by Jason Bodner

December 1, 2020

In World War II, the Center for Naval Analysis had a problem to solve. U.S. bombers were getting shot down over Germany. Analysts needed to figure out how to reduce the casualties. They tackled the problem by collecting tons of data on all the flights that made it back. They painstakingly logged and mapped all bullet holes they found on the returned bombers.

The data showed a clear pattern: The damage was mostly on the wings and central body of the plane:

Bomber Damage Data Image

The data led them to solve the issue logically by reinforcing the wings and body.

But before the Navy set about to re-armor the planes, a Hungarian-Jewish statistician pointed out that the analysis was totally wrong. Abraham Wald had fled Nazi Austria and worked in New York to help the U.S. in the war. He observed that the data collection was flawed. It only considered surviving bombers.

The critical missing data were the planes that did not return. It turned out that all the bullet hole data mapped the areas on the planes that could survive gunshots and still remain airborne.

The black areas were the vulnerable parts, Wald said. This revelation caused reinforcement to be focused on the black spots. This resulted in fewer fatalities and more successful bombing missions. This is a classic example of “survivorship bias.” That means we only consider the successes and ignore the failures.

It happens all the time in the business world. Think about the amazing success stories of Steve Jobs, Mark Zuckerberg, or Elon Musk. These college dropouts blew off college and became billionaires. The sad truth is that the media never profiled the thousands of failed entrepreneurs who risked all and lost all.

I can think of few places where survivorship bias is more dangerous than investing. Stocks can be an ideal setup for survivorship bias. Media outlets will focus on stories of stocks that made magnificent gains, but they rarely focus on the army of losers. Professor Hendrik Bessembinder found that in the last 100 years, only 4% of stocks are responsible for all the gains of the entire stock market. The other 96% of stocks couldn’t meet or exceed the return of Treasury bills.

Talk about bias… a tiny fraction of stocks inspired generations of would-be investors to try their luck. And once again, we tend to hear all about those who went from obscurely struggling to obscenely rich.

Take the fabled rise of Dan Zanger. He went from pool cleaner to yacht owner. In just two years, he turned under $11,000 into $18 million – or so the story goes – but let’s all observe a moment of silence for the many thousands of traders who weren’t nearly as lucky as Dan, and lost their shirts.

The truth is, analyzing stock data is like anything else: you get out of it what you put in. In computer science, the saying is: Garbage in garbage out. If you feed it dirty data, you’ll get crappy output.

So, when looking at stocks you want to consider every angle. I direct my computers to analyze a monstrous amount of data. We look at over 120 individual points of data on over 5,500 stocks every day. After that first pass, each stock undergoes many individual computations and is scored across 29 factors.

Then all the stocks are fed through another set of algorithms to identify when Big Money is trading them in an unusual way. This way, we leave no stone unturned. When Big Money is buying the best quality stocks, I will focus my energy on those stocks when creating a buy-list. This method has proven very helpful to me over the years in identifying the outlier stocks of the market – like those special 4%.

It also helps us identify which sectors the Big Money is moving in and out of on a consistent basis.

Last week was a short (3-1/2-day) week due to Thanksgiving. Yet even in those 3-1/2 trading sessions (Friday was a half day) we noticed a huge trend continuing. The “catch-up trade” is alive and well. Money is being deployed in previously unloved sectors left for dead in a COVID ravaged economy. But as news of vaccines gains momentum, so do the stocks set to benefit from an economic recovery.

Value and small cap stocks were gobbled up through the beginning of November. Sectors like Real Estate and Financials suddenly saw inflows of capital as the prior tech-friendly stocks were held back.

Last week we noticed something new: Even energy stocks are getting love now. These were the weakest of weak stocks in recent months. Yet this past week saw a shocking 137% of the energy universe bought up by Big Money. Materials and Real Estate were the second and third most bought sectors. And it’s big buying too: when a sector turns yellow, it means more than 25% of it is bought and that is noteworthy.

MapSignals Sector Rankings Table

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

But before we get carried away, let’s not let the recent events cloud what has been working for years now. Technology stocks have propped up this entire market for a long time now. This month they are taking a breather as other stocks play catchup. I suspect this trade will lose steam soon and there will be a flow of capital back into the prior “juice” stocks, namely tech.

Be on the lookout for an overbought Big Money Index in the coming week or so. This should lead the market higher in coming weeks until an eventual tipping point happens, and we see an inevitable market correction. When that happens is when you want your buy list ready for acquiring prior winners.

Survivorship bias almost led to more fatalities and losses by protecting the least vital targets on U.S. bombers in WWII. Don’t let something similar happen when recent data clouds longer-term stock data. The key is the meaning of the data – what information the data tells you. Remember what Daniel Keys Moran said: “You can have data without information, but you cannot have information without data.”

All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
“Analyze This!” (Late 2020 QE-Edition)

Sector Spotlight by Jason Bodner
Overcoming “Survivorship Bias” in Stock Market Analysis

View Full Archive
Read Past Issues Here

About The Author

Jason Bodner

Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. All content of “Sector Spotlight” represents the opinion of Jason Bodner

Important Disclosures:

Jason Bodner is a co-founder and co-owner of Mapsignals. Mr. Bodner is an independent contractor who is occasionally hired by Navellier & Associates to write an article and or provide opinions for possible use in articles that appear in Navellier & Associates weekly Market Mail. Mr. Bodner is not employed or affiliated with Louis Navellier, Navellier & Associates, Inc., or any other Navellier owned entity. The opinions and statements made here are those of Mr. Bodner and not necessarily those of any other persons or entities. This is not an endorsement, or solicitation or testimonial or investment advice regarding the BMI Index or any statements or recommendations or analysis in the article or the BMI Index or Mapsignals or its products or strategies.

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