The Yen Carry Trade

 In a nutshell, the yen carry trade is when investors borrow Japanese yen at very low interest rates, convert to U.S. dollars, and then invest in U.S. Treasuries, U.S. equities, and other various U.S. assets. These investors make their returns in the United States and have traditionally made big profits with these trades. Many of these investors have magnified their profits in this trade by aggressively utilizing leverage. They can easily convert their dollars back to yen to cover their loans with minimal interest expense. For an extended period, Japan had near- zero interest rates and the Japanese yen had been in decline vs. the U.S. dollar. From 2019 to 2026, the yen has been falling against the dollar. The currency pair had surged to a four-decade high near 164 in late July 2026. In other words, it took 164 yen to buy one U.S. dollar.

Fundamentally, the yen carry trade functions as a form of global leverage. Global markets have grown unusually interconnected. One of the tightest links runs from the yen carry trade straight into the largest U.S. technology stocks. As a reminder, the S&P 500 is being propped up by the appreciation of these 10-20 U.S. technology stocks, with the yen carry trade serving as a hidden form of leverage sitting underneath the major stock indexes. A sudden reversal in the Japanese yen can pull equities lower even when nothing has changed in the companies themselves. For anyone following big tech stocks, the behavior of the yen has become impossible to ignore. A currency move that begins in Tokyo can surface hours later as a deleveraging wave across U.S. equities.

Its always been my contention that the most important data point in the world economy is the current yield for U.S. Treasury Notes with a 10-year maturity. I've recently arrived at the conclusion that coming in a distant second place at this point in time would be the exchange rate between the U.S. dollar and the Japanese yen. For the last couple of years, some investors have been concerned, if not outright fearful, that the yen carry trade could unwind in a rapid fashion and wreck havoc on the capital markets. We witnessed what the yen carry trade unwind would look like in August 2024. The Bank of Japan raised interest rates from zero to 0.25% in late July 2024. Simultaneously, weaker U.S. jobs data fueled expectations that the Federal Reserve would cut the policy rate at the next FOMC meeting. These actions combined to rally the yen 8% against the dollar (moving from 162 to 148.) The impact in the markets was immediate and profound. Rising yen costs led to margin squeezes that forced automated liquidations of global assets. U.S. and Asian equities plunged in early August 2024 - the Nikkei 225 dropped 20% and major U.S. indexes slid sharply. Fortunately, the ship righted itself by mid-August (2024) and widespread carnage was largely avoided. Although a major market disaster was avoided in August 2024, the structural features and risk inherent in this trade deserve continued attention by investors.

As we return to the present day (October 2026), it is evident that the risks associated with the yen carry trade are stirring and threatening to awaken from dormancy. It took several years, but like practically every other country, Japan is finally experiencing inflation in their economy. Their current government is seriously considering engaging in fiscal stimulus, which will only accelerate inflation. The yen has been taking its lumps. The U.S. recently intervened to push up the yen, but that attempt was only successful on a temporary basis. A more meaningful recent (9/18/26) maneuver was the Bank of Japan raising its benchmark interest rate to 1.25%. This marks the highest interest rate level in Japan since 1995, continuing a steady departure from long-standing negative and near-zero interest rates.The general prediction is that Japan will be forced to continue raising interest rates to deal with inflation and the devaluation of its currency. This could ultimately lead to the collapse of the yen carry trade. Institutions and individual investors will have to sell their assets, buy back the yen, and cover their debts before the yen's value increases too much and they lose too much money. This could lead to rapid selling of U.S. securities which of course would have significant, negative implications for the market.

Unlike spendthrift Americans, the Japanese are prodigious savers. The historic low interest rates in Japan have encouraged Japanese investors to invest overseas. For an extended time, Japan was the world's largest creditor nation. Although they now trail only China in that regard, Japan has accumulated over $6 trillion of foreign assets. In terms of Purchasing Power Parity (PPP) and historical real effective exchnage rates, all indicators suggest the yen is approximately 40% undervalued against the dollar. If Japan continues on the tightening track and interest rates and the yen move upwards, many Japanese investors will see an opportunity to repatriate their investments back to their home country.

