It Doesn’t Have to Be Hard

My financial advisor tells me that I am pretty good at beating the S&P 500 in the most complicated and convoluted way possible.

Now, keep in mind that my advisor, a good friend of mine from the Lehman days, is really an advisor in name only—I am what you would call “self-directed” when it comes to my brokerage account. But I have a feeling he’s going to be providing me with more guidance in the future as my net worth grows and my needs become more complicated. 

But yes, I beat the index in the most complicated way possible, using options and short selling and buying all kinds of off-the-run exotic country ETFs and foreign stocks and stuff like that.

At no point in the last 10 years—or ever, really—have I just been long a basket of US stocks. I have been skeptical of the stock market, even going back to times like 2013 when I shouldn’t have been skeptical of the stock market. It’s in my nature. I like stocks when they are really, really cheap, and they haven’t been cheap (in the aggregate) for most of the last 17 years. I like 6 P/Es and 6% dividend yields. I want to go back to 1982, the death of equities. Those are the types of opportunities I look for elsewhere in the world, and it has worked out for me. Buy things with a margin of safety. Having said all that, if I had bought SPY in 2013 and held it for 12 years, I would be pretty happy! And I wouldn’t have had to do all this work.

So, you might say that I’ve spent the last 12 years fighting the market. Buying puts for protection, watching the premium get vaporized, shorting stuff here and there, and it never works out. What it has done is reduce my volatility, but I haven’t participated—at all—in this huge bull market in US stocks. A missed opportunity. I never believed in it. I have been fighting it the whole way up. And I’ve done well, but I could have done better if I learned to stop complaining and love the bomb.

The Gold “Problem”

Now I am in a position where I am long something (gold), it is working, and I am finding it to be more than a little disconcerting. You mean you can actually own an asset and it goes up and you make money and don’t have to worry about it all the time? And what is it in my psychology that makes me able to do this with gold and not with stocks? 

It has been an incredible year, performance-wise, because of gold. And I was talking to my financial advisor about it, who’s seen many clients’ accounts go up significantly because one thing in their portfolio goes parabolic. Now it is happening to me. Good problem to have, I guess.

But like I said, disconcerting. You start to think these strange thoughts, like, when do I sell? And then you say, perish the thought, gold has been consolidating since 2011, and you don’t want to sell something that has been consolidating for 14 years a few months after it breaks out. My mother-in-law came to visit over the weekend. She was talking about Friday, October 10, when the S&P 500 went down 3% in a day, and she said she bought stocks. She said that she buys the dip and never sells. Can I borrow some of that conviction?

Now, as I have written a bunch of times in this newsletter, I think that the “never sell” strategy is a poor one. There is a time to sell everything. There is a time to sell stocks, and there will be a time to sell gold. I think the time to sell stocks is soon, but I could be wrong. I think the time to sell gold is several years from now. 

Everything is meant to be sold… eventually. Do you really want to buy the dip and hold forever? That is what the bitcoin people do. That is what Michael Saylor is doing. Should I be doing this with gold? Buying the dip and holding forever? Gold for the long run? Gold always goes up?

When you start saying this stuff out loud, it makes it seem like you are part of a cult, rather than an investor. There are periods when stocks, bitcoin, and gold go down a lot. Bonds went down a lot in 2022. Commodities have been down a lot a bunch of times.

Greed Is Infinite

The US economy, being what it is, is prone to boom and bust cycles. There are periods when the economy is doing well (expanding), and there are periods when it is contracting. We haven’t had a true contraction since 2008 (I’m leaving out the pandemic). Trump is doing everything he can to forestall a recession before the next election, and perhaps 2028. Who knows—maybe a recession is five years away. We can’t predict the future. But when I hear things like “buy the dip and never sell,” that’s faith, not analysis or judgement. The faith people never sell at the top. One of these days, you are going to roll a seven.

Craps is really a game about trading and money management. You’re playing the pass line, you have place bets all over the place, you’ve been rolling for 45 minutes, and you’ve made $10,000—what do you do? You’ve got $5,000 on the table, and if you roll a seven, you’re going to lose half your profits. Do you take the place bets down? Nobody ever does. They keep rolling until they seven out and then color up and walk away with half their money, rather than all their money if they had taken profits. 

At some point, you just make enough money, but greed is infinite. You could make a million dollars at that craps table, and it would never be enough.

Jared Dillian, MFA