Better in their words…

Source: One Bar Ahead® – Keith Fitz-Gerald Research

Ed D’Agostino: Hello everyone. Thanks for joining us today. I’m Ed D’Agostino, and today I’ll be speaking with Keith Fitz-Gerald of Keith Fitz-Gerald Research. Now, if you know his name, it’s probably because you’ve seen him on CNBC or FOX Business. He appears every week, and he recently entered into a partnership with us at Mauldin Economics. We’re very happy about that.

I’ve got a lot of questions for Keith. I know you do too, because we literally have received hundreds and hundreds of questions from you. So thank you for all of that. We appreciate it. We’re going to get to as many as we possibly can in just a few minutes.

First, I want to share with you how John Mauldin and I came to know and respect Keith and his research. This takes me back to 2011. I was in Dallas at the time. I was sitting in John Mauldin’s house in the beautiful Highland Park neighborhood, and he was explaining to me his process for vetting hedge funds. He did a lot of work with hedge funds back then. He told me that he puts those fund managers through 110 questions over the course of a few days… and how the fund manager answers those questions on process, positioning, risk management, and worldview determines if he’ll work with the fund or not.

Well, nearly 20 years ago, John put Keith through an early version of that process while they were at a conference together, and Keith passed, and that’s what started a long friendship between the two—based on camaraderie and the sharing back and forth of research and market ideas.

So John introduced me to Keith about 10 years ago. At that time, we all agreed that someday, somehow we should figure out a way to work together. And here we are today. Keith Fitz-Gerald, it’s great to see you. It’s great to be working with you. Welcome, my friend.

Keith Fitz-Gerald: You are super kind, and the feeling is mutual. This has been a long time coming, and I am super excited that we finally managed to pull it off.

Ed: Yeah, me too. I hope you’re not nervous, right? We’re not going to ask you 110 questions today, but it might feel like it. We’ve got a lot.

Keith: I’m game for 115 if that’s what the battle requires. That’s how this business works.

Ed: So really, Keith, what I want to get into today, I want to dig deep into your process and your view of the markets. Specifically, there’s a few things that you do that I really want to make sure we dig into. There’s things… like you’ve said to me many times that there’s only 50 stocks that truly matter in the world, in a universe of 600,000 or so investible securities. I want to unpack that.

Keith: Sure.

Ed: I want to get into… last week you told me that you feel like right now, there’s 10 or 15 publicly traded companies that could disrupt their markets just like Tesla’s done over the past decade and have similar types of gains. And then, finally, I want to get into some of your great slogans.

You’ve got a lot of phrases and sayings that really help set key concepts in an investor’s mind. Things like, “Buy the best and forget the rest.” I want to get into those as well. Does that sound good? Are you game for all that?

Keith: Oh, absolutely. Let’s get after it. This is going to be fun.

Ed: So let’s start then at the beginning, Keith, right? What better place to start? Tell me a little bit about how you got into the markets, who mentored you early on, who Keith Fitz-Gerald is, because you’ve got over 40 years of experience in the markets. Give me a little summary of your resume if you will.

Keith: Oh, my goodness. Well, for number one, I put my shoes on just like everybody else does.

But I’ve had the good fortune to have been involved with this for a very, very long time. I actually began making my first trades when I was 15 years old using money that I had saved up cutting lawns. I was quite the lawn bearer in Atlanta, Georgia, at 12 years old. I took all that and began working on it.

But my grandmother, Mimi Virginia Gruner, was pivotal in shaping the person that I am today and in the beginning of all the analysis that we put together all those years ago. She became a widow, Ed, at a very young age, took a super-small life or insurance settlement and became a global investor before that term even existed.

She got so good at it that Merrill Lynch and her other brokers used to call her for her ideas. But she had a couple fundamental precepts that she just drilled into my head.

Number one, the world is bigger than your garage, so get out and see it. Because Mimi believed, and she traveled widely through the course of her life, that the world was filled with opportunity. Yes, of course, there’s lots of dangerous times and things that were in the headlines that were negative, but she was always looking beyond that because she was wired for optimism. And that’s clearly playing a huge role in my part.