The assumption laid out in this blog is that various factors will lead to a stronger, more valuable yen. The carry trade depends not just on Japan's rate, but on the interest rate differential with the United States. President Trump has consistently been obsessed with pushing down U.S. interest rates. This still appears to be the case even if lowering interest rates would be detrimental to the overall economy. Hopefully, the Federal Reserve Open Market Committee will retain their independence from political shenanigans and do what is best for the country and its citizens. Higher interest rates in Japan combined with lower interest rates in the U.S. would facilitate a stronger yen and weaker dollar. As mentioned earlier, this scenario would doom the yen carry trade and exert downward pressure on U.S. assets.

It's Time for an Article V (5) Convention

Thomas Jefferson wrote in 1789: "I wish it were possible to obtain a single amendment to our Constitution. I would be willing to depend on that alone for the reduction of the administration of our government. I mean an additional article taking from the federal government the power of borrowing." The Founders , including Jefferson, were prescient in their concerns that Congress would eventually be incapable of demonstrating even a minimal degree of fiscal restraint. It took over two centuries to arrive at this juncture where the majority of federal legislators have abandoned fiscal responsibility and embraced spending and borrowing to advance their own personal interest to get re-elected every two or six years. Article V of the United States Constitution provides a mechanism that bypasses Congress and offers a solution to runaway spending and annual budget deficits that rival a banana republic and in time will choke the life out of the U.S. economy.

The Constitution needs to be amended in order to bring discipline to federal spending. This can be done one of two ways. Two-thirds of both the House of Representatives and the Senate can propose an amendment to the Constitution. Since Congress is the problem, and not the solution, the second way to start the amendment process is via state legislatures. To start the ball rolling, state legislatures would pass identical resolutions asking Congress to call an Article V convention specifically for a balanced budget or debt brake amendment. This requires applications from 34 states (two-thirds of the 50 states). Once 34 valid state applications are officially recognized, Congress must call the convention. The amendment proposed by the convention must then be ratified by 38 states (75%) before becoming part of the U.S. Constitution. I don't see a return to fiscal sanity until this is done. Unfortunately, it very well may be too late in the game to save the sinking ship. A bout of hyper-inflation, although painful, would also serve as a catalyst for necessary reforms. My preference would be to do the smart thing and thus avoid the severe pain.

As with any major proposed policy change, there are those who oppose the introduction of a balanced budget amendment. A common argument from the opposition is that a constitutional convention might not be restricted to a single topic, potentially opening the entire Constitution to unpredictable changes. In my opinion, this can easily be avoided by the proposed amendment being structured with precise language that solely addresses measures to either balance the budget or impose a brake on the creation of federal debt. Some critics and economists argue that a mandatory balance requirement would worsen recessions by forcing sharp spending cuts or tax hikes when revenue drops. I agree with this assessment. There again, the solution lies in the provisions of the amendment. Exceptions should be carved out for the times of war, national emergencies, or recession; or allow Congress to suspend the rule by a supermajority vote. Opponents also note that rigid caps fail to distinguish between day-to-day operating expenses and long-term capital investments like infrastructure. This is simply an accounting problem and should not be considered an insurmountable challenge.

The arguments to call an Article V convention specifically for a balanced budget amendment are powerful and far outweigh ignoring the growing national debt and perpetual, large fiscal deficits. There needs to be structural limits on federal spending. A constitutional amendment would be more binding by its nature, and thus act as a surer means of achieving the desired result. A constitutional amendment, unlike a statute or rule, could be superseded only by another constitutional amendment. Without this discipline, proponents believe, the goal of a balanced budget would not be attained because of the conflicting pressures.

Balanced budget provisions have been added to the constitutions of Germany, Hong Kong, Italy, Poland, Slovenia, Spain, Sweden, and Switzerland. In 2009, Germany's constitution was amended to introduce the Schuldenbremse (debt brake), a balanced budget provision. This applies to both the federal government and the various German states. From 2016 onward, the federal government was forbidden to run a structural deficit or more than 0.35% of GDP with the possibility of exceptions for emergencies such as a natural disaster or severe economic crisis. For the sake of comparison, please note that the U.S. has been running deficits of 6%-7% of GDP for several years now. Poland's constitution (adopted in 1997) caps the public debt at 60% of GDP. For the sake of comparison, please note that the U.S. federal debt-to-GDP ratio currently stands at 122%. The Swedish government is required to run a budget surplus of at least 1% of GDP on average over a business cycle. In 2019, this goal was temporarily lowered to 0.33% of GDP. The overall debt must not be above 35% of GDP. It also should be noted that every U.S. state other than Vermont has some form of balanced budget provision that applies to its operating budget.

