If you look at why indexing works, a lot of the studies show that most stocks don't do much. 2/3 of the Russell components don't beat their own index (and I believe about 20% go to $0). Yet, there are a few outliers that carry the index upward. Its the huge sucessful companies, the NFLX's etc. What these 'bubble stock' skeptics do, is to basically fade the companies that are showing signs of being those convexity winners, the ones that go into monster runs and carry the index. I mean, that's got to be the stupidiest idea in the history of investing. Its no wonder that these idiotic skeptics tend to be drawn towards having 'small position sizes on shorts', its because their subconcious tells them its the appropriate amount, so does their experience (they get burned a bunch of times and realize the strategy deserves less size) yet their concious mind screws them up and they never realize the folly of the strategy altogether. If they were to listen to their subconscious, they would realize there is a lot of wisdom in their desires to be smaller in shorts, its telling them something. There is 'convexity wisdom' there, but their concious mind is blind to convexity (because of the contrarian bug that they have), so there is a conflict there which is why they continue to throw money away
But there is more, even when the skeptic is right and the company ends up failing and going to $0, the skeptic will be in a bad situation because his bad strategy/mindset was rewarded with profits. So now he is more likely to do more of it, perhaps even with more size but almost certaintly with more confidence. He will also think that optimists are stupid and being a skeptic is being smart. This will lead to problems in the future, mistakes, huge losses, underperformance, stress, blow ups etc. It will also lead him to miss GIANT convexity runs that would happen if he were to focus on the long side, giant missed profits There is a reason why the vast majority of people that achieve multi-millionarie or billionarie status were long convexity (usually long businessnes/real estate). Someone is a lot better off erring in the side of being too willing to be long convexity then erring on the side of being short convexity. Pessimists, skepticts and contrarians have the wrong mindset for wealth creation, its actually a problem they have to deal with. Not much different from chess player that is only comfortable with being on the defense. They need to realize their flaws, fix them and grow up before their life is over and they threw it all away. But also, commentators, pundits, journalists need to realize the harm that they do because when they induce investors to behave like skeptics, they harm them just like the shorts are harmed fighting convexity
But lets assume the worst case, lets say I`m saying all of this because I`m being a contrarian indicator which suggests the market is about to top out. SPY then drops 50% of the next 12 months. I havent checked my equity exposure lately but its probably around 65%, so I lose about 32%, but I got some gold and bonds plus I put tactical trades here and there, I also buy some equity puts sometimes, so I might lose about 25-27% maybe more if I add on the way down. So being a convexity believer, optimist, and anti-contrarian would lead me to a drawdown of 25-30%. The guy who was a skeptic about Trump from day 1, dodged a good sized drawdown, nice for him. The question is, over the next 30 years, which person is likely to do better? As I have argued a lot today, its the optimist, he will have the right mindset for being involved in the side that makes people millionaries/bilionaries. He will spend more time looking for good convexity bets with limited risk, he will be an optimist which works in capitalism, he will avoid short positions which can deliver giant losses. Meanwhile the guy who was a skeptic about Trump from day 1 wont see the mistake of his mindset, as a result, he will get positive reinforcement of his folly. He will be more of a skeptic, more of a bear, more willing to short things, more willing to fade optimism, more willing to sit on cash, more contrarian but more importantly, less willing to look for good long convexity bets, which can deliver him a gigantic pay day and retire him quickly. As a result, that person will have a hard time growing his wealth of the next 30 years. Unless the world goes into a large depression, I guess I`m done for today, I just hope someone learned something from this ramble. I feel like this is probably the most important lesson I learned since I started investing/trading in 2007
https://www.nytimes.com/2017/04/27/...-trumps-negotiation-strategy.html?ref=economy Decent article about the limits of negotiation tactics in politics. I would just add that Trump is likely well aware of these limits
