New York black and white clock face
The investment world is great at producing favored picks that become “sure winners” just as they tire and fall. April and October are popular months for old trends to die and new ones to begin.
Trend changes often involve 180-degree turnabouts, not only in the previous leading and lagging investments, but also in investors’ thought processes (a combination of reasoning and emotions).
So, how do we set our investment clocks forward now?
First, by realizing that current beliefs attached to winning ideas are no more than what was. The key realization is that past performance is meaningless in determining prospects. Instead, the view should be wariness of high past performance based on enthusiastic visions.
Note: This issue brings up the odd investor reaction to high flying performers: A higher level of assurance that more is yet to come. The proper view is that big gains can mean increased risk
Second, by looking towards the future with reasonable expectations and common sense
Third, by viewing the past “non-winners” as potential coming winners. No investment approach lasts forever, and often it’s the lagging investments in one period that move to the front in the next period. (This viewpoint is the source of “contrarian” investing that can produce good gains with reasonable risk.)
The current example
The media happily report the stock market making new highs practically every day. However, compared to the ruckus in the fourth circus ring, the market action looks uninspired. (See “Stock Market Upsetting Professionals – Don’t Worry” for discussion of stock market’s “crazy” fourth ring.)
The “craziness” in the fourth ring is beneficial because the actions there make the overwrought beliefs obvious. And those beliefs are wrapped up in three investments: GameStop GME +1.7%, Tesla TSLA -0.8% and Bitcoin. This graph shows the cumulative performance from just before the pandemic hit (January 1, 2020) through Friday, March 12, 2021.
Performance comparison: GME, TSLA, Bitcoin, SP500 and GOLD
There’s no arguing with those results. Everybody would be thrilled to win those lottery-payoff type returns. Note that the stock market’s nice 25% return is barely visible compared to these barn-burners and others like them. And that’s why so many investors have gravitated toward the day-trading-for-riches investment approach. What’s not known is how many of them are being burnt.
Misunderstanding the zero-sum game
Periodically, we read about the stock market being a zero-sum game. That is a mistaken view because stock prices are valuations based on company fundamentals and outlooks. They can rise and fall independently from demand and supply volume. A common example is during the earnings report period. Results are released when the market is closed, and any unexpected revelations show up as a “gap” between the previous close and the next opening. Thus, if positive, every shareholder is a winner.
However, that does not apply to a gambling game. And that’s what GameStop-type stocks have become. Valuation is irrelevant as investors attempt to beat out one another, buying low and selling high. Obviously, there is someone on the other side of those trades, hence the zero-sum label.
But there is a much worse issue involved: Zero-sum does not mean gains and losses are split evenly. That’s because Wall Street traders are active, possessing ample funds, superior experience and a natural savviness in game-playing. They even hone their skills trading against one another. Therefore, when a boatload of newbies offload onto the trading room floor, they are fair game. Yes, there are media stories about a few winners, but there are thousands of losers who don’t want to talk about it.
In the end, fundamentals will win out, as will Wall Street traders. That will leave many (most?) individual investor-traders high and dry. Most importantly, it will leave all those “meme” stocks in the tank.
Therefore, turn to future reality and investigate those overlooked “non-winners” of the past. They could be hidden gems, and that’s where Barrick Gold (GOLD) enters the picture:
Barrick Gold – A potential winner for tomorrow
So, what about the Barrick Gold 11% return? Why is it even on this graph?
It’s there, not because of what it has done, but because of what it could do. There are four reasons for considering this boring looking investment:
First, inflation (more accurately, “fiat money inflation”) will increase. The huge expansion of the money supply relative to the economy plus the eventual expansion from bank lending growing again will foster growth of the economy and the price level.
Second, gold will become popular again when two conditions happen: Inflation rises and gold’s price rises
Third, Barrick Gold, as a company, can produce added earnings growth beyond gold’s price rise through sound business management.
Fourth, as discussed above, gold has lost its luster in the recent investment period. Therefore, it has the potential for playing catch-up as investors return.
The bottom line: Now is the time to make a new investment strategy
The extreme gyrations and the popular press accounts mean it is time to avoid the highly popular, fast-acting investments. Instead, refocus on less exciting but more fundamentally sound investments.
During my 30-year career, I managed and consulted to multi-billion dollar funds. Using the “multi-manager” approach, I worked with leading investment managers. I now