It's sad that we have to resort to a constitutional amendment to reduce deficit spending and constrain politicians from making irresponsible short-term spending decisions when they are in office. Ironically, the installation of a "debt brake" in the Constitution may be the easiest part of the return to fiscal sanity. Because at some point, Congress will have to roll up its sleeves and determine where to increase revenues and where to reduce expenditures . I don't see how increasing taxes can be avoided. The top 10%, in particular the top 1%, of income earners/wealth holders have disproportionately benefited from monetary policies implemented by The Fed and by excessive, persistent deficit spending overseen by Congress. Maybe it's time to claw some of that largesse back. Entitlement reform is ground zero for cutting expenses, starting with the introduction of a "needs test" for social security benefits. At the same time, there must be a focus on reducing fraud, waste, and abuse inherent in just about every government program that processes transfer payments. The economic benefits of lower deficits would be vast - particularly in the form of lower interest rates, enhanced savings rates, and overall economic growth. Without fixing the deficit/debt problem, look for more and more Americans, especially young people, to blame their financial struggles on capitalism and more fully embrace socialism. This is the 40th blog that I have written in the past couple of years. Coincidently, our national debt just exceeded $40 trillion a couple of weeks ago.

 

More Than One Way to Skin a Cat

 In the world of buying and selling stocks, the terms "trading" and "investing" are often used on an interchangeable basis. But they have key differences and thus should not be lumped in the same basket. Trading could be considered a type of investing - much like a square could be categorized as a rectangle. Appearing below are some of the primary differences in Trading vs. Investing:

                                                                TRADING   

1.) Time horizon: short-term (minutes to weeks).                                                                                             

2.) Risk tolerance: higher risk, including potential for significant losses.

3.) Strategies & goals: active, frequent buying and selling focused on short-term profits by taking advantage of price fluctuations.

4.) Costs & tax implications: typically higher due to frequent buying and selling.

                                                                INVESTING  

1.) Time horizon: long-term (years).

2.) Risk tolerance: lower risk, relies on potential long-term upward trends.

3.) Strategies & goals: "buy and hold" with a focus on potential long-term wealth accumulation through compounding and dividends.

4.) Costs & tax implications: typically lower due to fewer trades over a long period.

At their most basic level, trading and investing are identical. Both involve buying and selling securities. As noted previously, that is where the similarities end. Trading by nature is short-term. Trading decisions rely heavily on technical analysis, such as identifying price patterns and gauging market sentiment. Buying and selling investments becomes riskier the shorter your time line is and the more you concentrate your money into just a handful of holdings - two challenges traders often face. Additionally, due to the amount of analysis and research it takes, successful trading can be - and often is - a full-tme job. Investing is considered a long-term endeavor. Investment decisions are typically based on an analysis of fundamentals, including company earnings, growth potential, and industry trends. Long-term investing most often takes a set-it-and-forget-it mentality. Compared to trading, it is definitely a hands-off approach. 

Neither trading or investing would be considered easy. Of the two, however, trading stands out as the more arduous and risky of the two. It is not for the faint of heart, intellectually challenged, or those unable to subordinate their emotions. The 90% rule in trading - often called the 90-90-90 rule - is a well-known industry saying that 90% of new traders lose 90% of their money within the first 90 days. The numbers are even more abysmal for those who trade on a daily basis. Academic studies on active day traders indicate that only about 1% to 3% generate net profits after accounting for transaction fees, commissions, and inflation. Many day traders treat trading like a get-rich-quick scheme rather than a disciplined business.

A short list of the world's greatest traders ever would include:

1.) Jesse Livermore: Early 20th-century speculator who famously made $100 million shorting the 1929 market crash.

2.) Paul Tudor Jones: Renowned for predicting and profiting heavily from the Black Monday stock market crash of 1987.

3.) George Soros: Famous for "breaking the Bank of England" in 1992 by shorting the British pound, clearing a $1 billion profit in a single day.

