Are You an Investor or a Story Teller?

I am fascinated by the pushback to the Goldbuggery post. It has provided an enjoyable and intriguing glimpse into the minds of a certain type of investor. The thought process of undisciplined traders, the people who invest based on a narrative is amazing (and a little sad).

Our story thus far: On April 9th, I suggested the actual rotation that was underway was not Bonds into Stocks, as Wall Street was claiming, but rather “Sell Commodities, Buy Bonds.” The timing was most fortuitous, as commodities went into free fall and bonds popped, sending yields even lower.

What caught my attention next was the full on denial of the Gold buying community. Despite the price action, they refused to accept even the possibility that their thesis — one that had made money for more than a decade — was coming to its natural end.

That led to my snarky tongue-in-cheek post, 12 Rules of Goldbuggery. It was a bit of a laugh but I was surprised just how viral it went. The pushback to it was an exercise in cognitive dissonance, some of which was disturbing in its money losing emphasis on narrative.  My response was this explanation of my thinking about any and all trades — not just gold — titled Sell Out: “The Other Side”.

Here is where things get interesting: Lots of emails/blog posts/comments from some quarters of the mortally offended bug world. A small subset seemed to have some recognition that something was amiss (“strange things are afoot at the Circle K”), but they could not quite put their fingers on it.

It does not matter what the trade is — it could be Gold, Apple or China — when a winner turns into a loser, you do not sit idly by and watch any trade go from bad to worse. You must have a plan B, an exit strategy, or else you just watch it turn into a full on disaster. “I’ll sell my Gold when it hits $7000” is simply bad trade management.

Some of the less jihadist Gold Bugs did engage in reasonable email exchanges with me. It often seemed as if they were following the 12 rules on purpose. Here is a typical exchange:

Bug: How can you say that in the face of all of the QE? Its going to destroy the Dollar and cause hyper inflation!

BR: We have had massive QE for 4 years, and the dollar is at a 3 year high. Inflation is modest. (These are facts).

Bug: It will eventually cause the dollar to collapse and hyper-inflation

BR: That has been the story for a long while — shouldn’t after 4 years and trillions in QE it should have happened already?

Variations of that sort of debate played out over and over again:  They would make a specific claim/prediction/thesis, and I would counter with some fact or data that countered their claim. They would go back to the narrative, while I went back to the numbers.

All of these debates ended precisely the same way: I would send the the following email, asking the bugs this question:

“What would it take for you to change your mind? What would make you consider that your thesis might be wrong and that Gold was not going to go $XX,000 dollars?”

This answer was the most instructive part of each of these conversation. In my opinion, it determined whether these folks were destined to be successful investors or whether their future was in crafting narratives and telling stories. Nearly all of of them were unwilling to abandon the narrative that had served them so well from $400 to $1900 in Gold.

It is no different an investor in Apple. Those who rode AAPL from $50 or $100 up to $700 down left huge unrealized profits on the table when it plummeted to under $400. They are no different than gold bugs or the China bulls, many of whom watched big winners turn into small winners, than break evens, than losses.

Their muscle memory is that every buy was a winner, and every previous sale had led to regret. They cannot see the change in trend. This is how bad traders buy every dip in a crash until they run out of capital. They tell the same story (repeatedly) as the walk down the road to ruin.

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The reality of investing in any asset class is that markets require two sides for any trades to go off. I am not suggesting that one side is always correct; What made this exercise so fascinating was how far people are willing to go rather than admit a trade is not working out. The absurd contortions required to stick to the story is an instructive lesson.

All trades eventually end. The question I have for you is “Do you want your portfolio to end with them?”