by Jason Bodner

February 17, 2021

Statistical Analysis.

Seeing those two boring words may have made you sweaty from bad high school memories.

Don’t worry, I won’t bash you with math.

It’s the concept that’s critical. Statistical analysis shapes our daily lives. Be careful when modeling huge data sets – you can arrive at expected outcomes, because expectations shape everything – speed limits, insurance premiums, weight-bearing beams in your house, life expectancy of people, cars, iPhones, and on and on. Whether they seem boring or not, you unwittingly rely heavily on stats every day of your life.

That’s why outliers are so vital. In statistics, an outlier is a data point that differs significantly from other observations. An outlier could be a real deviant observation, or a screwy measurement indicating an error. That’s why outliers are often excluded from data sets. Outliers can warp many a statistical analysis.

Outlier PictureBut outliers can also be priceless. Regular readers know that I’m always talking about outlier stocks.

Here’s when you throw out outliers: Imagine your kid feels sick. You measure her temperature with a touchless thermometer. The first reading says 99.2°; a little high so you do it again. The second reading says 145°: obviously wrong. So, a 3rd and 4th time each says 99.2°. You obviously throw out the outlier.

In my world, however, outliers aren’t thrown out. On the contrary: I throw out everything else!

 Ignoring outliers, as a blanket rule, can be extremely costly. Let’s revisit Superbowl 55/LV. Tom Brady, the new QB for the Tampa Bay Bucs, went to 10 of the big games in his 20 full years in the NFL. He won seven of them. That is a statistical outlier, a clear deviation from all other quarterbacks in history.

Do you throw him out of the data set? No.

Wayne Gretzky, hockey’s “Great One,” is arguably the most dominant athlete in any team sport of all time, scoring more points on assists alone than any other player in history, completely ignoring him being the all-time leader in goals by about 1,000. He is a visible outlier – way up in the top right corner here:

NHL Points Per Game Reg Season

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

Do we throw him out? I mean you could, but then you’ll be left with only those less accomplished.

Warren Buffett is arguably the greatest living investor. Do you ignore him simply because he’s the best?

Kids instinctively do what I do when it comes to stocks. They choose the best and chuck the rest. It’s rare to find a kid who would rather plaster a mediocre football player on their wall as opposed to a Tom Brady. Imagine a kid’s wall full of average unknown athletes, actors or musicians. Doubtful, right?

Yet when it comes to stocks, most people want to dive in the dumpster. One person’s junk is another person’s treasure, right?

Wrong! At least for me, when it comes to stocks. I say keep the outliers and forget everything else. And for good reason, too. Hendrik Bessembinder tells us clearly why. He wrote a paper titled, “Do Stocks Outperform Treasury Bills?” In it, he studied more than 26,000 stocks over 100 years’ time.

Boiling it down, he found this: Since the 1920s:

  • only 4% of all stocks accounted for 100% of the gain of stocks over U.S. Treasuries.
  • only 1% of stocks account for 50% of the gain of stocks over U.S. Treasuries.

Statistically, these tiny number of observances would be the outliers. If you ignored those few stocks, you would literally be throwing out any practical chance of beating the market.

I recently compared Tom Brady’s desirable outlier qualities to a stock: Nvidia (NVDA), a stock that appeared on of my quant-generated buy reports 77 times since 2000. More impressively, it appeared 53 times out of a possible 345 times since I formally started doing data science on stocks in 2014 (345 weeks have passed since July 1st 2014, when I made this my full-time career). That’s 15.3% of the time.

Tom Brady has appeared in 18% of all Super Bowls and 50% of those in his career. He won 13% of them and 35% in his career. See a pattern there? NVDA also won massively since it first appeared 2/15/2015, and it’s up 2680% since then, in times of trade war fears, product blow-ups and – oh – a pandemic!

NVidia Corporation

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

Now I’m not recommending you buy NVDA now. It is a great company, but the point I am making here is that when it comes to choosing stocks, not only should you not throw out the outliers, you should keep only the outliers. That’s where the gains are… Bessembinder’s long-term research proves it!  

This is important because I have been saying that the Big Money Index (BMI) was forecasting a selloff. It seemed to come on schedule in the week of January 21-25, but it only lasted six days. The powers that be wanted a stock rally to continue. So, brokers like Robin Hood and other online platforms halted buying in popular crusade stocks like GME, AMC, BBRY (I have no position in these stocks) against short sellers.

These short sellers had a much-needed stoppage of bleeding and so they no longer needed to sell their winning longs to fund their losing shorts. That meant the market stabilized and the pullback was short-lived. My data collection can’t account for unexpected interventions like we saw in late January, or lately.

So now buyers are back, and earnings have been great. While I had to shift gears after the late January selloff, the outlier stocks have ramped up ever since, but here’s the key point: We can spend valuable time trying to pinpoint the details of market direction until the hills wear down, so my interest is in finding the best outlier stocks out there. Like Tom Brady, they just keep winning, regardless of what the market does.

Focusing on mediocre stocks is an errand of someone afraid of losing, but focusing on winners is where effort pays off. Billie Jean King said, “A champion is afraid of losing. Everyone else is afraid of winning.”

Navellier does not own GME, AMC, or BBRY but Navellier does own Nvidia (NVDA), in Managed accounts. Jason Bodner does not own GME, AMC, or BBRY but he does personally own Nvidia (NVDA).

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
The Role of Central Banks

Sector Spotlight by Jason Bodner
Statistical Analysis for Smart Dummies

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

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