4.) Stanley Druckenmiller: Managed money for Soros's Quantum Fund and built a stellar multi-decade track record without having a single down year.

5.) Jim Paulson: Made history with the "Greatest Trade Ever" by shorting subprime mortgages ahead of the 2007-2008 financial crisis.

None of the famous traders listed above can hold a candle to the money-making accomplishments of Warren Buffett, the Oracle of Omaha. Buffett is usually considered the greatest investor of all time. He has been uniquely successful for a very long time - approximately 80 years. The longevity has contributed to Buffett's legacy and fame. His baby, Berkshire Hathaway, has compounded money at a 22% annualized rate since 1965. This has pushed Mr. Buffett's net worth above $100 billion and made millionaires of numerous Berkshire Hathaway shareholders. Warren Buffett focuses on the intrinsic, long-term value of a business. He buys shares in companies with strong brand advantages and management, often holding them for decades. He is very gregarious, transparent, and educational - giving frequent interviews, spends hours answering questions at annual meetings, and writes much anticipated shareholder letters.

There is another gentleman, who died in 2024 at the age of 86, who arguably achieved superior investment performance than the legendary Warren Buffett. This fellow's name was Jim Simons. Mr. Simons's modus operandi was to design and utilize mathematical models and algorithms to make investment gains from market inefficiencies. Simons's background was in the fields of mathematics and physics, primarily operating in academia. In 1964, Simons worked with the National Security Agency to break codes. Eventually, at the age of 50, Simons decided to get filthy rich. In 1988, he established the Medallion Fund. How did it do, you ask? Well, between 1988 and 2021 (33 years), it had an average annual return of 66%. Note that this is three times the level of Buffett's average annual return. The Medallion Fund was capped at $15 billion and thus compounding was not an option. Profits were returned to Simons and his co-investors on an annual basis. At the time of his death, Simons's net worth was estimated to be $31.4 billion. In comparison to Buffett, Simons was highly secretive and proprietary. He shunned the limelight and rarely gave interviews. Simons did not wear socks. He was also known for smoking up to two packs a day of Merit cigarettes.

It is possible, maybe even desirable, to trade and invest at the same time. Many people hold long-term investments while doing short-term trades. It is important, though, to establish clear rules and distinct goals if this approach is elected. Separate brokerage accounts should be opened to segregate short-term trading money from long-term money. Another suggestion would be to set money limits for each account. For example, one may set a 90%-95% allocation for safe, long-term growth, while allocating 5% - 10% for riskier, short-term trades. I see the trading account serving dual purposes. It focuses the investor/trader on different facets and movements of the market. Additionally, it satisfies a primal desire to speculate without losing a significant portion of one's net worth. Lastly, if a person is consistently losing money on his or her short-term trades, it might be a good idea to put the trading hat in the closet.

 

Trump is Not a Conservative (at least economically)

 While President Trump would be considered a conservative in areas such as national defense, Supreme Court nominations, and various social issues, he most definitely would not be considered an economic conservative in the traditional sense as embraced by the Republican Party for the past 170 years. Trump's economic policies, in particular those espoused in his second term, fundamentally reject core free-market principles. Instead of championing free-trade, fiscal restraint, and limited government, his platform relies heavily on protectionist tariffs, massive deficit spending, and government intervention in private enterprise.

By weaponizing across-the-board tariffs, Trump effectively betrayed one of the basic tenants of the conservative philosophy that Republicans have long claimed was a pillar of their party - free trade. For a mature economy like the United States, protectionism makes no sense whatsoever. Economists generally view tariffs as a tax on domestic consumers that distorts the free market rather than allowing it to operate efficiently. Tariffs are a sales tax that inflates prices for consumers. We know from decades of experience that tariffs reduce employment, productivity, and output. Trump loves tariffs partly because companies come begging him for relief, and he can extract more tribute from them. Both the tariffs and the jockeying for special favors ought to be abhorrent to the party that holds itself as the defender of the free market. Trump has consistently made claims that tariffs can build a trade wall around America while also raising trillions of dollars in revenues to replace the income tax. This is a seriously flawed claim. A tariff cannot raise revenues from imports if those goods are no longer being imported. Tariffs can either lock out imports or collect revenues from them, but they cannot do both.