But the other thing that was important was, kids that were 15 years old would get models and bicycles and other things. Mimi sat me down and gave me a subscription to Value Line, a subscription to Forbes, and then we would sit every Sunday afternoon and make ham sandwiches and martinis. I had to learn how to do that because that was her preferred drink. She said that was Wall Street’s drink at the time.

The rest went from there. We would review those things together. We’d talk about companies. She would repeatedly quiz me too—“Why do you like this company? Why do you like that company? What’s really happening? How’s the world working?” And so many of the Keith-isms that I have today come directly from Mimi. She, by the way, became fabulously successful, and she was able to live the rest of her life, and then some, with all of her investment profits.

Ed: That’s a pretty great story. She sounds like what we would call a pistol, right?

Keith: Well, she was, quite literally. She had an XK120 Jaguar that she used to jokingly say, “I have to exercise.” And of course, she, according to family lore, got to know all of the New York State troopers with a good smile on her face. But she was. She was very much a pistol, and fun. Just lots of fun.

Ed: That’s great. So after you go to school, where do you land professionally?

Keith: So I went to undergraduate at Skidmore College in Saratoga, New York. And I began, like many people, to study finance. I also began my relationship with the Asian markets at that point in time.

But I wound up at Wilshire Associates in Los Angeles. I was at the time the youngest associate ever hired. It’s a record, I think, that still stands… I’m not sure. But Wilshire was one of the world’s preeminent consulting houses, and it still is today. They’ve got clients all over the world. But the important thing about the Wilshire era, the Wilshire years, is that I arrived at a time when computerization was just on the cusp of going mainstream.

The things that we know as dark pools today were known as “crossing networks” back then. We had one of them on our floor. I learned what worked—but more importantly, I learned what didn’t work because many of the asset allocation models and much of the computational finance that’s used today as commonplace and almost all the platforms you see out there on the internet today is in fact stuff that we pioneered at Wilshire.

So I got an intimate understanding of how you allocate a portfolio, how you measure risk and return, how do you do performance measure, how do you find returns, where do you identify and how do you find stocks that are going to go that next role? Not the stuff you’re going to see in the rear-view mirror, but stuff that’s going to go forward.

So that was a really, really critical few years for me at a very young age. And my boss was really funny. He looked at me, and he says, “There is no second place around here. You will rise to the top, or you will fail miserably, and it’s your choice.” And fortunately, I rose to the top.

Ed: So let’s fast forward to today, right? We’ve got a lot of confusion in the markets, a lot of doom and gloom. Markets had a big, big drop back in October. They bounced back, but still I think people are really confused. How do you feel about the markets today?

Keith: Well, number one, confusion is normal. One of the things that investors don’t do very well is, they don’t process their emotions. In fact, many of them let their emotions get in the way, which is why, according to research, 85% or more of all buy-sell decisions are made at exactly the wrong time, Ed. People buy when they should be selling, and they sell when they should buy.

I joke with my audiences around the world, “Hold up your hands if you’ve ever bought a stock and watched it tank, or you’ve ever sold a stock and watched it take off.” And I usually put up both my hands because we’ve all been there, right?

But it brings to mind a very important point. Behavioral finance is absolutely critical in today’s markets because the computers have taken over. That sounds counterintuitive, but if you look at a market like it is today, we’ve seen this playbook before, and we’ve seen it many, many, many times through history. People have simply forgotten that.

What’s happening now reminds me of 1979, it reminds me of the dot-com era. It reminds me of the global financial crisis. Emotions get out of control and otherwise rational decision-making goes right out the dang window. But we know what happens next. You go to the store, you buy stuff that’s on sale. That’s exactly what you do at the financial market.

So I look at this stuff and yeah, the worry’s there, but that’s normal. I understand that. Yeah, people are scared. That’s normal too, I understand that. And finally, I understand the behavioral finance overlay. People do the wrong thing at the wrong time. So putting all that together, I know confidently that when stuff gets put on sale, as long as there’s a business reason for the stock that I’m interested in to go forward, I’m going to buy before I sell.

