Winning the Investing Race

The great American novelist, Ernest Hemingway, famously wrote, “There are only three sports: bullfighting, motor racing, and mountaineering; all the rest are merely games.”

Well, I’ve never been a bullfighter or a mountaineer, but I have spent plenty of hours behind the wheel of a racecar. And one thing I can say is that it certainly is a sport that’s well above the other “merely games” that I’ve played.

Now, perhaps it’s because over the weekend, I attended one of my favorite events of the year, the Long Beach Grand Prix, but my mind is all about racing and going fast right now. In fact, I just recalled that when I was first learning how to drive race cars, my coach used to tell me that as soon as I straightened out the wheels after a tight turn, that I should smoothly push my foot down on the accelerator as hard as possible to achieve maximum RPMs and maximum speed.

That thought came to me as a great metaphor for investing. You see, when you identify a great company whose share price is lining up for a big run down the straightaway, you want to straighten out your portfolio wheels and go full throttle into that stock. Indeed, that’s the prime directive for much of my investing thesis, especially in my trading services Fast Money Alert, Bullseye Stock Trader and High Velocity Options.

Interestingly, a different comparison between auto racing and investing came up during the pandemic-postponed Grand Prix of 2021. A friend then jokingly asked me: Do you know how to make a small fortune in auto racing? You start with a big fortune!

That same friend attended the 2023 Long Beach Grand Prix with me, and we talked about another observation that sparked the idea for this week’s issue. Here’s what he told me: “Jim, the racing business sort of seems like what you do. The team owners pour money into their people and products in pursuit of victory. And when it comes to investing, we put money into companies in pursuit of winning by growing our money.”

I thought about this observation for a few minutes, and then I came to the conclusion that my friend was partially on track (pun intended). You see, in some ways auto racing is similar to investing, but in other ways, it’s very far from it. Let me explain.

Like auto racing, investors want to win. And like auto racing, investors have to take risks to come out with a victory. If you want to win the Long Beach Grand Prix, you can’t just safely negotiate the 1.968 mile, 11-turn road course. Instead, you have to push, push, push all the way through, and you have to do each lap in about 70 seconds.

And if you want to win in your portfolio, sometimes you have to push things along by buying high-momentum stocks and/or out-of-the-money options on those stocks in pursuit of really fast gains, like the way we do in the aforementioned trading services.

Your editor in pit lane during the Long Beach Grand Prix pre-race festivities.

Yet, unlike auto racing, when we put our money into a company, our winning comes in the form of more money.

You see, in auto racing, particularly in the amateur and semi-pro ranks, but also largely in the professional ranks, the money you put into the venture doesn’t come back to you multiplied the way a good investment does. Sure, you might win a trophy, and it might be really fun, exhilarating and satisfying, but it’s going to cost you a whole lot of capital.

But when we invest, the trophy is the increased capital, and the bigger the gains, the bigger the trophy. So, unlike a pursuit that costs you money, investing is a pursuit that, when done properly, is going to make you a whole lot of money.

Another way to frame this for contrast is that unlike auto racing, investing doesn’t take a big fortune to make a small fortune. Instead, when you invest, you can take that small fortune and turn it into a really big fortune. And when it comes to investing, there’s no time like the present to go out on the “track” and test your driving skills.

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ETF Talk: Adding Some ‘Golden Shine’ to Your Portfolio

In life, the value or cost of some things may rise in tandem either with or in the opposite direction of the change in the value or cost of other goods.

One such precious metal that favors the second trajectory is gold. Indeed, while not a rock-solid economic rule, in general, during times of inflation, geopolitical risk and/or a weak dollar, the price of gold tends to rise. During times of deflation, global stability and/or a strong dollar, the price of gold tends to fall.

As uncertainty reigns about whether the Federal Reserve will pause its dogged determination to continue to hike interest rates, the price of gold has reflected that sentiment. On April 18, Reuters reported that the price of gold had breached the $2,000 level, a key metric that points to anticipation regarding the possibility of rate cuts by mid-summer.

While anyone who subscribes to any of my trading services (and if you haven’t, you should) knows that I always advocate dedicating part of your portfolio to gold, I am always looking for ways to invest in gold without holding the actual metal, which is heavy, bulky and hard to insure.

Enter the Aberdeen Standard Physical Gold Shares ETF (NYSEARCA: SGOL), an exchange-traded fund (ETF) that tracks the price of physical gold. This ETF seeks to replicate the performance of the price of gold bullion, net of expenses, creating a fund that appeals to investors who are looking for a simple and easy way to invest in physical gold without having to own the actual metal.

The good news is that SGOL’s decision to only invest in physical gold, rather than gold futures or something similar, precludes exposure to the higher level of risk contained in futures contracts. In addition, the physical gold holdings in the fund are audited twice a year by a third party, providing investors with reassurance that the fund’s managers won’t engage in risky investment adventures with the fund’s assets.

