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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 show you how he uses sex, drugs & gambling to be a better investor. Enjoy!
People! Listen up. I have to admit something:
A couple of weeks ago, I dove deep into some sex, drugs, and gambling.
But am I ashamed? Heck, no. Because it wasn’t pleasure I was looking for… it was profits.
Today, I’ll explain what I mean…
Then I’ll reveal how these “vices” helped me identify two stocks to avoid…
And I’ll show you where to look for profits instead.
Tracking Consumer Spending to Find Big Gains
To kick things off here, a quick reminder from your Econ 101 class in college:
Nearly 70% of the US economy is fueled by people like you and me spending money. 70%!
That’s why tracking consumer spending can provide insights into the economy’s health — as well as point you to the market’s biggest future gains.
Most forecasters track consumer spending by looking at traditional data sets like Disposable Income and Retail Spending. Or they look at surveys like the Consumer Sentiment Index and the Consumer Confidence Index.
The thing is, those data sets are severely limited…
The Problem with Traditional Signals
For example, the data you see on retail spending is old. It tells you what happened about a month ago.
Furthermore, retail spending only tracks what’s happening at stores. It doesn’t include what we spend on experiences — from concerts and hotels, to travel and gambling.
In addition, these surveys cover just a tiny group of people. For example, the Consumer Confidence Index surveys just 5,000 households. That’s just 100 people or so per major US city. And the Consumer Sentiment data is based on just 500 people total.
So, can you use those data sets to forecast the future and position yourself for investment profits? Well, you can try — but in my experience, you won’t be successful.
As I’ve learned over the years, to be successful as an investor, you need to track something else:
Vice.
Vice, Vice, Baby
In 2013, I started publishing my proprietary Vice Index.
This is a monthly measurement of US spending on gambling, cannabis, prostitution, and alcohol.
There are two reasons I decided to track vice spending:
First of all, I believed its time had finally come. For example:
- Gambling. Up until recently, only 2 states offered legalized gambling. Today 48 states do. So now we can accurately track spending in this enormous, fast-growing sector.
- Prositution. Because the internet reduced barriers to participation and created marketplaces, prostitution became more accessible, and far easier to track.
- Marijuana. Per the CDC, in 2002, 1% of adults aged 45-54 surveyed said that they smoked marijuana the previous month. Fast-forward to 2014, and that number rose to 6% — and for those aged 26-34, the figure went from 8% to 13%.
And the second reason I decided to track vice spending is simple:
I believe it’s the Holy Grail of economic forecasting!
Forget about tracking a few hundred people. My Vice Index literally tracks a few million events per month. That’s why it can predict consumer spending and future market moves so accurately.
In addition, it provides insights into what’s happening right now. There’s no time-lag, like with traditional indicators. Spending on vice is the first thing to slow in bad times, and the first thing to pick up in good times. In fact, if you dig into the chart below, you’ll see that my data can predict retail spending 4 months in advance:
But that’s enough of me telling you about my Vice Index…
Now let me show you how it can “see” things that traditional forecasters miss…
It’s Time to Get Out of “Back-to-Normal” Stocks
Traditional economists are currently looking at (old) data that shows soaring retail spending.
So one of the trades they’re recommending is in companies that focus on experiences. For example, companies like Live Nation (LYV), because it dominates concert events, and Expedia (EXPE), because it dominates travel.
But remember: the data they’re looking at isn’t just old… it’s incomplete.
In contrast, after reviewing the Vice Index data, I can analyze companies like LYV and EXPE and get a picture that’s far more accurate — and here’s what I see:
These stocks are currently trading about 10% or 20% above pre-COVID levels, at a time when I expect their next quarter revenues to be 30% below 2019 levels.
So if you own these two stocks, it’s time to get out!
Imitation is the Sincerest Form of Flattery
As I mentioned, I’ve been using my Vice Index since 2013.
Does it work as an indicator? I’d sure say so. In fact, it’s helped me rank as one of the top forecasters in the world, including as Bloomberg’s #1 Jobs Forecaster.
And since imitation is the sincerest form of flattery, the UK recently started including drugs and prostitution in its economic data. (Vice added 1% to its GDP calculation — go UK!)
If you prefer to keep basing your investment decisions on incomplete data, do your thing.
But if you’re seeking insights that can help you put more profits in your pocket, you might consider using my Vice Index.
So in future columns, I’ll tell you more about it — and I’ll show you exactly how to use it.
Stay tuned!
In it to win it,
Andrew Zatlin,
Moneyball Economics
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