Fiscal conservatism traditionally prioritizes balancing the federal budget, reducing the national debt, and limiting government spending. Under Trump's administration, the U.S. national debt has grown significantly due to a combination of tax cuts and increased spending. Should we be surprised that the self-proscribed "King of Debt" doesn't give a rat's ass about the level of our national debt ($40 trillion), and more importantly, the fact that the government's debt is growing faster than its economy. Interest payments now consume 20% of federal revenues and have surpassed defense spending. The vast majority of politicians promise things during a campaign, and then fail to deliver when elected. It seems that Trump takes that approach to a whole different level. During his 2016 presidential campaign, Trump promised not only to balance the federal budget, but even to pay off the entire national debt. Then, during this first term, he signed legislation and executive orders adding $7.8 trillion more in red ink. Through his first 18 months in office the second time around, he is well on pace to surpass the cumulative deficit levels for his first term. His questionable fiscal policies cannot escape the mathematical reality that deep tax cuts and spending expansions cannot reduce surging budget deficits. Trump has continued his predecessor's economic errors. Either on Trump's watch, or that of his successor, there is an above-average chance of a severe shock to the economic system. Problems will first surface in the sovereign bond market with contagion subsequently spreading to the equities market. As they always do in a crisis, The Fed wll open the spigots and flood the financial system with liquidity. The proverbial can will be kicked down the road. The inevitable reset of the monetary system will be deferred again, buying time, but increasing the severity of the eventual demise of the fiat world.

Trump has steered the Republican Party away from long-standing support of free-market capitalism to a bastardized form of state corporatism that features crony capitalism. Rather than letting the free market dictate business success, Trump has advocated for heavy government involvement. He has repeatedly squeezed or lured corporations into doing his bidding. Eleven companies have given the federal government a stake in their ownership, making the government in some cases their largest shareholder and giving the president leverage over them. Imagine the outrage among Republicans if a Democrat had done that. In the past year, in exchange for an export license needed to sell advanced AI chips to China - a license previously denied on national security grounds - Nvidia secured Trump's approval by agreeing to pay the government 25% of the proceeds. Trump has taken "pay to play" arrangements to a level rarely seen in the executive branch of government.

The majority of business leaders are frustrated by Trump's apparent desire to micromanage the U.S. economy. Trump has called for CEOs who do not support him to be fired. He will stop at nothing to ensure those who cross him are punished, whether it is by their businesses failing or the CEOs being sacked. Trump does not want companies that oppose his rule to succeed. Trump's ever-changing trade policies, whether it be across-the-board tariffs, or the U.S.-Mexico-Canada Agreement (USMCA), is creating a climate of economic uncertainty that will disincentivize business investment. The main value of a trade agreement is that the rules and provisions stay stable long enough for companies to make plans and act on them. Per former Undersecretary of Commerce, Dr. Robert Shapiro - "Every investment is based on an assessment of the likely future demand for whatever you're investing in, and how much it's going to cost to produce it. So there are assumptions about labor costs, material costs and other input costs - and again about demand."

In conclusion, for the most part, Republicans have gone along with the betrayal of conservatism because they relish the power and care more about results than long time, fundamental standards. The jury is still out insofar as determining the efficacy of Trump's economic policies. My concern is that this departure from free-market principles will accelerate an eventual economic crisis. As mentioned previously, problems will start in the sovereign bond market and then contaminate the equities market. Like the 2007-2009 Great Financial Crisis, it will be a global phenomenon. And a nasty one. Unlike the 2007-2009 GFC, I see the current fiat system being replaced by a new monetary system that will take away the printing presses from spendthrift governments.

Don't Let the Tax Tail Wag the Dog

 The headline for this blog is one of the golden rules of personal finance. It means you should never make an investment or financial decision based solely on minimizing taxes. While tax-efficient investing is smart, making decisions purely to dodge the tax man (IRS) often leads to taking on needless risk, holding onto losing assets, or missing out on better returns. All too often, a smart, successful person holds on to a stock for far too long because selling would trigger a capital gains tax. Say a stock holding was up 400% at its peak. Then it falls in a precipitous manner, and now it's up 30%. They still won't sell because they are hopeful of a reversal back to their previous high level. Eventually, there is a realization that the reversal is not forthcoming. The stock is back to its cost basis. Our investor has lost years of potential returns, all to avoid a tax bill that would have been a fraction of the ultimate damage. This is the tax tail wagging the dog.

