bush league investing

Everyone sees the world through a collection of biases that they have organically created through the sum total of their experiences. Whether implicit or explicit, biases are disproportionate weight placed in favour of or against an idea or thing, usually in a way that is closed-minded, prejudicial, or unfair. These biases work as short cuts that allow the otherwise overloading amount of information we receive to be managed into actionable decisions. The problem is that this can lead us to make mistakes that are quite costly.

Confirmation bias at its most simple is subconsciously favouring information that already aligns with your current thinking.

We don’t see things as they are, we see things as we are.

Anais Nin

Confirmation bias can decimate portfolios. It causes investors to ignore or dismiss information that clearly points to an investment having a low probability of succeeding. It can also cause missed opportunities when the opportunity presented doesn’t match the investor’s worldview.

Gold bugs tend to listen to other gold bugs and dismiss anything current. Crypto investors listen to other hodlers (crypto investors) and ignore anyone that thinks crypto isn’t everything. There are perma bears who have said the entire system is crashing since 1987 and there are people who think the market will never stop accelerating upward.

To combat this bias, it is crucial to listen to opposing ideas; if there are no credible counters to your best ideas, then it is up to you to do the research, create them, and weigh them against current thinking.

I have been burned many times by ignoring information that was counter to what I had already thought. I held on to GOPRO stock way too long despite the growing information showing it wasn’t making money or really on track to.

I have missed out on many other companies because I personally didn’t like the platform or product only to watch them do extremely well.

I somewhat learned this lesson by almost losing a large portion of this portfolio shorting SNAP (through puts). My position did great originally as the stock price tanked and I thought for sure it would go to zero. It became a meaningful part of the portfolio and I was confident I should keep holding. My thinking was that the company was gimmicky, it was a social media play that was easy to copy at scale, and the leadership team seemed to make bizarre choices bordering on fraud. It took a lot to make me see the potential growth case for SNAP. I didn’t reverse my opinions, but I spent enough time trying to see the other side that I eventually closed the position. If I hadn’t, I would have lost it and it would have been a big hit to take.

How I attempt to combat confirmation bias now is by spending at least 1/3 of my time researching companies and ideas from sources that are known to be at odds with my original investing theses.

It is impossible to completely counter confirmation bias, but by intentionally seeking out and considering multiple sides for informed decision making, its effect on P&L can be mitigated.

Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side.

Charlie Munger

As we like to point out here at Bush League Investing, having a longer time horizon in the market covers up all sorts of mistakes and misses and usually makes you look like an investing genius. There are a few times, however, that a crucial decision has to be made and we believe now is a crossroads that requires one. In the next few months, a secular shift could be made to inflation that would change the current investing paradigm.

For years we have had a relatively flat inflationary environment because of huge deflationary pressures where tech and growth have done well and value has lagged far behind. Some of the most obvious deflationary pressures have been:

• Tech/Disruption-ex. Amazon forcing retail prices lower; Uber/Lyft forcing transportation costs lower; automation in factories.
• Labour-For the last 25+ years, labour has moved offshore where it’s a fraction of the cost enabling corporations like Walmart to sell goods at cheap prices.
• Debt-As people take on increased debt loads, they are unable to stimulate the economy through more spending on credit. Additionally, when super debt laden individuals or companies pay off debt, they take credit/currency out of the system slowing down the velocity of money.
• Interest rates-Historically low rates have enabled zombie companies to survive through minimum servicing of debt creating a huge production drain on the economy.

These deflationary pressures along with other more subtle ones have managed to keep inflation low despite the large additions of liquidity into the system through quantitative easing and low interest rates since 2009. The big question we need to answer correctly is could that all change now?

Currently cherry-picking certain commodities like lumber, corn and copper you would jump to the conclusion that we are dangerously close to hyper inflation and the current monetary system will come to an end shortly. There is also a case to be made that inflation has merely moved into asset prices like housing, the stock market and, more recently, cryptocurrency.

What do the experts think?

There are many well known finance names digging in deep on either side. Some notable figures like Eric Townsend, Michael Saylor, and Peter Schiff are convinced this is the beginning of inflation and the next decade will see inflation run wild. There are some notable counters to these arguments from people like Cathie Wood (Ark Investing) who is certain the huge leaps forward in innovation will continue to create enough deflationary pressure that we are just going to go back to a huge bull market in tech and growth.

What do we think?

As in most debates that are polarizing, we find ourselves somewhere in the middle. We trend slightly further into the inflation camp though and do not believe it will just be transitory until the supply issues are sorted out. Our base case will be an approx. 5% yoy change for the near future. Luckily, the market will let us know which way this will unfold.

What to do about it?