"Law and history make clear that Trump’s most urgent risk is not getting ousted; it is getting hobbled by unpopularity and distrust. He is only the fifth U.S. President who failed to win the popular vote. Except George W. Bush, none of the others managed to win a second term. Less dramatic than the possibility of impeachment or removal via the Twenty-fifth Amendment is the distinct possibility that Trump will simply limp through a single term, incapacitated by opposition." http://www.newyorker.com/magazine/2017/05/08/how-trump-could-get-fired good article. its important to note that Mike Pence is likely to keep the main economic policies from Trump, so a Trump impeachment or removal wont change that much. The bear item is more on the article mention about change of control in the House in 2018. That would be pretty bearish
From the New Yorker article: "Because the Republican leadership in the House of Representatives will almost certainly not initiate the ouster of a Republican President, the first step in any realistic path to impeachment is for Democrats to gain control of the House. The next opportunity is the 2018 midterm elections. Republicans have been relatively confident, in part because their redistricting in 2010 tilted the congressional map in their favor. But Douglas Holtz-Eakin, a Republican economist and the president of the right-leaning American Action Forum, believes that the chances of control shifting to the Democrats is greater than many people in either party realize. “After a party takes the House, the Senate, and the White House, they typically lose thirty-five seats in the House in the next midterm,” he told me. “Republicans now hold the House by twenty-three seats, so, as a going proposition, they’re in trouble. They need to do really, really well.”" "Unfortunately for the congressional G.O.P., unpopular Presidents sow midterm fiascos. Since 1946, whenever a President has had an approval rating above fifty per cent, his party has lost an average of fourteen seats in the midterms, according to Gallup; whenever the rating has been below fifty per cent, the average loss soars to thirty-six seats. Steve Schmidt, the Republican consultant, is concerned that, in 2018, the Party faces a convergence of vulnerabilities akin to those which pertained during the 2006 midterms, whose outcome George W. Bush characterized as “a thumping.” Schmidt told me, “The last time Republicans lost control of the House of Representatives, it was on a mix of competency—Iraq and Katrina—and corruption in government, with the Tom DeLay Congress.” The Trump Administration has a comparable “basic competency issue,” he said. “The constant lying, the lack of credible statements from the White House, from the President on down to the spokesperson, the amateurishness of the threats to the members of Congress, the ultimatums, the talk of ‘enemy lists’ and retribution.”" That's a great anti-Trump article, backed with data and well supported. Now compare with this the avg NYT crap article that laches into anything against Trump, just to do it This New Yorker magazine seems quite solid, most articles I read from them tend to be good like that. It does give me pause to my thesis that Trump will pick up support in 2018. He might face gridlock if the Republicans lose support. As a result, the only part of the Trump economic triad that will continue to stand will be deregulation. Assuming the Democrats don't want infrastructure, which they might
The House is close to passing Healthcare, that's where the pundits never learn. They think its a binary system where they make claims 'healthcare will never pass' and if they are right, they count 1 for the 'I was right count', if they are wrong, they count 1 to the 'I as wrong count'. Overall, if they get more right than wrong, then they are a 'good' pundit. They are doing a 'good' job of warning stock investors. But where they are wrong is on the fact that stocks are exponential investments with unlimited reward that has an inherit return, you can get things right more often than wrong and STILL be doing a terrible job because of that fact. The one time they are wrong can be the time where the consequences are huge and not binary (the gain/loss payoff is not the same), big stock investors tend to be aware of this, while pundits never learn
When the Healthcare house vote failed pundits came out and said Trump was a amateur and it was proof he was a bad dealmaker. Well, now it has passed with a tiny margin despite the fact that the previous speaker, Boehner, said Republicans will never agree on healthcare. Will these pundits come around and admit he pulled a habbit out of the hat here? No, they will say 'they still got to pass the Senate now' and change the subject
Thanks for your thoughts as always Daal. I think your discussion about convexity is particularly relevant to Bitcoin and cryptocurrencies in general. Intuitively, I think it's crazy that Bitcoin has a "market cap" of $26 billion, and that the total "market cap" of cryptocurrencies is $49 billion, but the same arguments could have been made last year at much lower values. It's entirely possible that I could be completely wrong about my cryptocurrency skepticism, and that cryptocurrencies today are like buying Internet stocks in the mid 1990s. Sure there might be a lot of failures (eg. the cryptocurrencies outside the top 10), but for all I know Bitcoin / Ethereum / Ripple / Litcoin might go up tenfold in the next decade. .