I am fascinated by the pushback to the Goldbuggery post. It has provided an enjoyable and intriguing glimpse into the minds of a certain type of investor. The thought process of undisciplined traders, the people who invest based on a narrative is amazing (and a little sad).

Our story thus far: On April 9th, I suggested the actual rotation that was underway was not Bonds into Stocks, as Wall Street was claiming, but rather “Sell Commodities, Buy Bonds.” The timing was most fortuitous, as commodities went into free fall and bonds popped, sending yields even lower.

What caught my attention next was the full on denial of the Gold buying community. Despite the price action, they refused to accept even the possibility that their thesis — one that had made money for more than a decade — was coming to its natural end.

That led to my snarky tongue-in-cheek post, 12 Rules of Goldbuggery. It was a bit of a laugh but I was surprised just how viral it went. The pushback to it was an exercise in cognitive dissonance, some of which was disturbing in its money losing emphasis on narrative.  My response was this explanation of my thinking about any and all trades — not just gold — titled Sell Out: “The Other Side”.

Here is where things get interesting: Lots of emails/blog posts/comments from some quarters of the mortally offended bug world. A small subset seemed to have some recognition that something was amiss (“strange things are afoot at the Circle K”), but they could not quite put their fingers on it.

It does not matter what the trade is — it could be Gold, Apple or China — when a winner turns into a loser, you do not sit idly by and watch any trade go from bad to worse. You must have a plan B, an exit strategy, or else you just watch it turn into a full on disaster. “I’ll sell my Gold when it hits $7000” is simply bad trade management.

Some of the less jihadist Gold Bugs did engage in reasonable email exchanges with me. It often seemed as if they were following the 12 rules on purpose. Here is a typical exchange:

Bug: How can you say that in the face of all of the QE? Its going to destroy the Dollar and cause hyper inflation!

BR: We have had massive QE for 4 years, and the dollar is at a 3 year high. Inflation is modest. (These are facts).

Bug: It will eventually cause the dollar to collapse and hyper-inflation

BR: That has been the story for a long while — shouldn’t after 4 years and trillions in QE it should have happened already?

Variations of that sort of debate played out over and over again:  They would make a specific claim/prediction/thesis, and I would counter with some fact or data that countered their claim. They would go back to the narrative, while I went back to the numbers.

All of these debates ended precisely the same way: I would send the the following email, asking the bugs this question:

“What would it take for you to change your mind? What would make you consider that your thesis might be wrong and that Gold was not going to go $XX,000 dollars?”

This answer was the most instructive part of each of these conversation. In my opinion, it determined whether these folks were destined to be successful investors or whether their future was in crafting narratives and telling stories. Nearly all of of them were unwilling to abandon the narrative that had served them so well from $400 to $1900 in Gold.

It is no different an investor in Apple. Those who rode AAPL from $50 or $100 up to $700 down left huge unrealized profits on the table when it plummeted to under $400. They are no different than gold bugs or the China bulls, many of whom watched big winners turn into small winners, than break evens, than losses.

Their muscle memory is that every buy was a winner, and every previous sale had led to regret. They cannot see the change in trend. This is how bad traders buy every dip in a crash until they run out of capital. They tell the same story (repeatedly) as the walk down the road to ruin.


The reality of investing in any asset class is that markets require two sides for any trades to go off. I am not suggesting that one side is always correct; What made this exercise so fascinating was how far people are willing to go rather than admit a trade is not working out. The absurd contortions required to stick to the story is an instructive lesson.

All trades eventually end. The question I have for you is “Do you want your portfolio to end with them?”

Category: Gold & Precious Metals, Markets, Psychology, Really, really bad calls, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

40 Responses to “Are You an Investor or a Story Teller?”

  1. [...] Are you an investor or a storyteller?  (TBP) [...]

  2. romerjt says:

    Submitted on 2013/04/25 at 7:36 am
    “The Misconception: When your beliefs are challenged with facts, you alter your opinions and incorporate the new information into your thinking.