Ed: So let’s get into something I mentioned earlier then, because you often write that there’s usually only about 50 or so companies in the world that you feel are worth investing in at any given time. So how does this factor into what you just said?

Keith: Well, that’s an interesting wrinkle. Again, everything I do is quantitative. I mean, I was king of the propeller heads and king of the nerd herd when I was growing up, and I’m still somewhat of that today.

It’s a running joke around here, where’s my propeller beanie? But all joshing aside, the thing that’s really important is the fundamental mechanics of the market have changed. So we used to diversify our investments.

That was what we were taught for generations, based on Markowitz’s theory. You spread your money around on the assumption that not everything goes up or down at once. Because of the rise of computerization, now we’re dealing with an environment where 70, 80, 90% of the market is computerized because of either the algorithms, the rise of passive investing, or the funds that have come into vogue.

So again, as an investor, an individual investor, that sounds daunting, but really there’s an advantage there because somebody had to program all those computers. They work by mean reversion. They work by capital allocation, they work by liquidity. They’re all programmed to move when they have certain fundamental conditions that are detected. So the reason we get to the 50 out of the 600,000 is a function of how all the big money actually works. So if you think about the pension funds, the endowments, the major trading houses of the world, there are really only about 50 stocks in the world that they must own. And they’ve got to own them because they’re going to change the world, and because their clients expect them to, and because they’re the biggest, strongest, and best companies on the planet.

We used to be able to hunt around the edges for the small stuff, but in fact, counterintuitively, the big money is with the big stocks because they’re going to get bigger, stronger, meaner, and more profitable going forward.

Ed: Oh, okay. So how do you identify those companies? Is it a quant process, or is it more looking at what the big boys own?

Keith: It’s extremely quantitative at the beginning. So we marry. We are what’s called a quantimental shop. So my team and I are quantimental analysis. So we take a top-down approach that is driven by fundamental macro-story stuff. We actually develop scenarios that are based around something we call the 5Ds.

Now, the thing about the 5Ds is that every dollar you’re going to make over the next 10 years, maybe even 20, is on this list. What makes it different from sector-based or allocation-based thinking that we’ve dealt with in the past is that we’re talking about themes that are backed by trillions of dollars that will get spent no matter who’s in the White House, that will get spent no matter what the Fed does next, that will get spent no matter how Wall Street tries to hijack things.

Digitalization is a great example. Everything is becoming more digital. It’s from your auto mechanic to your ironing board to your refrigerator. I mean, it’s all going digital. So if you’re investing by sector, you’re going to miss that because you’re not thinking in terms of tech. But if you’re investing in terms of digitalization, now you can capture the structural changes that are going to change our world. They’re literally going to change our world in ways that we can’t even comprehend today. So every one of the scenarios has a 5D driving it. So that’s number one.

Then we do the universe analysis you’ve just referenced. I want to know where is the market’s liquidity concentrated, where is the big money about to go because of all the behavioral finance and the quantitative things I just spoke about? And we can identify that with a reasonable degree of certainty. So people commonly talk about rotation on television.

That’s sort of right, but what we’re really looking for is, where does it have to move because it needs to be there, not just because it’s rotating or because one sector’s gone in or out? The big money has got to own these stocks in order to move forward because they’re the only things capable of holding all of that money. We’re talking trillions of dollars.

And then finally, we start to get really technical. Does the company we’re interested in, once we have that, we’ve gone one, two, we’ve got our universe, are there companies that match specific criteria in terms of quality, price action, technical indicators? Does the business story make sense? Are there compelling reasons we want to own this? And we marry that top-down, bottom-up. It’s like an abacus. You move things around, and sooner or later you have the solution. So it’s a very, very choosy process with a high bar.

I get asked a lot, “There’s household names that are on the OBA 50, but they’re not in the portfolio. Why is that?” Well, the answer is, because they don’t meet the stringent criteria needed to move them from the universe into an actual recommendation or vice versa.