The flip side of all of this is that, as I said above, the price of gold is highly dependent on external factors and can change sharply, without warning. Since this fund is entirely focused on gold bullion, rather than mining stocks or gold futures, a drop in the price of gold can cause a sharper drop in the share price of this ETF than in the share price of similar gold-based ETFs.

Similarly, the fact that gold bullion does not generate any income on its own is reflected in the fact that SGOL does not pay dividends. So, income investors who are interested in precious metals might want to look elsewhere for their dividend needs.

As of April 18, 2023, this fund has been up 1.37% over the past month, up 5.27% over the past three months and up 9.85% year to date.

This ETF has total net assets of $2.74 billion and an expense ratio of 0.17%.

While SGOL is a far simpler and less costly way for investors to gain exposure to physical gold, investors should be aware of the risks associated with investing in gold and always do their due diligence before adding any stock or fund to their portfolio.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You may just see your question answered in a future ETF Talk.

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In case you missed it…

Is There a Cure for the Summertime Blues?

Sometimes I wonder what I’m gonna do
Cause there ain’t no cure for the summertime blues…

— Eddie Cochran, “Summertime Blues”

I know what you’re thinking. The first day of spring was only about three weeks ago, so why I am leading off today with the notion of “Summertime Blues”?

Well, in addition to being one of the great songs in rock history, and one whose popularity was taken to the next level by the likes of The Who, RUSH and Alan Jackson, the notion of upcoming summertime blues is what we could be looking at in financial markets this year.

Indeed, we’ve already seen the chatter go from “sell in May and go away,” to “sell now and go away.” And while selling now might be a strategy that serves some well, particularly if you’ve been in tech stocks in 2023, the better approach in my view is to let the data decide.

In today’s issue of my morning briefing, Eagle Eye Opener, we took a look at what conditions/market events would be required to keep markets from suffering the summertime blues, and what conditions/market events would need to take place that would usher in a big bullish summer party bash.

Let’s take a look at these right now, starting with the current macro drivers.

The current situation for markets is that regional banks have stabilized, there continues to be “dovish” Fed policy expectations, still-elevated inflation, mild deterioration in the labor market and slowing growth. The current market environment largely reflects the divide between what the market thinks/wants to happen (stable banks and less-hawkish Fed) and what is actually happening (inflation sticky, growth slowing).

As long as the market sees its “wish list” come true (a big ask), then current levels on the S&P 500 are justified. However, if those wishes aren’t granted, markets are over their skis by at least 5%.

For things to improve from the current situation, i.e., the so-called “better-if” scenario, we would need to see regional bank stress continue to subside and/or disappear. We also need the Fed to confirm dovish expectations, core CPI needs to drop towards 5.0% (it came in at 5.6% today), the labor market must deteriorate and economic growth needs to gradually moderate.

This situation would confirm the market’s positive hopes about the banks and the Fed and add to it disinflation and a normalizing economy and labor market — and in effect deliver the “soft landing” just about everyone wants. In this environment, stocks should rally hard, and rightly so as multiples and earnings should rise. If this environment were confirmed it would signal the end of this bear market, as this environment would be “Goldilocks” for stocks and bonds.

Now, for things to descend into the summertime blues, i.e. the “worse-if” scenario, regional bank risks need to re-emerge, the Fed hikes rates by 25 basis points in May and signals more hikes are coming, Core CPI stays sticky, or worse, disinflation reverses and the labor market and economic growth remain resilient.

This would truly be a worst-case, summertime-blues scenario for stocks, and it’d dash the hopes of investors that have underpinned the recent rally and open up the possibility of a substantial decline in stocks. This environment would be “stagflation” with the added stress of regional bank failures and a Fed powerless to help. The S&P 500 at 3,300 (about 19% lower from here) should be thought of as a “worst case.” But given market momentum, a technical-driven violation of that level can’t be ruled out if contagion gets a lot worse. This is pretty much a nightmare scenario for stocks.

So, by this summer, we should have all the data necessary to give us a read on whether the better-if scenario is upon us, or if that aforementioned nightmare scenario is the order of the day. If it is the latter, then we’ll all be lamenting that there ain’t no cure for the summertime blues.

If you want to get market insight like this on a daily basis, then I invite you to subscribe to my Eagle Eye Opener today. For the price of a daily cup of coffee, you’ll be armed with the intelligence to help you avoid any summertime blues.

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Wisdom of the Tailor

“The only man I know who behaves sensibly is my tailor; he takes my measurements anew each time he sees me. The rest go on with their old measurements and expect me to fit them.”

–George Bernard Shaw

In life, making adjustments and “taking new measurements” is essential. Not only in terms of your clothes, but in every part of your life. If something you’re doing just doesn’t quite fit well any longer, don’t try to conform to it. Rather, get a new tailor, take new measurements, and go out and find the right fit.

The Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.

In the name of the best within us,

Jim Woods