We think the better question is what not to do. The worst mistake made in the next few years might be to wait too long to do something. If you are sitting on a large pile of cash waiting for the perfect time to make a move, it could end badly. There are always reasons to be skeptical about the market, economy, and the future but it more often than not ends up positive. The clearest example of the harm of doing nothing comes from the highest inflationary time in Canada’s recent history. If you sat on money in 1973 and then worked up the courage to invest it in 1983, it would have taken almost 2.5 times the same money to get the same goods. There are many parallels in this lesson to today. Using these numbers, if you have $10,000 sitting in your bank and you don’t do anything with it until 2031, you would potentially need $24,600 to buy the same goods you could have bought today. This calculation is based off of CPI which measures a broad basket of goods and the yoy change. There are many analysts that have concluded this metric doesn’t cover the entire story and the true rate of inflation the consumer faces is higher, which makes this argument more potent.

What are we doing about it?

We are positioned to benefit from inflation but have not gone “all in” yet. If we start to see more companies raising prices to offset costs that will be a clear signal. The true telling will be if there is wage growth, or if the labour share of the market starts to have some control and we see unions forming with enough bargaining power to increase wages. These things don’t happen too quickly, so there will be time to react if we are prepared. In the interim, commodities and more stable value names should continue to benefit in increasing inflation.

Keep an eye open for price increases and signs of wage growth!

One of the questions we are frequently asked is if there will be a huge stock market crash this year. The reflexive answer is no one knows for certain; the lengthy answer is below.

Crashes and Corrections

On average there is a market correction once every 16 months and a crash once every 7 years. A correction is normally seen as a drop of over 10% in a relatively small timeframe that lasts for less than two months. Crashes are events with a drop of over 20% in a small timeframe and can take much longer to recover from. Some notable crashes are the dot com crash (2000), the great financial crisis (2008) and, more recently, the COVID 19 crash (liquidity crash) last March (2020).

Crash Supporting

Below are some of the strongest themes supporting a near term crash:

Valuations have surpassed levels only reached before the dot com crash.

The put/call ratio is also at levels only reached in the build up to the dot com crash.

Bullish sentiment has been building for years and is at an all time high.

The current level of leverage has only been seen right before crashes in the past.

The Buffett Yardstick has correctly predicted when the market has been over stretched multiple times in the past.

Some More Confirmatory Thoughts

• Red hot IPO and SPAC markets
• Retail investors flooding into the market
• People have watched multiple recent vehicles make life changing money in buying SPACs, crypto, and meme stocks. Large, quick moves with 50x gains are pathognomonic for an end cycle.

Crash Contradicting

• The market is still charging ahead with great momentum
• There is a perceived backstop in the Federal Reserve and central banking system that will keep boosting returns
• Interest rates are historically low despite a slight rise recently, and there is massive money that needs to find a home producing returns which no longer exist in bonds and treasuries.
• More quantitative easing or stimulus is on its way estimated at over $1.9T
• Earnings on market moving stocks are very positive so far in early February

2021 Crash?

There are definitely enough catalysts making a good case for a crash in 2021. The system is being propped up and the numbers in many sectors paint a picture of being overstretched.

All of this to say it might crash and it might not. The better question to ask is what should you do about it?

2021 What Should You Do?

You can’t control what happens in the market, but you can control what is in your investment account. We will remain mostly invested and if momentum turns, we will move more into cash. If it truly dips, we might buy puts on overextended companies. We will not catch the very top of the move and the account will fall in a downturn, but if it is a massive crash of 20% or more, we will probably be out around -12% and back in as soon as possible. If you are going to lose sleep over an impending crash maybe it makes sense to move more into cash, but consider the scenario below.

What if you bought the day before the three worst crashes in the last 25 years?

If you were super unlucky and only bought the S&P 500 the day before each of the worst crashes in the last 25 years where would you be?

• $100 000 on 3 Mar 2000
• $100 000 on 10 Oct 2007
• $100 000 on 19 Feb 2020

If you had the worst timing possible and put all of your money in right before the biggest crashes in recent history you would still be up 30% or $91000. That isn’t a great return for the amount of time in the market, but that is pretty close to a worse case scenario. The only way to perform worse is to take your money out at the bottom which unfortunately happens even to seasoned investors. If you are willing to hang on and have patience, time in the market can cover up most market corrections and crashes.

What If It Just Keeps Going Up?

If the market doesn’t crash this year there could be good money to be made just holding current positions. We have watched people sit on the sidelines for years waiting for a dip only to watch their good ideas triple without them. To make an unfortunate situation worse, the same people who wait for the dip to get into positions often are too frightened to buy the dip when it happens.