Before proceeding further, it probably makes sense to introduce the applicable income tax rates to the discussion. Capital appreciation (when investments go up in value and the gains are realized) is taxed at your capital gains tax rate. There are short-term gains and long-term gains. If an asset is bought and sold within one year, it will be subject to short-term capital gains. Generally speaking, this will be the investor's marginal income tax bracket. Investments that are sold after being held for more than one year will be subject to long-term capital gains. There is preferential tax treatment as it will be lower than your marginal income tax bracket. The applicable capital gains tax rates are itemized below. Please note the taxable income parameters are for single filers.

LT Capital Gain                                                                                                                                                  Tax Rate                                  Taxable Income    

-0-                                            $0 - $49,450                

15%                                         $49,451 - $545,500

20%                                          over $545,500

Besides the obvious example as detailed previously in the first paragraph, there are other common mistakes associated with holding on to securities at all costs. One risk is that it can get in the way of your overall investment strategy. Rebalancing a portfolio is a critical part of any investment strategy. Rebalancing goes hand in hand with asset allocation and diversification. Over time, certain asset classes will increase in value compared to others. This can disrupt the original asset allocation that was chosen when your strategy was determined. While this is a good thing, normally the advice is to return the portfolio to its original strategic asset allocation. This involves selling appreciated assets - which means paying some capital gains taxes. Paying taxes is the price you pay to participate in the equities market and, even more specifically, the price you pay to keep a strategic asset allocation over time. It is never enjoyable to write a check to the Internal Revenue Service. However, you're paying taxes because you made money (which is the goal) based on either a smart or lucky investment decision, and that sure beats being on the losing side of a trade.

Several years ago when I was a young banker and novice investor, my late father was always pestering me to purchase municipal bonds. Many investors buy munis because the interest income from these bonds is generally exempt from federal income taxes. My reluctance to buy municipal bonds at a fairly young age was supported by multiple considerations. First of all, I wanted the risk/reward associated with the stock market. Second, the commissions charged when buying munis can be fairly stiff. Lastly, I simply was not in a high enough federal tax bracket to justify an allocation to municipal bonds. Munis are inherently more valuable the higher your marginal tax rate is. Another consideration would be that changes to the federal tax code can draw investment monies into bad deals that would never attract attention except for the favorable tax treatment. Always run the investment through a non-tax filter first. Ask: Would I own this if there were no tax benefits? Still another example of chasing "tax-free' growth would be over-funding whole life insurance policies. The returns need to be evaluated honestly against alternatives. The question is always, "Is this a good use of my capital?"

Investors would be wise to consider future tax risk. There is a strong possibility that in the not-too-distant future, income derived from long-term capital gains will be taxed at a much higher rate than is currently the case. In the 1970s, long-term capital gains tax rates were over 30% - peaking at 39.875% in 1976. It would not surprise me in the least if we see a return to those much higher rates. With a national debt of $40 trillion and annual budget deficits consistently around $2 trillion (6.5% of GDP), there will be increasing pressure to increase taxes. The growing wealth inequality will reach the point where Congress will modify the tax code to address this issue before social unrest leads to violence on our urban streets. I expect the top 10% of income earners, especially the top 1%, will be paying significantly more in income taxes in the next few years. It might even be worse than I am predicting. Can you imagine the tax rates for wealthy Americans if President Mamdani has a Democratic House of Representatives and more than 60 Democratic Senators in the United States Senate?

I'll end this blog with a comment I came across when reading an article for research I was conducting on this subject matter. " The best tax shelter of all time is a great investment. Don't contort your portfolio into unrecognizable shapes trying to avoid taxes. A well-diversified, well-managed portfolio that grows steadily will always outperform a tax-optimized portfolio of mediocre investments."

