KukaXoco Finance - TRADING PHILOSOPHY

Many statistical studies confirm that most uses of most popular investment strategies just don't work consistently. So we don't use them. Some comments, and links to solid studies on these issues. As a result, as Barry Ritholtz argues statistically, 90% of all investement products are crap! -- mutual funds, SPACs, hedge funds, private equity, ETFS - few beat benchmarks (such as the SPY) net of fees over a long-term investment horizon (5 to 10 years +). And one reason most go-long investment products are crap is that most patents (innovations that can produce alpha-returns) are crap, leading to: ▸ from 1926 through 2025, just 27.6% of stocks beat the broader market. Nearly 60% actually destroyed shareholder wealth, and the median stock delivered a lifetime return of -6.9%. A lot of CEOs replaceable with an AI CEObot.

BUT FIRST, IS IT ALL RIGGED?
Even assuming there exists financial trading techniques that work in theory, worked in the past, etc. - something worth putting your money into - something you put a lot of your smarts into - is it all rigged? Here is one lament:
A couple of months ago I wrote that I had stopped actively trading, stopped sports betting, quit fantasy football and the likes. I also spoke out against the culture of gambling taking over our country. The reason? In short, it is all fucking impossible to predict, there is always going to be sharper money with better leans on short term bets. Whether its massive 0DTE puts coming in on oil before the next ceasefire announcement, or someone seeing Conor McGregor limping into the ring and knowing he already had a leg injury last night before his fight, the rigging of both sports and financial markets is now beyond obvious. .... Then there are central banks, governments and policymakers distorting markets to the point where fundamentals feel/are irrelevant. [Trading has become a casino]: monetize attention by keeping people emotionally activated every waking minute of the day. People celebrate that you can trade cryptocurrencies 24/7. That is a bug, not a feature.
▸ QTR's Fringe Finance, 12 July 2026
CAN BE USEFUL
HIGH PROBABILITY HISTORICAL TRADES

There are a variety of historical trades that have good track records across the decades. For example, Jeffrey Hirsch in his ▸ Stock Trader's Alamanac (an excellent buy) has or many years described the January effect - the rise or fall of the SP500 in January is mostly in the same direction of the rise and fall by year end, with good enough average returns to make relying on AI superfluous. A similar effect is seen in the direction of the first five days of January. Another involves mid-term elections. We provide a spreadsheet of data back to 1950 for you to play with: ▸ Spreadsheet of high probability historical trades.

PREDICTION MARKETS

There are some useful sources of economic investment advice. One such potential useful source is prediction markets. The Federal Reserve has a January 2026 paper, which conclude: ▸ Our results suggest that Kalshi markets provide a high-frequency, continuously updated, distributionally rich benchmark that is valuable to both researchers and policymakers. "We have shown that Kalshi-implied distributions are well-behaved, responsive to news, and comparable in forecasting accuracy to established benchmarks such as the Survey of Market Expectations and the Bloomberg consensus. In several cases, they provide unique insights -- particularly for variables like GDP growth, core inflation, unemployment, and payrolls, for which no other market-based distributions currently exist.

PROBABLY NOT USEFUL

Note: if all of the below is confusing, that's what the financial world is today.


THE 60 (stocks) / 40 (bonds) PORTFOLIO

A long time philosophy, probably no more. One article arguing this: ▸ The 60/40 portfolio died years ago. August 2026 (Apollo Global): The 60/40 portfolio is broken because equity returns are driven by AI concentration rather than the business cycle, while bond returns are now driven by fiscal constraints rather than cycle dynamics.


Graph from: ▸ Bonds are not doing their job, Trendlabs, 31 August 2026.

(UN)PROFESSIONAL MONEY MANAGERS / EQUITY FUNDS

August 2026: ▸ Stock-picking funds are performing as poorly as ever - just 13% of USA large-cap funds have outperformed indexes over the past decade, new data show. Despite the huge AI bubble in the stock markets, just 27% of actively managed U.S. large-cap equity funds beat their benchmark passive-fund alternatives in the 12 months ended June 30. ▸ Standard & Poors publishes an annual report on the performance of money managers, at least for active large-cap USA equity funds. For 25 years, in each year, the majority of these money managers underperformed the SP500, with 79% underperforming in 2025, the fourth-worst performance in 25 years. Most money managers of other types of funds: Mid-Cap, Small-Cap, International - also underperformed their respective indexes. And those funds that outperformed the indexes relied much on the AI bubble (which managers should get no credit for). Money managers replaceable with MoneyManageBots.

