Today I took a 50% loss on what had been my largest speculation for years.
This was the gold stock fund I bought when my former employers required me to sell all my stocks near the market bottom in 2015. Well, not all of them… just the ones that were in the newsletter I wrote at the time—which was almost everything.
They were not crazy. Nor mean.
Their concern was to avoid a potential conflict of interest. If I wrote about stocks I owned, I might become biased. I might even go over to the dark side, selling while telling my readers to buy. That’s the classic scam called “pump and dump.”
They knew I would do no such thing, of course. But they didn’t want to take any chances, and implemented a zero-ownership policy. This was much stricter than required by the Securities and Exchange Commission (SEC), which only requires that I disclose my ownership in any stocks I write about.
When the company announced this policy, dozens or maybe hundreds, of people wrote in—to complain. Not one person then, or since, ever wrote or spoke to me, saying, “Gee, I’m so glad you no longer have that potential conflict of interest.”
Every person—every single person—who has commented has said they liked it better when I could put my money where my mouth is.
But there’s more. I think the non-ownership policy set up a different potential conflict of interest.
Imagine me out there kicking rocks in the jungle or desert somewhere…
The unknown company I’m investigating, in which I own no shares, shows me a big fat quartz vein with visible gold running through it. It’s as wide as a house—and runs for kilometers on surface. The company has just made a discovery that will send its stock through the roof.
Now, if I care about my readers, I pull out my laptop or my phone and start writing a positive report. But if I do that, I can’t buy the stock myself. If I can make more money keeping the discovery to myself, what interest do I have in sharing it with my readers?
If you ask me, the rules I operated under before created a direct conflict of interest between my readers and me (just not a legal one). It created an incentive for me to keep my best ideas to myself and share the second-rate ones with my readers.
I know you have only my word on this, but in fact, I chose to do the opposite. Finding great speculations is no easy task. The newsletter would have suffered if I’d kept my best ideas to myself. If I was going to write a newsletter at all, I just couldn’t do less than my best for my readers. I wouldn’t have been able to face myself in the mirror.
Sadly, my choice to look for opportunities similar to the ones I wrote about didn’t work out for me. There were never two equal opportunities. If I found something good, it went in the letter. If it wasn’t good enough for my readers, I sure as heck didn’t want to put my own money in it.
So, after a long time of not finding anything to put my own money into, I decided to buy into a fund that owned some of the stocks I liked. The legal folks cleared this, and I disclosed it to my readers at the time.
It was a poor substitute.
This is, in fact, a key reason why I’ve started publishing my own newsletter, the Independent Speculator. I’m not simply disclosing when I own stocks I write about: the whole idea is that I only write up companies in which I’m willing to put my own money.
Since the unanimous opinion of my readers was that they liked me having “skin in the game,” that’s exactly what I’m doing now. And I’m doing it with 100% transparency, down to screen shots of the trades I make. This shows exactly when I invest, how much, and at what price. Readers then make their own decisions with my real world actions and results in mind.
Flash forward to today.
I closed the position, selling every share I had in that fund I bought years ago, losing roughly half my money.
Why?
It’s not because I’ve turned bearish on gold stocks. I’m unhappy with the fund’s performance, but I’m sure it will recover in time. Whenever gold goes back into roaring bull mode, that fund should do well. The problem is that I don’t know when that will happen. I’m hopeful that it will happen soon, but I know it could be another year or more—and I don’t invest in hopes.
Many times over my career, I’ve told readers that asking, “How much money will I lose if I sell this?” is the wrong question. Even, “What if it goes up after I sell?” is the wrong question.
The right question is: “Where is the money in this position most likely to deliver the gains I want?”
If the answer to that question is anywhere other than where the money is now, the right decision is to sell and redeploy.
Note that my analysis assumes there’s nothing inherently wrong with the company, fund, or asset being sold. If there’s nothing wrong with it, the investment might recover. That makes leaving the money where it is a viable option. If there is something actually wrong, however, holding is never a good option. There really is no question: just sell it.
When there’s something wrong, I want to get out while I can.
My analysis also assumes I have options that could be better alternatives than the one I’m considering selling. If I have no better speculations at hand, I might as well leave the money where it is. Perhaps my original bet will work out, after all.
Why not go to cash? Because the cash was deployed for better gains than money in the bank can give me. While my speculation has a chance of doing that, there’s no reason to sell and hold cash. If it becomes clear my speculation can’t do that, then it’s a failed speculation and I take my lumps and move on. But the sole fact that the share price is lower is not proof that a speculation won’t deliver. Most speculations fluctuate into the red at some point or another.
If I do have something I’m very keen on—especially if I think it can deliver a quick win—selling an underperformer and redeploying into a new speculation is a no-brainer.
That’s why I don’t let myself get hung up on how much it will hurt to take a loss.
My focus is on where I can deploy my financial resources for maximum returns.
And yet… I am human. It did hurt taking such a big loss today. It helps that I’ve urged readers to ignore the hurt and think about new gains so many times over the years; it would bother me more to be a hypocrite than taking the loss does. But I wouldn’t have done it simply to sit on more cash. I did it because I have a new speculation in mind that I’m very excited about.
So, I’m not just putting my money where my keyboard is. I’m also taking my own medicine. Today I did exactly what I’ve always told my readers is the right thing to do in a situation like mine.
Yes, it hurt, but I’m excited about what comes next.