Beware of IPOs

 IPO is an acronym for Initial Public Offering. An Initial Public Offering is when the stock of a private company is sold to the public. In other words, the company becomes available for the public to invest in via the stock market. As if the equities market isn't animated enough sitting at all-time highs, currently there is a tremendous amount of buzz surrounding three companies going public in 2026. Those companies are Space X, Anthropic, and Open AI. Space X launched June 12, 2026 and already has a market capitalization of $2.65 trillion. Space X's value currently makes it the world's fifth-largest publicly traded company, leapfrogging Amazon and within spitting distance of Microsoft. Last year, Space X took in $18.7 billion in revenue and lost $4.9 billion, while Amazon took in $717 billion and earned $77.7 billion. Anthropic and Open AI both formally filed their form S-1s with the SEC in early June. They are projected to go public in the last quarter of 2026 and first quarter of 2027, respectively. Both of these companies are expected to top the $1 trillion market cap level right out of the gate. Needless to say, this 2026 mega-IPO bonanza is unprecedented and crazy.

If you would have invested $10,000 in Amazon at its IPO price of $18 per share in May 1997, you would have approximately $28,500,000 today. If you had invested $10,000 in Netflix at its IPO price of $15 per share in May 2002, you would have approximately $7,200,000 today. If you had invested $10,000 in Apple at its IPO price of $22 per share in December 1980, you would have approximately $26,400,000 today. It's easy to see with these three examples why people get so excited about IPOs. So, why am I extremely cautious with IPOs and why do so many well-known investors just say no and refuse to touch an IPO, any IPO, with a 10-foot pole.

There are multiple reasons why IPOs should be avoided. They often feature inflated opening valuations driven by media hype and usually arrive on the scene when market excitement is at its peak (sound familiar?), selling incentives are high, and valuation discipline is low. Traditionally, by the time a company goes public, the easiest money has already been made by the founders, insiders, venture capitalists, and the investment banks who underwrite the stock issue. IPO shares are generally only available to high net worth investors before they become available to the general public via the stock market. Furthermore, the underwriters often price the stock aggressively, leaving little room for immediate growth and making the stock vulnerable to steep sell-offs once the initial excitement wears off. In other words, average retail investors frequently get hung out to dry.

Newly public companies lack a proven track record as a publicly traded entity. Without extensive historical price data, their stock prices can swing wildly on IPO day and during the weeks that follow, making them a risky proposition for long-term or conservative portfolios. Early insiders, executives, and major investors are often subject to "lock-up periods" (typically 90 to 180 days) during which they cannot sell their shares. When these restrictions expire, a flood of new shares can hit the market, causing the stock price to plummet.

In general, IPOs disappoint investors with poor returns. According to Verdad Capital, the median IPO (out of 3,700 IPOs reviewed since the late 1980s) lost 31% of its value three years after its IPO. After five years, the loss was even greater at 41%. In a Dimensional Fund Advisors' (DFA) article titled, "IPOs: Profiles are High. What About Returns?", DFA reviewed approximately 6,400 IPOs from 1991 through 2018. Their research concluded that the collective group of IPOs underperformed the broad stock market (Russell 3000) by 2.20% per year. To put that into context, an investment of $100,000 into IPOs would have been worth $653,000, while the same investment in the broad stock market would have been worth $1,155,000. If you are going to take on the additional risk associated with IPOs, you better make sure you will be compensated for it.

If my powers of persuasion have not convinced you to avoid buying an IPO, then I offer the following bits of advice:

1.) Wait. Let the market determine the stock's true price as opposed to the price the investment bank initially sets. Wait until after the lock-up period ends. Sit back and evaluate a minimum of two or three quarters of earnings before serious consideration is given to the purchase of shares. 

2.) Only invest in an IPO with money you can afford to lose. Don't use your "serious money" such as a retirement nest egg.

3.) Keep your fingers crossed.

Batting Average vs. Slugging Average

 One of the biggest misperceptions in the field of investing and trading securities is the viewpoint that investors have to be right nearly all of the time to be deemed successful. In other words, they have to accrue a batting average that reflects vastly more winners than losers. The batting average for an investor is derived by computing the number of investments that make money as a percentage of total investments made. In baseball, a 0.400 batting average would be considered the holy grail. This was last accomplished by Ted Williams in 1941. The argument can be made that Ted Williams was the greatest hitter of all time. In the world of investing, a 0.600 to 0.650 batting average is considered top-tier, while professional investors often look for at least 0.500. This tells me that picking winners in the stock market is considerably easier than hitting a major league curveball.