What Are We Doing in 2021?

We don’t know for sure if the market will crash. It might; it might also run up 30%, or any other possible scenario imaginable. We think that a crash is possible, and we will have our long plays on a short leash, but so far we will be participating in the move up. We are also heavy into commodities and Bitcoin, which should fair better even with a large pull back. We will be paying close attention to the momentum of the broad market; we won’t be able to time the top but rather position differently in a big selling event.

For completeness, “smart money” was saying the market valuations were too high and a crash was imminent from 2010 until what happened in March of 2020. That would have been an awful long time to watch the market go up while you waited for your perfect entry.

Invest well and safely!

One of the most important investing decisions of 2021 is how to position against a growing influx of fiat currency injected into the monetary system. Of all the US currency in circulation, 25% was added in 2020 with 2021 shaping up to raise the bar even higher. With more and more dollars competing for the same amount of fixed goods, each dollar loses its purchasing power. 2021 requires a strategy to compensate for this dollar depreciation. There are three assets that we believe are up to the task: Bitcoin, gold and silver.

I want to draw an analogy here that will help explain the importance of these advantageous assets as we move deeper into 2021. In 59 BC Rome, three opportunistic figures, Caesar, Crassus and Pompey, decided to align themselves politically for mutual benefit and to gain control over the Republic. Just as this First Triumvirate strengthened the Republic for a time, we believe Bitcoin, gold and silver can fortify a portfolio in 2021. One may emerge above the others as the true winner, but the partnership will benefit all.

Bitcoin = Caesar

Bitcoin is the Caesar of this alliance. It has the most upside and is currently enjoying an unprecedented winning streak. It also has the most to gain if the entire monetary system collapses as it functions as well, if not better, outside of the current system. This is not a likely event but in the case of a monetary collapse or reset, Bitcoin would be left standing in the ashes in a much more dominant place. As it expands rapidly and becomes entrenched, it carries an increased risk of current monetary powers and authorities acting against it. If this happens, in theory it could drop to zero, erased from history. Caesar was not a sure bet early in the alliance and was consistently on the brink of defeat during his early campaigns. He was detested and dismissed by many of the wealthy stake holders and politicians of the Roman Republic. Bitcoin, too, struggles for legitimacy with institutional investors just starting to add Bitcoin to large portfolios.

We think it’s unwise to miss out on the upside of Bitcoin, but it is not an all in as it could still get struck down if the current monetary system senses the threat early enough.

Gold = Pompey

Gold represents Pompey; it has been around a long time, is understood, and feels like a safe choice. It doesn’t have the exponential potential of Bitcoin, but it is far less likely to plummet in value as well. Gold is highly regarded and held by nations, central banks and wealthy individuals. Pompey was beloved by the average citizen and the powerful alike as a military figure for his consistency and stability. Currently many more people have a stake in gold performing well than in Bitcoin or silver. It is seen as the default play when times get tough just like Pompey the Great was a hedge or insurance against the worst-case scenarios in Rome. Gold has for centuries been a hedge against government and societal collapse. It is also seen to be in competition with Bitcoin not unlike Caesar and Pompey who were bitter military rivals.

We think gold is a safe bet, but it lacks the exciting upside of the others.

Silver = Crassus

Silver is Crassus in the triumvirate; it moves up and down and no one truly understands what sector it is in; it is both an industrial metal as well as a financial asset. It shows up in commodity bull runs or panics as a currency and as an industrial metal when the economy is roaring. With the Green New Deal and an inflation of fiat currency, it seems perfectly poised to win as both. Crassus had a fairly prominent military career but was more seen as a businessperson, toted as the “Wealthiest Man in Rome”. Just like Crassus’s role in the Triumvirate, the importance of silver as a counterbalance gets forgotten about when hedging a portfolio or betting on commodities. Silver will succeed if the economy starts doing well and if everything gets much worse, it will do well as a currency.

Silver historically trails gold then explodes to the upside near the end of a commodity cycle. If this happens in an inflationary backdrop, it could be game changing.

How We Have Been Trading

Our base case is that the monetary pressures will continue to cause scarce assets like commodities to rise. Bitcoin has been on fire leading us to continually rebalance by taking 1/3 off the table every time our position doubles. If this continues, we will keep feeding the spoils to gold and silver mining ETFs. Provided we are correct, these ETFs are going to start moving early springtime alongside changing policy. If our thesis continues to hold, the overall goal is to keep the positions relatively equal as they

should all be moving in the same direction. If we got it wrong and are met with huge deflationary pressures, we will redeploy the capital elsewhere.

