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For many years, I didn’t believe in karma. I saw that bad things happened to good people, good things happened to bad people, and I figured that many don’t get what they deserve; they just get what they get. I no longer believe this.

I do believe in a concept that I call “financial karma.” In essence, this means that if you are doing stupid things and taking too much risk, it is going to come back to bite you. We’ve seen this over and over and over again.

Who were the “winners” of the whole GameStop incident? The retail investors who bought upside calls like a jerk? No. They lost billions. The winners—if there were any winners—were the electronic market makers and, for a time, GameStop itself. Melvin Capital was a loser, which was also a failure of risk management (having too much of your portfolio tied up in one short position).

Doing dumb stuff always comes back to bite you in the ass. I can vouch for this, on a smaller scale.

We sell some newsletters here at Jared Dillian Money. The Daily Dirtnap, obviously, but also Street Freak and the Strategic Portfolio. There are trades in all of them. 

What kind of trades are in these newsletters? Really boring stuff! Hardly ever any tech stocks. No Nvidia. We short some stuff but mostly to smooth out the volatility. It is slow, boring stuff. And the returns are slow and boring. We hardly ever have any transcendent years, but we never have a catastrophic year. 

That’s my investment philosophy in a nutshell: Do slow and boring stuff, focus on portfolio construction, watch out for correlations, smooth out the volatility, and just crank out returns year after year. Not very sexy, and the problem is that people want sexy. People want triple-digit returns. Well, you can shoot for triple-digit returns, but then karma will have your address eventually.

Let Me Put It This Way… 

I have been doing this gig in some form or another for the last 26 years. I think it was Nassim Taleb who said in one of his books that you want to look across the trading floor for the guys who have gray hair. Those are the ones who have been through some cycles, who have seen some ups and downs and managed risk through all of it. 

Stan Druckenmiller is over 70 years old now. A lot of people look at his track record and marvel at the fact that he’s averaged 25% a year with no down years. Yes, that is remarkable, but the most remarkable part of that is the “no down” years—he never blew himself up. Sure, he’s had some mistakes over time, as well as some years when he’s had low single-digit returns, but an entire career with no big mistakes? Incredible. That’s whom I aspire to be, even if my returns are lower.

I should point out that there have been some down years in my newsletters… but nothing catastrophic.

People Get Excited

A lot of this is about controlling your emotions and, in many cases, controlling your enthusiasm. 

When you enter a trade, you are naturally excited about it—you think it could be a big winner. So, you put a giant position on at the start. I used to do this. These days, I average into everything, and I average out of everything to the extent that I can. 

As Dennis Gartman, another big newsletter guy, used to say, “You never, ever add to a losing position.” All rules are meant to be broken, and I have done it occasionally, but this is how people end up with big losing years. I never want to be in a position where one trade can ruin my life.

But the most common mistake that people make is never taking profits. This is called fear of future regret—they think that if they sell the stock and take profits, they will miss out on future gains. There is no shame associated with taking profits. There is no stigma. 

Quick example: I bought Bitcoin in 2019 for $10,000 and sold it in 2021 for $40,000. I bought a Corvette with the proceeds. Bitcoin has taken a hit this past week, but it’s still in the $84K ballpark. Do I regret not holding on to it? Not a bit because, as you know, there were some big drawdowns in between, I would have been miserable during those drawdowns, and I might have sold my position in a weak moment. 

Sell the stock, pay your taxes, and move on to the next trade. There is always another trade. And yes, pay your taxes. Dumb: People won’t sell winners because they don’t want to pay taxes, and then they’ll hold on to them until they become losers. Well, they didn’t have to pay taxes! This has to be, hands down, the dumbest thing in finance.

This newsletter has been about risk management. I spend more time thinking about risk management than you do; trust me. If you wanted to learn how to be cool, you would probably talk to Brad Pitt. He thinks about being cool more than you do.

I also probably think about music more than you do—check out my latest mix, “Whisper,” on SoundCloud. Coffee + Jared Dillian’s music = unbelievable productivity. Go here and see for yourself.

Jared Dillian, MFA