Ed: Keith, I’m always drawn to thematic investing. I think it just helps you build a framework through which you can look at the market. So I’m very attracted to that. Jared Dillian is another person in our world that kind of structures things initially, thematically, when he builds a portfolio. You mentioned the 5Ds: digitalization, defense, distribution, dislocation, and I think diffusion is the last one.

Keith: You are good.

Ed: Did I get them right?

Keith: Yes, that’s them.

Ed: All right.

Keith: Exactly. And I’m thinking about adding a sixth one. I’m thinking about adding a sixth one. Synthetic biology is coming into the forefront. Quantitatively, it’s making a lot of sense right now, but we can talk about that another time.

Ed: Interesting. So yeah, I mean, you mentioned digitalization. How does something like diffusion, what does that mean? How does that factor into your framework?

Keith: Again, a lot of what we do is counterintuitive because much of what we think we know about the financial markets, what we grew up with, you and I grew up with, people watching this video grew up with, it doesn’t work anymore. Long-held truths are now sacred cows that need to be barbecued.

And so this is a classic example. Diffusion really is the spreading out of resources. Robinhood would tell you it’s the democratization of investing, but that’s not correct. What you’re seeing is diffusion of empowerment and input.

So the internet, for example, has been the primary enabler there because you can take information at the click of a button and have more access than somebody did a hundred years ago their entire lifetime. And so this is an interesting piece because it allows us to use, move, understand information in ways that we never did before.

I’ll give you a great example. In the 1870s, it took three to four weeks—if you were lucky—for a critical news event to go around the world. Now it takes a matter of seconds. And so all of the same inputs are there, all of the same human reactions are there, all the emotions are there. The difference is now we have this tremendous overlay of speed.

So if you can break all that down, if you can get rid of this, if you can learn to diffuse the way the resources and the information are moving, see how that’s spreading through society, you can identify companies that are poised to take advantage of that.

Ed: So give me what you would call a quintessential example of taking your quant process and your framework with the 5Ds, putting it together and coming up with an investment idea.

Keith: Absolutely. So let’s go back to Tesla, right? I mean, that stock is a lightning rod right now, and it has been for a long time. People thought I was a stark raving lunatic back in early 2011, ‘12 when Musk said he wanted to plant vegetables on Mars. I think that was about the right time frame.

But anyway, I said, “Oh, wait a minute. This guy’s onto something here.” And people said, “Wait a minute, he’s just making cars.” And I said, “Oh, no, read his commentary. Look at what he’s doing, understand where the man’s mind is going.” He was going not just to cars or to vehicles. He was going to rewiring the electric grid. He was talking about reforming our relationship with energy. The cars are just simply what he’s produced as an entree. It’s Apple, but with wheels.

Because if you think about this, everything that’s going to go forward for Tesla is trucks, AI, data, decision-making, power trading, rewiring the grid. All of those things are going to be byproducts of the infrastructure he built in the first place.

Nobody understood why he was building a charging network and why he was so insistent on doing it… but you bet Detroit noticed, you bet Europe noticed, because now every one of those guys has to play catch-up.

So that’s a quintessential example. He’s a modern-day version of Steve Jobs. Steve Jobs is another great example of somebody who was truly a transformational leader, the kind of person I want to focus on from an investing perspective. When he rolled out the iPhone, Steve Ballmer famously panned it, said, “This is terrible. How many people are going to buy a $1,000 smartphone? Ha-ha-ha-ha.”

One of the greatest malformed, malintentioned comments of all time in the business community. I latched onto the fact early on that Steve Jobs was making a sensor platform. And what he didn’t care about was Apple as an iPhone. What he cared about was all of the information that that was going to enable.

And today, all these years later, we’re seeing that happen. We’re seeing the Apple Watches, we’re seeing the phones, we’re seeing the environmental sensors, the pictures, the data, the 3D measuring, the sensory input, all of which came from that kind of thinking. Right now, one of the really exciting things to me is there’s 10 to 15 Teslas out there. That’s what history says is out there.