ETF.com, 24 June 2026 warning article: ▸ Are thematic ETFs a $300 billion trap for everyday investors?. These specially-designed (by money managers) ETFs have problems: over 60% of thematic ETFs have a Sharpe ratio below 1.0, meaning most aren't delivering strong risk-adjusted returns despite their popularity among investors seeking exposure beyond benchmark heavyweights.

Larry Swedsoe has an article: The seven sins of active fund management/[managers]: many are poor forecasters, rely too much on too much [useless] information, meeting with companies they invest in, thinking they can do better than the average fund manageer, short time horizons and overtading, believing everything they read [note: one reason Kukaxoxo Finance is building probability models of lying that affects investments], and group decision making at investment firms.

INCOME FROM GAMBLING/PREDICTIONS

The latest investment scam is the lure of riches from sports gambling and prediction markets, which starting in the 2020s, addicted millions of (young) idiots. As of June 2026 over $45 billon was wagered on two platforms, Kalshi and Polymarket. How idiotic? The top 1% of gamblers earn in the low-five figures. "Betting on a salary equivalent to a part-time job's wages isn't a wise decision to plan one's retirement around." 26 percent of Gen Z people consider sports gambling as part of their retirement investment plans. From: Never attempt to dollar cost average a coin flip, by Anthony Isola's "A Teachable Moment", September 2026.

FUNDAMENTAL ANALYSIS

Between ETFs inflows/outflows, pension rebalancing, random political disruptions, nonsense economics such as EBITDA and non-GAAP, socialist subsidies, yet-to-be-convicted corporate crimes, meme stock squeezes by gaming retail tradeers, and the Federal Reserve's 'cocaine' (rate cuts) or 'cold turkey' (rate hikes), fundamental analysis just is not that useful anymore, more for providing entertainment on CNBC and Bloomberg. Read Barron's for inspiration.

Yahoo Finance has a neat article: ▸ 3 brilliant quotes on the challenge of valuing companies, a classic aspect of fundamental analysis:

That is a lot of assumptions that you are making.
Yeah, absolutely. What choice do I have?

Do you know what the biggest intangible is? Future growth.

It is like having a kindergartner's report card and extrapolating
from that what they will be doing in college.
Some articles:

FUNDAMENTAL ANALYSIS - EBITDA

EBITDA - "Earnings Before Interest, Taxes (which includes tariffs), Depreciation and Amortization", an accounting scam slightly better than EBITDA-I - EBITDA before Income. EBITDA ignores critical costs, such as depreciation, which can distort a company's true economic picture in capital-intensive industries. When companies extend the lives of their assets to reduce depreciation expenses, EBITDA increases, even though the underlying cash outflows remain unchanged. If you rely only on EBITDA, you may miss the fact that the business is burning cash, depending on borrowing, or stretching asset lives unrealistically. More on the scam of EBITDA at: EBITDA and the warnings of Charlie Munger.

FUNDAMENTAL ANALYSIS - NON-TRANSPARENT COMPANIES

Citigroup announced a new platform for tokenized shares of private companies last week, describing it as a blockchain innovation. RED FLAG: If a private company's shares can increasingly trade like public securities, at what point should that issuer be required to provide public-company levels of disclosure? This is pure casino gambling. Enjoy it at your risk. But unless you are an insider, you will probably lose money.

VALUE INVESTING

From a Morningstart article: ▸ Is value investing dead?. "Value investing and its followers have struggled over the past two decades. That might be an understatement. The drought has lasted so long that some have understandably thrown in the towel." Value investing is built around a basic idea: Investors should buy stocks at a price below the value of their underlying businesses - a form of fundamental analysis. But determining the value of business is difficult. And what is determinable, everyone now has access to that information, so no profit edge.

LOSING PUBLIC PENSION FUND STRATEGIES

Real Clear Markets, 25 June 2026, has another example of failed investment strategies: ▸ The actuarial fiction hiding $5 trillion in public pension debt. Public pensions hide $5 trillion in debt by assuming that they can earn 7.0% a year with investments, while properly funded corporate pension funds only assume a return of 5.6^% a year. 86% of public plans assume returns above their own 23-year average. Over the past 20 years, 84% failed to beat a passive 60/40 portfolio, which delivered 7.9% annually against the public plans' average of 7.5%. Every plan in the sample trailed the S&P 500 over the same period, which returned 10.4%. Which, I suppose, creates the counter-strategy - whatever a public pension fund invests in, do the opposite.

