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Nobody falls ass-backward into money in the markets.

Okay, maybe that happens sometimes. In my novel All the Evil of This World, one of the characters, an options market maker, is sold a bunch of teeny (1/16) puts in a stock right before earnings—and then it gets cut in half on earnings. That never happens. The rest of the time, we have to work for it, and it’s a lot of work. It’s not as if you just get to buy puts on something, the stock collapses, and you walk off a hero.

I am trying to do that now, with Apple. As of a few weeks ago, Apple was trading at 41 times earnings—for a company that isn’t growing and hasn’t innovated. You may have seen this week that its iPhone sales in China are down 47%, and it’s quietly disbanded its VR headset offering. 

I have a short position in Apple, through puts. There is risk. If Apple does what it has always done—as in, marches higher and becomes a $5 trillion market-cap company—I am out of luck. I have conviction that Apple is going down. We all do when we put the trade on.

Occasionally, you can borrow someone else’s conviction. Early on in my time at Lehman Brothers, around March of 2002, I had a view on short-term interest rates—I thought they were going down. I told my boss about the idea. I figured we’d put on a small spec position and buy a few hundred contracts. My boss took the idea and put it on with 12,000 contracts—literally betting our entire year on one trade. I said to him, “Are you insane?” But the trade worked; we ended up making about $15 million on it, which actually made our year. 

There are the old stories about Druckenmiller supersizing George Soros’s trades. Go big or go home, right? This is why I will never be Druckenmiller—I never have that much conviction on an idea. 

I say to myself, Well, this could go wrong or that could go wrong, and I end up putting on a smaller trade. Then I have a portfolio of lots of smaller trades, which means I have to rely on a high batting average to make money. Much has been written about how diversification is the enemy of high returns. All your ideas can’t possibly be good.

For the record, I have a decent amount of conviction on Apple, and I have sized it accordingly. Consider that your stock tip for the day.

Market Common

In 2006, in Myrtle Beach, someone built this big mixed-use retail development on the south side of town for $120 million… right at the top of the market, of course. I moved here in 2010, and the place was tumbleweeds. You’d walk around in the winter and be the only one here. It was like a bomb went off.

Well, Market Common went bankrupt, and someone bought it out of bankruptcy for $19 million.

$19 million is not a lot of money. I mean, I could almost afford $19 million. But in the past 15 years, housing developments have risen all around Market Common, the economy has improved (obviously), and now the place is jammed with people (even in the winter). Went there on December 30 and couldn’t get a seat in any of the restaurants. Incredible.

I don’t know who bought it, but could they see the future? Because now, it’s probably worth $300 million, one of the greatest trades of all time. I suppose you could see the future, but you couldn’t have possibly seen the TCJA tax reform in 2017 that capped SALT deductions, which accelerated the mass migration from the North to the South. 

Sometimes you make decisions without all the information. Sometimes you just put the trade on and say a prayer and hope for the best. You might think that $19 million was an easy decision. It wasn’t. They could have easily lost $19 million. Like I said, the situation was dire. Whoever bought Market Common had conviction.

I was goofing around on Zillow the other day, looking at a lot for sale in my neighborhood. The lot has changed hands a bunch of times in the last 20 years. In 2009, it sold for $1,200,000. In 2019, it sold for $100,000. Now, it’s going for $600,000, and it’s probably cheap. I’m not happy the financial crisis happened, but I wish I was a little older with some disposable income to take advantage of some of these distressed deals.

Along with conviction goes courage and capital. With capital, courage, and conviction, you can take advantage of the quote, unquote “obvious” trades out there. I think short Apple is obvious, but we will see.

By the Way…

I wrote a novel in 2016 called All the Evil of This World that is kind of a cult classic on Wall Street—you might want to pick it up. 

Warning—it is X-rated. It is beyond X-rated, the filthiest thing you will ever read.

But maybe you’re into that sort of thing! It’s actually the book I’m most proud of. Hope you enjoy it.

Jared Dillian, MFA