In both baseball and investing, the slugging percentage supersedes the batting average in terms of importance and relevance. On a baseball diamond, the slugging percentage measures a hitter's batting productivity, and it differs from batting average because it values hits differently by weighing them differently. A single is worth one base, a double is worth two bases, three bases for a triple, and accordingly a home run is worth four bases. The total bases are the sum of singles + (2 x doubles) + (3 x triples) + (4 x home runs). Slugging percentage is the total bases divided by the number of at-bats for a player, ranging from 0.00 to 4.00. A player near the -0- level will soon be looking for a new day job. While a player at or near the 4.00 level will most assuredly be a deity. In general, a high slugging percentage tends to lead to more runs being scored and to winning more games.

Concerning investments, the slugging average is the average absolute gains for successful investments divided by the average losses for unsuccessful ones. This would apply to both realized and unrealized gains and losses. The key to investment success is ensuring when you have winning ideas, they are big positions generating outsized returns (e.g. doubles, triples, or home runs), and when you have losing positions, the positions become smaller (singles). Your losses are minimized and do not significantly matter. Thus, the best investors focus more on "slugging average" - the magnitude of gains - rather than just the frequency of winning trades.

What you're looking for are multi-bagger winners that go 3x, 4x, 10x, and more. Multi-bagger winners drive the majority of returns for exceptionally robust investment portfolios. Although multi-baggers don't grow on trees, they are out there just waiting to be discovered. My Achilles Heal is that I tend to prematurely realize relatively decent gains by selling early, and then rebalancing and reallocating to other positions. This approach does not allow gains to run, and sometimes they run wild. A case in point - I bought Meta (formerly FaceBook) in 2013 for $28 per share and then promptly sold it for a modest profit a few months later. A second case in point - I bought Micron in 2018 for $52 per share and then sold it a year later at a 20% loss. It is too painful for me to write down the current share price for those respective companies.

One of the key insights thus is that an investor can be correct much less than half of the time, with say a 0.400 batting average, and still generate high returns if the winning trades are significantly larger than the losing ones. Listed below are a dozen quotes from legendary investors that pertain to the subject matter of this blog:

1.) "Even the best investment analyst is going to be right just two out of three times." - Sir John Templeton

2.) "Most traders make money only in the 50 to 55 percentage range. That means you're going to be wrong a lot. If that's the case, you better make sure your losses are as small as they can be, and that your winners are bigger." - Steve Cohen

3.) "No investor can be right all the time. If an investor is correct half of the time he is hitting a good average. Even being right three or four times out of ten should yield a personal fortune if he has the sense to cut his losses quickly on the venture where he has been wrong." - Bernard Baruch

4.) "I am a professional mistake maker. One third of my trades are probably wrong." - Ray Dalio

5.) "I always say to people who come in to see me that you have to realize in our business a really, really good person is wrong 30% of the time. That's a world-class investor. Are you comfortable being wrong 30% of the time? By the way, you can't be wrong in a massive way." - John Phelan

6.) "It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong." - George Soros

7.) "If you're terrific in this business, you're right six out of ten." - Peter Lynch

8.) "During 68 years on Wall Street, I have been wrong about 30 percent of the time. That means a lot of losses. But it's the 70 percent right that matters. If any investor had been right all the time, he or she would have accumulated a considerable portion of the world's wealth. But as you might suspect, always-right investors don't exist, except among liars." - Roy Neuberger

9.) "Our portfolio managers have a tough job as you are wrong half the time. They get a report card every day that is an F. It happens to be that 53%/47% still is very profitable in finance, but it's still a tough report card. We hire the best and brightest and they go from having 90's as their average test score to 53%." - Ken Griffin

10.) "John Templeton said something to me a couple of years ago - he said if you are right 60% of the time and wrong 40% you will be a hero, and if you are right 40% and wrong 60%, you will be a bum. But I am sure he used more gracious language than that." - Peter Cundill

11.) "Five to one means I'm risking one dollar to make five. What five to one does is allow you to have a hit ratio of 20%. I can actually be a complete imbecile. I can be wrong 80% of the time, and I'm still not going to lose." - Paul Tudor Jones

12.)"So you have flops. Maybe you're right 5 or 6 times out of 10. But if your winners go up 4-or10-or 20-fold, it makes up for the ones where you lost 50%, 75%, or 100%." - Peter Lynch