Just like the First Triumvirate it is likely there will be a clear winner left standing after the fray, but this will only be decided in time and currently all three should benefit. This might just be what we want to happen given our current portfolio construction. Even Caesar said, “Men willingly believe what they wish”. Only time will tell for sure but we will continue to keep score.

Thanks for reading and let us know what you think!

Is it worth being a retail investor in an industry seemingly stacked against small players? In the past, high fees, poor access and a lack of good information left retail investors at a large disadvantage. This has all changed in the last 15 years. In the current market environment, we believe retail investors have an overwhelming advantage over larger funds and institutional investors and if you’re willing to work hard, the edge is yours.

Key Advantages

Time Horizon

Investing on your own terms means you decide the timeline to measure if your ideas are working or not. If you are sure your investing thesis is correct, you can let an investment run until it gets proven right or wrong. Imagine being sure that Amazon was going to be a big success in 2003 but only having 1 year to see if you were right or not. This happens yearly as underperforming positions get cut or reduced in managed portfolios only to soar in the next few years. As a smaller scale investor, you have the ability to set up long term strategies and see how they play out without the pressure of yearly, sometimes quarterly, report cards many professional portfolio managers face.

Size of Account

Big money moves to big companies because it has to.

Investors managing large portfolios, say billions of dollars, can’t access the same companies a smaller account can. For example, if we were to assign 5% of a multibillion-dollar portfolio to a company like VCI.V (love this company!) we would own the company outright multiple times over.

As retail investors, there are more options available to us that can make meaningful impacts on our accounts such as companies that are in growth mode or temporarily beaten down to small market caps. Take advantage of this. Warren Buffet has:

¹“If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”

Small accounts are also much more nimble than large firms. We can be in and out of a position in a few clicks where it can take hours or even days for large firms to execute trades.

Kick Back and Do Nothing….

This sounds foolish but the biggest advantage held by retail investors is the ability to do nothing for long periods of time. If all of our best ideas are already in our accounts and working well, we can leave them alone to work. Professional investors are under much more pressure to do something to validate their large salaries. The optics of earning a six or seven figure salary to make no trades isn’t something most firms endure.

Herd Mentality and Career Risk

As retail investors, if we see an opportunity and have the instinct to act, we can move without a second thought of what others might think. Fund managers have to worry about being seen as too different and risky relative to other funds. When investment decisions are ruled by fear of losing employment for veering too far from the pack, it is easy to see why many funds look similar. There is job security in getting it wrong if everyone else got it wrong too. As retail investors we are free to trade our best ideas, not only the ones that are similar to the herd.

Control over Capital

Large funds are usually made up of multiple investors and are at their mercy in terms of capital. When times are great, investors historically pour into the markets making it hard for managers to find a home for all the capital. When the market dips, investors get scared and if the market really drops, people cut and run. Investors taking out their capital at the bottom forces the large funds to lock in those losses greatly reducing their ability to benefit from the bull run following the correction. Retail investors can add funds when they feel the time is right. This means their capital can be deployed at the times when it can be the most effective and useful. It also means that when things are too extended, they don’t have to force any trades just to meet a predetermined allocation strategy.

Disadvantages

It would be unwise as an investor not to also consider the edges that are working against you.

Research

Large firms have access to a tremendous amount of research and have amazing people, algorithms, and artificial intelligence spending an unfathomable amount of time analyzing it. This is the place retail investors are at the greatest disadvantage. It is impossible to compete in terms of quality and quantity of information and investment of time. While this gap has narrowed, it’s still formidable. If your edge is that you believe you know more than the market, you’re likely wrong.

Are Retail Investors Being Front Run?

There is a lot of speculation and concern that retail investors are being front run in today’s market. Being front run refers to the concept of larger firms having access to your pending trades immediately before they fill so they can trade just prior. This happens in milliseconds and is something you can’t really detect. Limit orders remove this as a concern entirely and with a focus on a long-term time frame, I wouldn’t have cared if I purchased Starbucks at $53.71 a share or $53.73 a share in 2017; especially when it’s currently trading at $106.

Speed and Fills

Without the enormous recourses of large funds, competing on speed is out of the question. The edge that their technology and infrastructure allows is not something that is wise to try and compete with.

Conclusion

Ultimately, if we strategize for the long term, make good decisions and keep our emotions in check our returns will continue to crush those of the S&P 500 and many managed funds.

Many people, including large funds, believe that retail investors are at a disadvantage and are certain to lose. The best way to prove them wrong is know where we have the advantages, where we don’t and use strategies that play to our strengths.

There are many advantages and disadvantages not discussed here. Please let us know your thoughts!

¹As quoted in “Wisdom from the Oracle of Omaha” by Amy Stone in Business Week (5 June 1999)