Hey Trader,
Jim Cramer is an idiot. His advice to invest in what you know feeds affiliation bias.
He may be on TV every night. He stopped running his hedge fund back in 2001.
I’m still trading this market every day. My Burn Signal alerts keep racking up winners.
Affiliation bias is one of the worst habits you can carry into this market. It means buying a stock because you recognize the name and feel good about it.
That’s just another term for “I’ll do no research.” You skip the chart and the fundamentals and buy on pure emotion.
The market doesn’t care how you feel. Trade that way, and you’ve got a recipe for going bankrupt in this business.
Affiliation bias also has two close cousins. One chases whatever’s already going up.
The other buys the story instead of the numbers. The AI trade just showed you how that ends.
Beating affiliation bias and its cousins means doing the opposite of what Cramer preaches. I’ll show you how to spot each one before it costs you.
Let’s start with the habit Cramer’s advice feeds the most.
Habit One: Affiliation Bias
There are 88 different biases in technical analysis. All of us carry some of them.
Affiliation bias is the one I want you to watch for first. People feel good about Amazon, so they buy it on that feeling alone.
No matter how far it crashes, they convince themselves it doesn’t matter. It’s Amazon, after all.
Fear makes affiliation bias worse. Frightened money runs to a name it trusts and hides there.
Hiding works until the chart breaks.
Monster Beverage shows what affiliation bias costs. Buyers are paying 40x earnings for Monster and 30x for Coke.
A multiple is the price you pay for every $1 a company earns. The higher it climbs, the more perfection you’re paying for.
Monster is twice as expensive as Nvidia on a valuation basis. Those prices tell me this market isn’t close to a bottom.
If you worked for me and bought Monster here, I’d fire you. Nobody should buy a stock this overbought and overpriced at once.
I’m the guy who’s short Cracker Barrel right now. Nobody’s listening to me yet.
It’s a ridiculously overpriced stock. It’s also just starting to break down.
When it gets down to 50, people will understand what I’m talking about. Every stock gets exposed, no matter what.
You can only hide in a familiar name for so long before it gets exposed.
Habit Two: Buying What’s Already Going Up
The second habit is a close cousin of affiliation bias. DraftKings shows it at work.
ESPN and Fox are always pushing its product in commercials. When tech started falling, money rotated into DraftKings because it was rising.
The thinking went, “I’d rather buy what’s going up than what’s going down.” Nobody did any research.
Buyers figured football and basketball season would bring monster numbers. Then DraftKings reported earnings of 9 cents.
That’s almost like making no money. Revenue came in weak, and guidance got cut too.
I’ve been on the other side of this stock for a while. We shorted it in the Genesis COG account around 30 about a year ago and covered at 25.
Somebody paid $74 for DraftKings at one point. Corey Rosenbloom always says never fight the dominant structure.
DraftKings has been fading lower for a long time. Buying a rally inside that structure means fighting it.
Year-end money managers are doing the same thing with Pepsi, Coke and Procter & Gamble. They’re chasing one bubble to escape another.
Buying a stock just because it’s rising isn’t research.
Habit Three: Buying The Story
The third habit just burned Wall Street. Like affiliation bias, it swaps research for a feeling.
Managers bid on the narrative that AI would change the world. They piled into Micron, SanDisk and Western Digital way too late.
Some of them now think their careers in this business are over.
I’m a professor. Every model I teach prices a stock one year out.
The AI names got priced five years out.
Those expectations were completely out of whack. Some of these companies borrowed heavily, and now their growth has dropped from 100% to about 15% to 20%.
When a story cracks, the market loses its anchor for valuing anything. It hates that uncertainty.
It shoots first and asks questions later. That’s why I’d sell any AI rally right now.
A great story never tells you what to pay.
How I Beat Affiliation Bias And Its Cousins
I never trust the chart. I trust the value.
Affiliation bias and its cousins all skip that step. Before you buy your next stock, run these three checks:
- Check the multiple. Paying 30x for Coke or 40x for Monster should make you nervous.
- Check the dominant structure. If a stock has faded for a year, one good day doesn’t make it a buy.
- Price it one year out. If the price only works five years from now, you’re buying a story.
People think I’m a bear. I’m an opportunist.
I hunt for a misprice. When I find one, I grab it.
That same hunt drives my Burn Signal alerts. Each alert gives you the ticker and the signs that triggered it.
You also get a stock play and an options play. You decide how to trade it.
Leave the feel-good names to the folks on TV.
Professor Jeffrey Bierman
Creator of the Genesis COG System
