Keep Being a Pessimist

 | Aug 12, 2014 | 9:00 AM EDT  | Comments
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Stock quotes in this article:

cmg

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mcd

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f

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gm

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tsla

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bks

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amzn

The bulls do have a point. Things get better over time! Life is better than it was 10 years ago, and 10 years before that, and 10 years before that. Our standard of living is higher, people are smarter, and there are more opportunities than ever before. We have electric cars and solar panels, and all of human knowledge is accessible by a computer that fits in your hand. Absent political upheaval, people are smart and they generally tend to improve things over time. That's especially true in this country.

But, most of the time, people think the opposite. People believe that things get worse. They have a pessimism bias. In his book Practical Speculation, Victor Niederhoffer called it "The Cult of the Bear." It's very easy to name everything that is wrong in the world: wars, terrorism, disease, political upheaval, inequality and hunger -- and that is just in the last couple of weeks. Ask people to name the good things, and they tend to draw a blank.

So it shouldn't come as a surprise that most people tend to miss out on trades such as Tesla (TSLA). Even those who get involved, such as myself, fail to see the trade through to completion. (I sold it some time ago.) It's hard to be an optimist. It certainly doesn't come naturally to me.

So here's an idea. If it doesn't come naturally to be an optimist, keep being a pessimist! Just be smart about it.

In previous installments, I've talked about how much I like Chipotle (CMG) and how much I think McDonald's (MCD) is doomed. I'll rehash the fundamental idea right here. McDonald's has vile food and a vile customer experience. In 1955, maybe it was fancy, but today the food is so cheap and of such poor quality that many people eat there only because they have no other alternative. There is more to the trade, but that is the CliffsNotes version.

Chipotle is the innovative one here, offering better food and a better experience. If that's the case -- and if you are uncomfortable chasing the chart higher -- instead of buying the innovation, short the stock that stands to lose most from the innovation. In this case, it's McDonald's. For every winner, there is a loser.

As with Tesla, if you can't bring yourself to chase the stock, short Ford (F) and General Motors (GM).

If you could go back in time, instead of buying Amazon (AMZN) you would have shorted Barnes & Noble (BKS) -- and that would have worked out great, right?

As a general rule, it is always easier to pick the losers than the winners. Why? Because it comes naturally to people.

So, while we're on the subject of Chipotle: Yes, McDonald's is a very obvious loser. The market is starting to figure that out, too. It may not be the sexiest short in the world -- it's certainly not going to go to zero -- but you certainly wouldn't want to be long the name.

Instead of sitting around trying to think of the New New Thing (leave that to the venture capitalists), sit around and try to think of the old thing that the new thing is going to render obsolete.

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