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Horizon Preference

Horizon Preference

I’ve done a couple of interviews with Peter Atwater of Financial Insyghts in the last few months. He is a master of market sentiment. So am I, but he analyzes it empirically, while I analyze it with yabba dabba doo.

Peter taught me a term called horizon preference. I don’t have the vocabulary to explain it in the way that Peter does, but let me do my best with my knuckle-dragging trader lexicon.

When things are good (like now), we think of the future. We think of spaceships and flying cars and EVs and vertical farming and 3D printing and NFTs and Web 3 and all kinds of innovations. I spoke with a blockchain venture capital fund last week, and the stuff they are investing in just blew my mind. So incredibly futuristic.

When times are bad, we do not think about the future. We think about the immediate present. How to get food. How to get shelter. How to pay the bills. How not to go bankrupt. All the flying cars and spaceships go out the window.

So now, we would say that horizon preference is very long, and during the financial crisis, we would say that horizon preference was very short.

Over the course of my career, I have seen horizon preference vacillate between long and short several times. And one thing is certain—at some point in the future, our horizon preference will shorten once again.

Although, this is difficult to trade. I remember in the scooter craze of 2018, the scooter startups raised billions of dollars. Lime and Bird. There was a third scooter company, Spin, that sold tokens on the blockchain. Scooters on the blockchain. Check, please. And there were still three years to go in the bull market.

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Of course, back in 2017, the dog-walking app Wag raised $300 million. Four years later, we’re scraping the highs of the Nasdaq.

The sentiment game is very difficult. Things looked pretty stupid in 1997, but the tech bubble still had three more years to go, and those three years were the most profitable. I’ve been telling my Dirtnap subscribers that sentiment is absolutely orgasmic in energy right now, but in the context of the big secular trend, energy still has a long way to go, expressed as the market cap percentage of the S&P 500.

Things are good right now. Someday they won’t be. This, too, shall pass.

When to Sell

Most people aren’t too fussy about entry points on their trades. You get an idea, and you buy it.

Selling is a different story. Here are some guidelines on when to sell a cherished position:

  • When you tell all your friends how much money you are making
  • When you keep refreshing the brokerage site in the browser to see the balance go up
  • When you start counting your money and thinking about the cars/houses/toys you are going to buy with it
  • When you start calculating when you can retire

If you find yourself doing any of these things, sell immediately. Don’t stop to mix yourself an old-fashioned.

Some people say they will never sell. You hear the Bitcoin guys say this. I assure you that at some point in the future, there will be a time to sell Bitcoin. If they don’t, they will do the round trip.

Back in 2011, you had people saying that they would never sell gold. A 45% drawdown tends to sharpen the mind.

It is better to sell early than late. If you sell late, past the peak, then some very insidious behavioral finance kicks in. You want to get back to the high-water mark, so you hold out for the previous highs. Then you are trapped as the bear market begins. If you sell early, you simply take it off your screen and move onto the next trade.

But the reason people sell late rather than early is because they’re operating under a regret minimization framework. Fear of future regret. They are worried they will regret their decision to sell too early.

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Sometimes you sell simply because you have made enough money.


We live in an age of fabulous wealth and technological progress. And it is very difficult being short human innovation.

But there are periods of time when we actually move backward, not forward. Like from 1929–1946.

All of human progress is a series of three steps forward, two steps back. It’s usually pointless to try to play for the two steps back, but if you can avoid the great, secular bear markets, obviously your returns will improve. And you’ll experience a lot less stress.

I’m seeing divergences between markets and culture. Stocks are making new highs, while retail stores are closing down because of excessive shoplifting. Technological innovations abound, while drug overdoses in the US have reached 93,000 a year. This is not a political statement at all—it’s a statement about paper wealth increasing while quality of life deteriorates. We have seen this at a few points in history.

I’ll pass on playing for new highs—in the near future, our horizon preference will be much shorter. Because things will not stay good forever. And you may find yourself wishing you had more exposure to an asset that performs well when things are… not so good. An asset like gold.

Longtime readers know I think everyone should own some gold. Over time, it will improve your returns, help protect you from the ravages of inflation we’ve been discussing for the past several months, and smooth out some of the volatility we’re starting to experience. My colleagues here at Mauldin Economics have put together a special report to show you all the ways gold can help you now, when things are good (and even more later, when they are not). Access your free copy by clicking here.

Jared Dillian

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