“The Paddle Strategy: Profiting in a Bear Market”

By Travis Johnson, Stock Gumshoe, January 24, 2008

Just wanted to share a few words about this teaser, mostly because I have gotten sooo many emails about this one.

Which is not a surprise, of course — it’s no coincidence that this email ad has been circulating heavily over the last couple weeks as investors have nervously been watching the market make wild moves, and investing pundits have been letting us all know that the sky is falling and the recession is coming (if it’s not already here).

I don’t know what the economy will be like in six months, or whether or not we’re in a recession. I don’t know if the housing market will recover this year, or next year, or in five years. I do know that most of the people making most of the specific predictions will be just as wrong as you or I would be. It is easy to see what the short term trend might be in the market, though even those guesses are often wrong, but it is very hard to tell when a bear market is going to lead to 20% losses versus 35% losses versus 17% losses, and when it will end — just as NBER often takes a year or two to confirm when the economy was technically in a recession, so bear markets are very hard to see the beginning and end of, whether you’re in the middle of one or not.

But on to the specifics — what does this teaser offer to sell us? It’s from Dan Amoss’ Strategic Short Report. I wrote about another teaser they sent out earlier this year, called the Santa Monica Technique, which was really more or less a broadly worded teaser about shorting the market with put options.

“This controversial and little-used “paddle strategy” once launched the family fortunes of a U.S. President… Last year, it made as much as $10.96 million per day for one astute investor… And it now stands behind the top three most profitable market moves in history… ”

Most investors who have any kind of broad experience at trading will recognize that this “paddle strategy” that they’re talking about is simply betting against the market — which can be done in a variety of ways.

The long stories in the email teaser about the many fortunes that have been made by those who bet on a falling market serve to get the greed impulse going, since who among us doesn’t want to make a fortune like Joseph Kennedy or George Soros, both of whom had some very large profits on a small number of short bets.

And the “paddle” imagery? I can only imagine that this comes from “up the creek without a …”, but it could be something more exciting. Either way, what they call it doesn’t make much difference.

But what do we do with that knowledge? It’s easy enough to say that when the market goes down, people who bet that it would go down make money. They’ve got to be selling more than just that idea.

And it appears they are — they’ve got some kind of proprietary trading strategy. Sound familiar? Yes, there are probably just as many “proprietary trading strategies” as there are entries in the phone book. Lots of them probably work some of the time.

Unfortunately, the teaser doesn’t go into much detail about the criteria they’re using to identify short candidates, so I don’t know that I can tell you just want it is they’re selling.

Actually, that’s not true — I can tell you what they’re selling: Fear. As we’ve noted before, most newsletter teasers rely heavily on the greed impulse to get subscribers to sign up quick for a great instant win idea. But when investors are as skittish as many of us seem to be today, sometimes you have to pull out the fear impulse, also known, on down days in the market, as the “you ain’t seen nothin’ yet” threat.

And if you’re anywhere near retirement, or worried about losing capital, the urge to do something, to act in the face of a declining market and feel like you’re helping your portfolio instead of watching it collapse, can be very strong indeed.

Of course, what many people do is notice that the Dow dropped 15% and sell everything, or move their retirement mutual funds into the money market fund option. Even though that can seem like the only thing you can do, it also essentially means that you’re “seling low” — which is the opposite of what long term investors want to do.

So a teaser like this, that promises an active solution to a falling market, can be extraordinarily compelling, which is probably why so many people have emailed me about it.

I don’t have any clear cut answers. I can tell you that if you can pick stocks that go up, you can also pick short candidates — the things to look for and the skill required to identify stocks are more or less the same on the short side as on the long side. If you’ve any experience at valuing stocks, you can pick those that are overvalued, and bet against them. Unfortunately, betting against the market is usually more expensive than betting with the market, so you have to be even more certain that you’re right.

And, as Keynes is famously quoted as saying, “The market can stay irrational longer than you can stay solvent.” So you can’t necessarily count on a market, even a bear market, accepting your more rational valuation and driving a stock or an index down by the amount you need to be profitable, or in the timeframe that works for the bet you have placed.

That said, I can’t sniff out what the “five part strategy” is for picking short candidates because not many clues were given for