Motivated Reasoning

The small print: this newsletter is mostly stories, pop-psychology, and half-baked trading ideas. This is NOT financial advice. We’re here to show you the psychological traps that investors fall into, so you can avoid them. But if you are having a punt in the markets, make sure you restrict your trade size to whatever change you can find down the back of the couch.

In 2012, Bill Ackman placed a $1 billion bet against Herbalife.

His theory was simple:

Herbalife was a pyramid scheme, regulators will shut it down, and the stock will go to zero.

That was his thesis. But he also hated the company. Like, really hated it…

And he wasn’t shy about telling people: Ackman attacked Herbalife publicly, and his short position was no secret.

So it wasn’t just money on the line - it was his ego and reputation too. He was in deep. He desperately wanted Herbalife to fail.

And that’s a bad place for an investor to be. Because it gets harder to see the trade objectively.

But at first, it seemed Ackman was right. In 2012, Herbalife’s value plunged, and Ackman had a chance to exit with a profit.

But he was so caught up in his crusade against Herbalife that he stayed in the trade…

Then big names like Carl Icahn piled in on the other side, Herbalife rebounded, and Ackman got squeezed.

Suddenly he was trapped.

Six years later, he finally locked in a loss of around half a BILLION dollars.

Herbalife wins. FATALITY.

Now, most of us won’t ever get the chance to lose $500M.

But our portfolios can still be destroyed by the same mental mistake that Ackman made…

Sometimes we really want something to be true. So we stop looking at the evidence around it objectively.

It’s called motivated reasoning.

And it can ruin your portfolio.

Let’s say you back a company because you love their product and it fits your worldview. You really want the stock to do well.

And maybe you tell a couple people about it, or convince someone else to buy.

Well, now it’s more than a trade. Now your wants, ego and reputation are involved.

Suddenly it gets harder to see the evidence for what it is. Your view is distorted:

Good news is good news and bad news is ignored.

The trade’s no longer objective.

This is what happened to Ackman with Herbalife - and he stayed in the trade long after he should have walked away.

So how do you avoid the same trap?

Few ways:

We really wanted to short Palantir this week.

We aren’t fans - it’s basically Skynet. And the valuation is stretched, so we thought maybe now’s the time for short-dated puts.

Problem is, the business is good: growth is huge, margins are ludicrous, and PLTR keeps winning contracts.

Other problem is - we just talked about motivated reasoning, and this one fits into that category for us.

So we’re leaving it alone. For now.

Instead, we’re looking at bonds.

Debt Crisis

America has a debt problem.

Bond yields have been ripping higher, and Scott Bessent has already tried throwing liquidity at the problem with treasury buybacks. Which worked for about half a day.

But now, bonds have been battered. The 30 year is above 5%, and TLT is sitting at $82.

And as much as we want Washington to be punished for racking up $40T in debt, we’re side-stepping our motivated reasoning here and playing the other side:

Because yields have run, sentiment is poor, opinions of Bessent are at an all-time low, and midterms are coming up.

Even with oil spiking this week, maybe Bessent has a trick or two up his sleeve to get yields under control, and any modest sentiment reversal in the next month or two could produce a decent bounce.

We’re buying: TLT, Nov 20 $85 calls.

Potentially some major catalysts this week - treasury buybacks, long end auctions and fresh inflation data.

Do we think America’s debt problem is going to be fixed?

Lol, no.

But a short term bounce in long duration bonds leading up to midterms?

Maybe.

There’s psychological traps everywhere in life. They shape how we think, how we make decisions, and spend money.

But enough word salad - let’s gamify this:

💲💲Jensen Huang just declared the arrival of AGI.

All the world’s problems are solved, presumably.

The AI hype-train already seems wildly out of control, valuations gone stratospheric.

But momentum is a dangerous thing to bet against.

The answer - and the psychology behind it - will be revealed in the next edition.

Last Week’s Answer:

If you chose clean-energy over the bookies, fair play to you - you’re a better person than us. Clean energy might make the world a brighter place, but it doesn’t mean it’s the winning trade.

Trading with your values intact is admirable. Just make sure motivated reasoning isn’t hurting your PnL.

Thanks for reading! See you next edition 👀

In the meantime:

Have a friend or loved one in your life who’s really bad at making financial decisions? Then tell them that (indirectly) by sending them this newsletter.

And finally, got a topic you want us to cover? Reach out and let us know.

Stay solvent out there

Jack