“It's a wonderful thing to be optimistic. It keeps you healthy and it keeps you resilient. We're blind to our blindness.” -Daniel Kahneman
Doomsaying pays in this racket. You can always get a lot of clicks on a chart designed to inspire fear and panic. It’s a perpetual feature of dealing with money as a human being that it feels worse to lose than it feels good to gain it. And this makes us susceptible to negative narratives. One of our primary survival skills is imagining what can go wrong and changing our behavior in anticipation. However, we personify markets in many cases and forget that they are merely the sum of trillions of decisions, many of them unrelated. Markets are irreverent and cold and do not consider out human emotions or narratives.
People are afraid of losing their money and services like Game of Trades and Hedgeye will happily capitalize on that fear to sell you poor ideas that make you little money with shabby ideas. They’ll present scary charts like the one above that have no meaning, nothing actionable to do, and no purpose other than to enrich their creators and purveyors. But the reality is that the market is tough as nails and has made it through all the horrors of history with flags flying.
One of the side effects of the constant doomsaying, the extreme need of the wealthy to preserve their wealth, and the extreme desire of the wealth management industry to serve the wealthy and appeal to their confirmation bias is a system that has become bland. Devoid of risk. The modern financial industry has all the pomp and circumstance of disco. But it lacks the risk-taking spirit that is at the heart of markets.
And just like disco needed a kick in the ass, so does modern finance with its undue risk aversion and sycophantic wealth worship. The incredible system of markets that has evolved in our modern economies can do a lot more than just preserve wealth. They can create it quicker than ever given the evolution of options markets. That’ why we try to use whatever tools are available to maximize alpha and to get returns that are so high they seem conspicuous. But they’re the real deal. Optimism pays too—see below. We made the trade below by shorting the volatility index on election day.
Punk Rock was more than just music; it was a social and cultural revolution. Members of the movement rejected conformity and the whims of the crowd, embraced a do-it-yourself attitude to the music, and deplored mainstream culture and the mainstream music industry. That’s what we’re trying to do here. We pair fundamental research on high quality stocks with the leverage available in options markets to get outsized returns over a period of two weeks to two years.
Punk Rock may initially seem out of place in an investing context until you consider that Wall Street research is stuck in the last century and being against the consensus pays. That is what is behind our brand, we are contrarian investors—not just in the investments we select but also in the high-risk tools we use to get exposure to them. We are selling the opportunity for extreme price pop. Investments that can give you big returns in short times. We also sell stock lists and lower risk common investment research, but the options ideas are the lifeblood of our brand.
One of the ways we consistently find ideas is by exploiting undue fear and overactive imaginations. Earlier this week the VIX spiked on fears of nuclear war when Russia changed their nuclear doctrine. That fear is now gone in the rearview mirror. Markets quickly assess whether risks will interrupt commerce or change earnings. If they won’t they usually won’t affect the market that much. What risk is worse than nuclear war? Nothing. But the market correctly judges it as a low probability event and thus it doesn’t affect it all that much.
One of the things I like to remember in the market is that forced liquidation causes greater instability than geopolitical risk almost all of the time. The famed contrarian investor bought stocks at the outbreak of World War II and made of fantastically. The market can take anything that the world can throw at it, but what it cannot take is a complete absence of buyers. And when there’s forced liquidation, there’s no buyers in many cases. This causes prices to collapse more than the prospects of nuclear war. Sleeper risks like the Yen carry trade or triple A rated RMBS are what cause the real price collapses, not foreign wars or tight elections.
