This is the worst approach to investing
This strategy simply doesn't work...
As I mentioned in a previous article, I laid on a silver trade at the start of this week. However, I just came across this Tweet that really grinds my gears.
While I assume that this chart is factually correct, the message it conveys is beyond useless. Hopium is not a valid investment strategy.
A return to the 1980 15:1 ratio would result in silver outperforming gold by a factor of 5x.
Fan-fucking-tastic. So what? That’s like saying,
If I win the lottery I’ll have a lot more money
If we crack the code to fusion we’ll have unlimited power
Once flying cars are a thing we won’t get stuck in traffic
These statements might be factually accurate, but who the fuck cares? Stating a bullish case, and alluding to how much money one can potentially make, is not a good investment thesis. Mostly it’s just a good way to get yourself to over-invest so that you end up panic selling when the inevitable drawdown comes a knocking.
The number one lesson I learned from reading Richer, Wiser, Happier* is: don’t think about how much money you can make, think about how much money you can lose.
*Also, a big lesson I’ve learned from actually investing and losing money…
A better approach to investing
Instead of cherry picking the best date for performance (1980) and then asking us to think about how much money we’ll make if we get back there, here’s what we could do instead: list all the reasons it might not happen.
Conditions appear to indicate that we’re heading into a worldwide recession. That means less demand for industrial production and less demand for silver
Silver hasn’t hit the 15:1 ratio since 1980. After six and a half minutes of feverish calculations, I’ve determined that 1980 happened 42 years ago. Great, why are we magically headed back to that level now?
People have been calling for a silver breakout for years and they’ve been wrong. Why is now the right time?
Inflation hurts the silver miners
Investors have been saying for years that the silver market is manipulated. Is it magically not manipulated anymore?
Precious metals have been very sluggish during the last few years when we’ve had the highest inflation in decades. So why should we expect outperformance now?
The silver ratio nuked to hell during the March 2020 crash. What if we have another crash like that this winter?
And so on and so forth. Any four year old with a crayon can draw some squiggles on a chart and say, “If XYZ happens we’ll all get filthy fucking rich, oh gosh it’ll be grand.”
Fanciful projections aren’t actually useful though. I do my very best to look at the downside, focus on the bear case, and only then invest. When I buy something I have to ask, will I be OK if it draws down another 30% in the next month? That’s a far more useful thought exercise than picturing the perfect outcome.