Bad Ideas

I’ve had some bad ideas in my day. One of them resulted in me getting stung by a bee inside my nose. Welcome to Jackass.

I’ll tell you another bad idea: spending almost a trillion dollars to build data centers all over the US. But this is capitalism, right? Booms and busts, gross misallocations of capital, herd behavior, all that stuff. I guarantee you that we will have many more data centers than we need, and a lot of them are going to end up as goat storage units. We think that we will have tens of thousands of these data centers powered by all these small nuclear reactors—not a chance. We are already starting to see pushback from the environmentalists. 

Pessimism gets a bad rap, but you know, there are periods in history when pessimism plays. I have a feeling that this is one of those times. And I believe that because I have seen it before, when spools of optical networking cable were going for pennies on the dollar in 2001. By the way, the optical networking bust plays a role in one of my short stories from NIGHT MOVES, “Disaffected.” Pick up the book if you haven’t already.

Which leads to derivative bad ideas—we think we will need all these nuclear power plants (which, by the way, not a single one has been built), so we will need a lot of uranium, so the uranium mining stocks are going bananas. Will we get some nuclear power plants? Sure, we will get some. In 2025? No, in 2035. Far fewer and far later than expected. There are also mini bubbles going on in rare earths, aerospace and defense, and elsewhere. All of this is very, very silly.

The main benefit to being a pessimist—or at least, a skeptic—is that you don’t get caught up in this stuff. Yes, there is money to be made, but there is money to be lost if you’re a late long. I am usually late to learn about this stuff, but I am pretty good at identifying peak stupidity, and we’re just about there. Very few people have what it takes to sell short stocks, but if you can identify the point of peak stupidity, you can stay out of trouble. By the way, Nvidia is now just 5% away from being a $5 trillion company.

What’s in Store for You

What is in store for you by being a sober, sane investor? A lot less volatility. Steady returns over time, instead of the breathtaking highs and lows. The SPX has returned about 16.1% annualized over the last five years. I have achieved approximately the same returns with a lot less volatility, because I hate volatility. I don’t have many 2% days in my portfolio—hardly ever. In fact, almost none.

I was talking to a local guy on the phone about an hour ago, and I was telling him I took a little hit in my portfolio today (because of metals), but then I went on to say that I never worry about money. Money is the worst thing in the world to worry about—there are much better things to worry about than money. And if you structure your portfolio and your life in the correct way, you will never have to worry about it. Yes, another plug for the Awesome Portfolio. 

But if you want to get more complex and exotic than the Awesome Portfolio, you can trade options, you can trade futures, you can short things… which would make you a hedge fund. And the whole purpose of a hedge fund is to deliver steady returns with less volatility. The pod shops are all up about 12% this year, a little behind the SPX, so you are getting the usual stupid articles from the journalists, saying, “Why would anyone invest in a hedge fund? You can just put it in an index fund.” 

The people who say this (not exclusive to journalists) are some of the dumbest people you will find in finance. Just drooling, slobbering idiots. XYZ pod shop tries to make 12% every year, whether the market is up or down, and they are usually pretty successful at it. The next bear market, people will get interested in hedge funds again, at least the ones that are nimble and know how to be short as well as long.

Low Opinion

As you can probably guess, I have a very low opinion of index funds. I mean, for people starting out, they’re great, but after a while you outgrow them. You get to about a $2 million net worth, your index funds are ripping around $50,000 a day, and you think there must be a better way. Well, your index funds are loaded up with all this AI/data center/nuclear stuff. I know I am going to get flambéed for saying this, but NVIDIA WILL GO DOWN SOMEDAY. It absolutely will, and probably a lot. 

Of course, the benefit of holding an index is that there is stuff in the index that will go up when Nvidia goes down, but when the top 45% of the index is all stuff that is correlated with Nvidia, there will be no place to hide. Again, I probably sound like an angry bear. I’m just trying to save your portfolio. Diversify across asset classes. Diversify internationally. Sell some stuff. Take some profits. Notice the change in your psychology when you take those profits. You will immediately feel better. Money won is sweeter than money earned, but you have to close out the trade to lock in the gains.

One more thing I should point out: All companies, all of them, go to zero eventually. Did you know that the average lifespan of an S&P 500 company is 16–18 years? That’s it. And that’s the average—half of them are lower than that. That’s not how much time a company spends in the index—that’s its lifespan.  

So, if you think you are going to hold Nvidia forever, I assure you that is a profoundly bad idea.

Enjoy your day.

Jared Dillian, MFA

P.S. One more thing—just recorded a new mix, the chilliest, smoothest one hour and thirteen minutes of music you will ever hear. Please listen to “Proof of Heaven.”