    The Truth: When your deepest convictions are challenged by contradictory evidence, your beliefs get stronger. (David McRaney the Blowback Effect)

  3. capitalistic says:

    ” “I’ll sell my Gold when it hits $7000””. Remarkably, some “sophisticated” investors have the exact strategy.
    And this is why economics is about behavior, not business.

  4. brokrbob1 says:

    So true. I’ve been asking gold bugs for years why gold went down for 2 decades while the Fed printed trillions of new, inflationary dollars in the ’80s and ’90s, but I never get an answer. My question for you, Barry: Is this going to be a secular bear market in gold on the order of 1980 – 2000, in your opinion?

  5. streeteye says:

    If no change in reality can change your belief, then your belief is not based on reality.

  6. MidlifeNocrisis says:

    I’m guessing there are millions of people that; 1) have no clue how QE actually works, and; 2) watch too much Fox News.

  7. Pantmaker says:

    The most difficult part of trading/investing is the selling part. I liken it to an Easter egg hunt on a hot Texas day…put as many in your basket as fast as you can because in about two hours they’re all going to stink.

  8. Chief Tomahawk says:

    BR, I was on a different PC yesterday, one without my bookmarks. I then fired up ye ol’ Google and typed in The Big Picture; congrats are in order as you have now passed the usurpers at The Boston Globe for the #1 spot!

    • The Big Picture predates the Boston Globe’s version by 5 years or so. When we switched domains from bigpicture.typepad.com to Ritholtz.com I lost a bit of Google juice, dropping from an 7-8 to a 5-6 in page rank. It is almost entirely recovered now, back to 7.

  9. wally says:

    Politics, religion, science… you see the same human behavior. Some people will ever prefer the fairy tale to the facts. The pendulum seems to swing and now we are in an era where we give way to much attention to goofy ideas that ought to just be swept off the board.

  10. lotusblue says:

    Hi Barry,Thanks for your good works !
    This is a Neural Structural Problem (?).
    Any market narrative held eventually will end in sadness.
    Brain “plasticity” is the requirement for solid investing.
    Nimble unstructured thought based on empirical data is only path for “successful investing” and even then Hard wired neuro narratives can and will hold markets in false stasis for quite awhile !
    Whether Gold goes up or down it’s just another asset class to be treated as such.
    We all know or should know who and for what reasons the Gold narrative has been so STRONGLY inculcated into PSYCHES of weak unformed/educated minds !
    It’s the old frog in the slow temp rise boiling pot adage.
    Maybe you’ll create the AA for Gold buggers! Call it GA. Lol
    Thanks again.

  11. Moss says:

    Nothing is forever. Gold however has a fervent following much like religion so unless one is willing to convert the story stays the same just like the Bible.

  12. WFTA says:

    One person watching Fox News is too many.

    I continue to be amazed that so many people think that gold is worth something other than what some other sucker will pay you for it.

  13. miraje182 says:

    “It is no different for an investor in a hot stock like Apple. Those who rode AAPL from $50 or $100 up to $700 left huge unrealized profits on the table when it plummeted to under $400. These traders are no different than gold bugs or China bulls, many of whom watched big winners turn into small winners, then break evens, then losses, then disasters.”

    Some of us actually don’t just bandwagon on to Apple, so I would be careful with this analogy. Apple is ecosystem provider, being valued as a hardware company with no sustainable competitive advantage.

    Its scary how much % of the profits Apple captures in the Smartphone market, and its even scarier at the % of profits that Apple catches in the PC market.

    Consumers are willing to pay a premium for access to this ecosystem, and nobody seems to think that is reasonable. I think the assumption by Wall Street is that consumers are stupid, and will eventually defect from Apple once they realize how much they overpay for the hardware specs. Consumers are not stupid- and are making an informed decision to use Apple products because they are not paying for hardware specs, rather they are paying for access to an ecosystem.

    Thoughts on gold:
    a financial asset should be valued at the PV of its future CFs. Gold has no future cash flows, therefore its PV is 0. Gold isn’t exactly a financial asset so maybe it should be valued like a commodity.

    a commodity should be valued based on its available supply vs. its industrial/useable demand. Any deviation from that is speculation and will eventually revert to its long-term supply vs. demand. Gold has very little industrial demand, and eventually when people stop thinking that a shiny rock is a store of value- it will plummet.

