Andy Kessler: “There’s Only One Way To Invest Today”

Authored by former hedge fund manager Andy Kessler, originally published in the WSJ

George Costanza’s Investment Tips

I’m frequently asked what it takes to run a hedge fund. Translation: “If a dope like you can run one, I certainly can too.” Fair enough. A lot of hedge funds are getting killed in a huge upmarket: Brevan Howard’s Master Fund shrank 5.4% in 2017, while David Einhorn’s Greenlight was down 12% in the first two months of 2018. It’s time for a new batch of fund managers. Think you can do better?

First, let’s see if you’re up to it. Right now, go out and buy a 60-inch flat-screen TV. Easy, right? As soon as it arrives, return it for a 75-inch model. Then, when that shows up, return it and get the 42-inch version. Still having fun? It’s a royal pain. As soon as you’re comfortable with something, it’s probably time to sell it. This self-qualifying exercise will show if you can turn on a dime when, say, tariffs tank the economy.

Next, visit all the people you know and ask them to take out their wallets and give you a slug of their money. Do the same for a bunch of strangers, too. Then promise that you’ll return triple the money in a decade, minus your modest 20% of the upside fees.

Ready to invest? What’s your style, your edge? Macro, distressed debt, long-short, dollar-event-driven, cryptocurrency arbitrage? Actually, there’s only one way to invest, especially in today’s environment. It works for everyone, from $20 billion hedge funds to individual retirement accounts worth a few thousand bucks: Take the pulse of the market and figure out how everyone is wrong.

Easier said than done. It isn’t hard to get caught up in the emotion of the market. It’s euphoria when stocks are booming and you’re getting crypto tips from Uber drivers—and despair when everyone is dumping stocks and swearing never to own them ever again. You’ve got to zig when everyone else zags. “Serpentine, Shel, serpentine!”

How do you know what’s right? It almost always feels wrong. There’s an old saying on Wall Street: “Your hand should be shaking when you place your order.” You can learn from George Costanza of “Seinfeld.” He once lamented, “Every decision I’ve ever made, in my entire life, has been wrong. My life is the opposite of everything I want it to be.” When Jerry Seinfeld opines, “If every instinct you have is wrong, then the opposite would have to be right,” George gets it. “Yes, I will do the opposite. I used to sit here and do nothing, and regret it for the rest of the day, so now I will do the opposite, and I will do something!”

Model Investor

Being contrarian, as Monty Python explains, “isn’t just saying, ‘No, it isn’t.’ ” (“Yes it is!” “No it isn’t!”) But Costanza was never on his way to becoming a fund manager. There’s that twisty feeling in your gut, constantly second-guessing. You wake up with goblins in the middle of the night. You train yourself to think different, to feel wrong when things are rosy. Who gets this right? Investor-guitarist Pete Townshend wrote in 1971: “When my fist clenches, crack it open / Before I use it and lose my cool / When I smile, tell me some bad news / Before I laugh and act like a fool.” Or invest like a fool.

Shrinks call this borderline personality disorder, like living on the outside looking in. It’s required to succeed, though it’s better if you teach yourself to simulate rather than live it. It sounds odd, but you harness these out-of-body vibes through the bile in your gut.

My former and very sane fund partner Fred Kittler had it perfected. I bumped into him in February 2000, during an internet conference at San Francisco’s Palace Hotel. I—metaphor alert!—was headed up the escalator and passed him on his way down. Everything in our portfolio was popping up five, six or seven points that day. He looked terrible and told me, “I need to go home and throw up.” He wasn’t sick, but his gut was calling the top. Fortunately, we had already been selling.

Not 16 months before, on the morning Long Term Capital Management blew up, our fund temporarily lost hundreds of millions before breakfast. Fred was absolutely giddy, buying everything in sight.

George Costanza again: “It’s all happening because I’m completely ignoring every urge towards common sense and good judgment I’ve ever had. This is no longer just some crazy notion. Jerry, this is my religion.”

If you want success running money, pay heed.