Keep It Simple

My job is to come up with trade ideas, and sometimes they are few and far between, but I will tell you my best one right now, and I will do it in one paragraph.

I am bullish on oil and energy stocks. Sentiment is max bearish, positioning is max bearish, everyone has given up, the charts are starting to look interesting, and if you haven’t noticed, there is a lot of geopolitical stuff happening in oil-rich countries these days.

That’s it. That’s the bullish thesis.

I’ll add that I am a macro guy, and I paint in broad brush strokes, and I am a pretty average stock picker. If you asked me what individual names to pick to best capitalize on this trade, I would really have no idea. But I have TOP MEN working on it, and those picks will be in my newsletters soon, including the Strategic Portfolio, which is still open for enrollment at a discount. Deadline at midnight! For everyone else, you can buy oil in ETF form, or you can buy XLE or OIH, or all three.

I have a saying (and this is by no means an original thought) that the best trades are the ones that you can sum up in a sentence. If your thesis is so fiendishly complex that you need a 100-page slide deck to pitch people on it, then it is probably a terrible thesis. I mean, Bill Ackman has a 100-page slide deck on the Fannie/Freddie privatization trade, and it is pretty compelling, but you could simply tell me that Trump wants to do it, and that Trump usually gets what he wants. That would be good enough for me. I skimmed the slide deck, by the way, and I don’t have any disagreement with it.

I highly recommend that you go through your portfolio and come up with an elevator pitch for each of your stocks. Can you do it? Can you sum up the thesis in one sentence? If not, you should probably chuck it. I have another theory about this phenomenon—investment success is not a function of work. It is a function of creativity. I have historically outperformed a lot of hedge funds with teams of Ivy League graduate analysts because I keep things super simple and don’t tie myself in knots trying to split the atom.

Danger Zone

More on this: You can make money on a stock by knowing nothing; you can make money on a stock by knowing everything; but the danger zone is in the middle, where you know just enough to be a danger to yourself and others. 

I think most amateur stock pickers do a cursory amount of research on a company, maybe spending a few hours on it, and then they think they have an informational advantage. In fact, they are at a massive informational disadvantage. This is a bit like that meme about the tyranny of the midcurve. Very dumb troglodytes make money; Bill Ackman makes money; but the people in the middle who have done their “research” on the “internet” get sconed. Since I don’t have the ability to do Ackman-level research, I actually do no research and pay attention to the charts. Doing some research would have negative value, aside from taking the time to find out what the company does.

So, if you are to have an investment thesis that you can sum up in a sentence, that is a good thing, but the danger is that you will have the wrong thesis. Alternatively, you can be right for the wrong reasons, which is also nice. But yes, sometimes you have the wrong thesis, and then you are wrong, and you lose money. So, if you are going to be a simpleton and invest in stocks simply based on an idea, how do you ensure you have the correct idea?

Experience, and a lot of trial and error.

No Room for Complexity

I will give you another example. After predicting that Javier Milei had a good chance of being elected the first time around, I bought Argentine stocks and made money. And then I got the idea that the other Latin American countries would want their own Milei, and the entire continent should shift to the right. That has happened in Chile, may happen in Colombia, and probably won’t happen in Brazil, but Brazilian stocks pay huge dividends, and Lula probably can’t get any worse. 

After two years of this, the “Latin America moving to the right” theme has become consensus, and it is time to think about exiting the trade in the near future. I didn’t do any macroeconomic research on Chile, Colombia, or Brazil, outside of looking at some charts. I basically said, MONGO LIKE LATIN AMERICA and bought the ETFs, and it has been one of my greatest trades ever. Keep it simple.

I was acquaintances with a guy who was the biggest simpleton I have ever met in the markets—but also a very successful trader. He used to say, “Buy the stocks that are going up, not the ones that are going down.” Suffice it to say that he did not have a CFA. But he did remarkably well, and he used to drive me crazy.

I think that research should be used to bolster (or disprove) a thesis, rather than to come up with the thesis in the first place. And I may sound like some kind of cowboy, throwing darts at the stock quotes in the newsletter. I have no room in my life for complexity, and while there are people out there who will find stuff in the 75^th page of footnotes on a 10-K, that is not my style. Not to say that style doesn’t work, but the reward per unit effort seems to not be worth it. 

So, keep it simple! People became millionaires because in 2004 they said, this iPhone is cool! I think I’ll buy AAPL. And the stock is still going up 22 years later.

Jared Dillian, MFA