    Investing in gold is a game of “Hot Potato” and I can’t wait until the day the music stops.

  14. Vikalpa says:

    Hyperinflation: Do you understand that the US dollar hyperinflating would mean the end of US dollar hegemony? The scale of that event is on the order of anywhere from the end of the British Empire to the collapse of the Roman Empire, depending on how things play out. So you have a once ever 200-1000 year event having the potential to occur, yet you give it only 4 years to play out.

    I don’t know if the US dollar with hyperinflate. I do know that that the consequences of exponential growth based off of finite resource extraction are playing out as we speak. We are clearly not at the end of this transition phase. In this tumultuous environment one invests in assets that have been resilient over very long periods of time… rail, farm, gold

  15. slowkarma says:

    I’m not a gold bug, though I did once pay $600 each to buy gold coins for my kids. But here’s where the gold bugs have my attention: they insist that something weird is going to happen because of QE.

    Unlike the bugs, who have a specific idea of what this will be, I don’t have a specific idea. But, I suspect it won’t be “nothing.” So, here’s a sincere question. Will it be nothing? Or will it be something? If it’s something, how big will it be?

  16. [...] Barry Ritholtz, “All trades eventually end. The question I have for you is “Do you want your portfolio to end with them?”"  (Big Picture) [...]

  17. Barry999 says:

    I have enjoyed the interplay as well. Still I thought your position was a little more nuanced -
    There is the distinction between investing and holding. The discussion has been fired by people offended by your investment stance. But this is your job and how you deliver the results that your clients expect (seemingly quarterly at the max time frame) – and that’s where your analysis says it’s time to rotate into other sectors.

    Then there is holding – what you do for your own assets. I’ve been under the impression in the past that you do still have a small gold holding (not sure if that’s still true). And that’s part of what you to do personally to protect yourself.

    Or am I veering down another dark corridor?

  18. socaljoe says:

    Barry, your view on gold does represent the mainstream consensus… but I never thought you sold out. It is only natural for someone in your profession to see gold as a trade.

    I don’t think you need to feel sad for the goldbugs… it’s the traders and speculators in GLD and Comex futures that got flushed. The goldbugs seem to happy to take this opportunity to buy more physical metal at a lower price.

    I am also agnostic about the future price of precious metals, but I like to own some as insurance against central planner misjudgement. I would be shocked if you did not also.

  19. Biffah Bacon says:

    I thought the Daily Show did a remarkable job in its presentation on gold.
    The dark side of all of this is that the same flim-flam con men who are selling Gold as a miracle cure for economic distress (as depicted in the DS piece) are simply going to move on to a new topic, double down on conspiracy theory, and continue to drag the rubes into advanced states of poverty and despair resulting in violence when the cognitive dissonance can no longer be sustained.

  20. faulkner says:

    Everyone is born a storyteller. It’s how we humans put events together. Successful investors overcome this. Perhaps they simply tell more complicated stories. (What goes up must come down.) Or perhaps they realize they are “just” stories. I’m intrigued by the amount of religious language gold bugs use.

  21. [...] We choose ideology over facts and stories over data. We all develop ideologies as intellectual strategies for categorizing and navigating the world. [...]

  22. Ctreit says:

    This reminds me of an interview with Paul Ryan, who was arguing (among other things) that there was no recent volatility in the gold price. It was dollar volatility because gold is the only stable thing against which everything else has to be measured. This “dollar volatility” proves once again how terrible the economic and monetary policies these days are.

  23. [...] you an investor or a story teller? (The Big Picture) This entry was posted in Investments by Ben. Bookmark the [...]