TECHNICAL ANALYSIS

Most technical analysis techniques, especially moving averages, look good in articles and books on trading systems. But rigorous statistical analysis reveals most are not that profitable, as compared to just buying the SPY or GLD. Some articles:

Kevin Meneses Gonzalez, in a Medium article about using AI to predict the markets, offered some Python code to test out some basic technical analysis strategies. He tested 9 strategies to predict next month's stock return: 
PREDICTOR                          CORRELATION        R^2
---------------------------        -----------        ---
Drawdown from 63-day high             -0.26           6.6%
21-day realized volatility             0.23           5.4%
6-month momentum                      -0.19           3.5%
3-month momentum                      -0.19           3.5%
Distance from 200-day MA              -0.18           3.4%
1-month momentum                      -0.15           2.3%
12-month momentum                     -0.10           0.9%
RSI(14)                               -0.09           0.8%
Recent volume surge                   -0.01           0.0%

To quote: "First, nothing here comes close to explaining most of next month's return. The best single predictor accounts for roughly 6.6% of the variance. The other 93% is noise, news, and everything else that moves markets."
GANN SQUARES

William Gann was a trader in the early 1900s who invented his system of Gann lines, squares and triangles. Some people swear by their use, but you have to wonder. Gann couldn't make much money trading using his Gann techniques. Those who can do, those who can't write books, which Gann did (and have many other traders in the following years) and made a lot of money by selling books. Which he lost with further trading in the stock market using his techniques.

CANDLESTICKS

Most candlestick patterns are not statistically profitable over the long-term. While there are a few patterns that are highly profitable, they occur do infrequently to be of little use beyond generating some fun, spending money. Some papers:


ARTIFICIAL INTELLIGENCE

Despite the buzz of chabot LLM AI models for trading, assuming that such models provide higher returns, that everyone has easy access to them means that such returns will quickly evaporate (as have other profitable systems, once popularized, soon lose all power - especially with the biggies on Wall Street using their AI to capture most of the profits).

In the past, most funds that have tried to trade stocks and ETFs using AI-generated signals have been unsuccessful, either losing money or underperforming the relevant benchmark index. Indeed, if modern AI is trained on all of the Internet filled with commentary from fund managers and pundits who can beat the indexes, how useful can they be?

At best, AI is good for increasing a non-AI system by a few points (which KukaXoco is more than glad to exploit), this benefit can often be obtained from traditional multivariate statistical techniques such as VARIMA, for which the fitted parameters are clear and understandable. Or similar benefits can be obtained from other statistical techniques, such as k-nearest-neighbors. All of which KukaXoco is more than glad to exploit.

And when the current AI bubble pops, and it will, AI in trading will be disparaged. And it will pop, given the extreme weight of AI in the S&P 500: measures of concentration for market cap, returns, earnings, and capex (Apollo Global, Sept 2025).


BUY-AND-HOLD AND COMPOUNDING

The classic strategy for many individuals and funds. Problem? Doesn't seem to work well in practice. And sadly, it works better than the average (naive) retailer trader.


BUY THE DIP

When you are buying-and-holding, buying-the-dip seems a good idea. And buying the dip when some government agency will bail out the markets seems a good idea. BTD is a popular acronym is because it is a popular strategy. Maybe it shouldn't be.

RETAIL TRADING

This is trading done by individual investors. And it is dangerous, partly because such investors rely on all of the above.

PRIVATE EQUITY

Private equity has invested $200 billion in AI since 2020. What does AI think of private equity: "Institutional investors are over-allocated to private equity, the returns are not improving over time, GP-stake sales are not positive for limited partners, and PE funds using continuations are hiding bad assets. GP-led secondaries, according to Gemini, are thie "most limited-partner-abusive development in the private equity/credit industry."


PRIVATE CREDIT

Another financial sector repeating the RealEstate Credit crash of 2007/8. Some private credit funds have already gone bankrupt, or halting redemptions, more to follow. And part of this scam is that they get to assess themselves, with no independent auditors doing daily mark-to-market valuations, no public exchanges where information can be presented to investors (who can do their own valuations, etc.). An April 2026 article is righteouls sarcastic: ▸ The biggest short trade since 2008 is already live (A.Z. - Medium (locked). He writes on one analyst who wrote a letter to Treasury Secretary Bessent: "On $12.9 Trillion in Self-Marked Capital and the Retirement Savings of the American Public". One of the funds he analyzed, Cliffwater, reported zero non-accruing loans in its portfolio. Nemeth says he found 50 using nothing but public documents. Their reported Sharpe ratio - the measure of risk-adjusted returns - came in higher than Bernie Madoff's fabricated numbers. Fitch Ratings reports that the private credit default rate in their monitored portfolio hit 9.2% in early 2026 - worse than the peak during the 2008 financial crisis which was 6.5%. "But the underlying math - companies paying 11% interest on loans their revenue was never designed to service, an increasing share of borrowers adding interest to principal instead of paying it, default rates above 2008 peaks - does not improve on its own. It compounds