional input that would derail somebody with a lesser skill set. I was very happy to see that my faith in markets held true when we got the rip-your-face-off rally on Trump’s victory.
Everyone was calling for a massive unwinding of the market should Trump win. I looked at all my analytics; I looked at all my social data. I looked at all of the years of experience around me and said, the conditions are right for such a rally. I’m pleased to see that hold. Because it reinforced decades of experience based on social analysis as they relate to financial conditions. So, to me, it was a year of reassurance.
In 2017, we’ve got a tough start. We’ve got to see where this goes next. I’m looking to what the social mood tells me. I’m looking to the social indicators. I see the market has pivoted from “woe is me” to hope and optimism.