  24. jaysan says:

    Barry: I totally agree with you that gold is a trade, not a religion. I sold out of GLD and gold stocks before you did because they had lost momentum. I am a trader, not an investor (with occasional exceptions). Still, I do want to share with your readers a few thought-provoking FACTS I learned:

    On Friday, April 12 there were a series of sharp sell-downs on very large volume in the COMEX June futures contract that flowed one after the other. Somebody (or somebodies) sold pieces of paper with a
    value of $28,000,000,000 into the gold futures market (that’s roughly 25% of the market cap of Bank of America).

    The London physical platform that buys and sells physical gold got locked up. The system froze. Meanwhile the futures market continued to drop. Buyers were unable to take advantage of paper weakness
    to buy physical bullion, and holders were forced to sell yet more paper contracts in order to
    properly hedge themselves.

    As the price dropped even more, underfunded players began to liquidate. The market went into a total collapse as stops got tripped. The market finally closed in New York. But it wasn’t over. The weekend was arriving and players began wondering about margin calls. The banks and brokers were open all weekend to go through all the accounts and issue all the MARGIN calls. Customers have 24 hours to get more money to their brokers. If the money was not received by Sunday night or Monday morning, their positions would have to be liquidated. Without a doubt, the shorts knew exactly what was about to transpire.

    Monday came and the margin calls caused a cascade of liquidation selling that saw the gold price tumble to the low $1300s at one point on even larger volume than had flooded the exchange the previous Friday.

    Barry, that was not a normal sell-off. Surely you have something to say to your readers about that.

    • It is what it is — if the upside was enhanced when buys are made with margin, the downside prices gets exaggerated when calls get made. During the 2000-03 tech collapse, the margin clerks were the driver of market prices. Margin drove prices up, margin calls drove prices down.

      As I said to another reader, this reminds me of the National Association of Realtors — they don’t want subprime foreclosures to count when calculating average prices today, but during the run up in home prices, they were just fine with subprime mortgage driven home prices.

      Margin is a double edged sword — you have to understand its impact up AND down.

  25. JayBondman says:

    It is difficult to classify gold as an investment because the only way to generate
    income from it is by “lending” it. This is quite an arcane way to generate a relatively
    small return on the asset. Moreover, it costs money to “store” it.

    However, lending is also the only way to make money with cash. By lending it, we
    can earn “interest.”

    If we think back to what we were taught in Econ 101/102, we recall that one of the
    properties of money is that it functions as a “store of value.” Another property of “money”
    is that it be a “medium of exchange.”

    Clearly, those who are “gold bugs” (may I wax nostalgic about James Dines?) view gold as
    a “store of value.”

    When I consider that as a kid in NYC in the 1960s my father used to send me to the corner
    store with a nickel to pick up his copy of the daily (not Sunday) NY Times, it is clear that currency
    has failed to operate as a “store of value.” Paying $10 or $12 back in the mid/late 70s for tickets
    to see Led Zeppelin at Madison Square Garden further demonstrates that cash has not functioned well
    as a “Store of Value.”

    These shortcomings of cash are further amplified by the existence of capital gains taxes, which confiscate a portion of any investment’s ability to actually act AS a store of value. A large portion of capital gains represent no gains at all, but, of course, the decline in the value of cash relative to the asset in question.

  26. [...] will be strongly held.  As such, we tend to hang onto them too strongly and too long.  We can see it today with respect to (for example), gold, commodities, bonds, China and Apple, to name but a [...]

  27. [...] We choose ideology over facts and stories over data. We all develop ideologies as intellectual strategies for categorizing and navigating the world. [...]

  28. [...] gold during the 70s, Japanese stocks in the 80s, U.S. stocks (especially techs) in the 90s, or more recently (for example), gold, commodities, bonds, China, private equity and Apple, to name but a few, the [...]

  29. [...] and unbiased thinking. This reality fits conveniently together with our tendency to prefer stories to data and our susceptibility to the narrative fallacy, our tendency to look backward and construct a [...]

  30. [...] Are You an Investor or a Story Teller? (April 25th, 2013) [...]

  31. [...] • Be aware of the tendency to let Narratives obscure the data. [...]

  32. [...] me, I am agnostic about the metal, except when it is losing people lots of money. I do detest the narrative driven sales pitch that has caught so many suckers at prices appreciably higher than [...]