So anybody who is looking at Musk today and says, “Well, I don’t like the guy. I don’t this…” I get it. He’s not for everybody. But that does not change the fact that history is very clear about what happens next. There’re 10 to 15 Teslas out there. And if you can find those, if you have a method that can lead you to those companies, chances are you can do very, very well over the next 5, 10, 15, 20 years.

Ed: So people do love to hate Elon, right?

Keith: Oh yeah.

Ed: And then the Twitter acquisition, I think, really kind of frothed that up. I caught you on Liz Claman’s show a couple weeks ago. You said something… How did you put it? You said you looked behind the headlines, I think, is what you said with the Twitter acquisition, and that kind of helped crystallize your view on Tesla. What did you mean by that?

Keith: Well, again, so we have something, one of the Keith-isms is the ”Rule of the Back Page.” You want to identify companies that are on the back page before they become front-page news. Now, most investors do that the other way around.

They look at the front page, and they say, “Oh, wow, that’s in the news. I better buy some, or I better sell some.” And they get all upset about what’s happening in the news. And not coincidentally, lots of clickbait artists masquerading as journalism understand how to manipulate the psyche. Wall Street has spent billions of dollars learning how to push people’s buttons.

So you know that’s a trap. But if you look at the back page, the 12th page, the stuff in the back of the newspaper, that’s where you frequently find the one-off headlines where it’s just a tiny little glimpse of information you can pull on.

So for example, synthetic biology is a big one. If you’re looking at food, and we’re talking about egg prices and cattle prices and chicken prices, all those things are front-page news right now. But if you look in the back page, there you find the news about ranchers who are worried there’s not enough land. You’re worried about chickens who can’t get enough feed. You’re talking about an egg call, viruses, you’re talking about nutritional density in synthetic food that is five times conventional food.

And we start putting information together; you realize this has nothing to do with whether you like fake meat or not, fake fish or not, but you realize that for the next billion, 2 billion people on the planet, we are going have no choice but to go that direction. We’re going to have to invest in that kind of technology if we want to eat or drink or simply remain alive.

So that’s the kind of compelling stuff that starts to really get me excited. Tesla was much the same way. We’re going to go to EVs. Okay, fine, we’re still going to need dinosaur juice, but eventually that’s going to cause such a fundamental shift in the way this planet functions that it’s going to force all kinds of other ripples in the atmosphere, in the ecosphere, in our lives that we don’t even anticipate yet. So profits inevitably follow innovation.

And COVID, funny enough, sped that up 10X. CEOs I’ve talked to said they are moving farther, faster, and more convincingly forward than they ever have in their careers. And that, to me, is really… from an investing standpoint, that’s like waving a red flag at an all-you-can-eat buffet in front of me. I’m like, “Wow, okay, let’s get down to business.” Because if we can find those 50 companies and we can be really selective, again, history shows, we’ve seen this playbook before, Ed. People look at me all the time, they go, “No. No way. No way. No way,” the markets have a very pronounced upside bias.

I mean, I had a hunch this might come up when we started our talk together, so I took the liberty of digging up a little piece of information. So the stock market went up 42,000% over the last 120 years. That is a ginormous number. And people tell me all the time, “Oh, I don’t have that kind of time to invest.”

Well, actually, funny enough, because of the rule of 12, you do. Some of the gerontologists and age-related experts think the first person to live to be a thousand may already be born. So we may have two or three careers in our lifetime. We may have to rethink Social Security. We might do two or three jobs in our 80s that we might have otherwise done in our 20s. So there’s huge repercussions and very, very exciting opportunities out there.

And people say, “Oh, I still don’t have that kind of time.” They come back to that all the time. Well, if you had 10 years… Microsoft 1,041%, as of last night’s close. Apple 943%. Tesla 8,094%. It really does pay to find, identify, and stick with these winners.

Ed: You brought up Apple a couple of times. And I’ve heard you talk about how you should be owning companies that make must-have products. And I loved this example that you gave in your last research report. In One Bar Ahead, you compared Apple to Peloton, and I just found it hilarious.

Keith: Well, thank you. I hadn’t had enough coffee that morning when I wrote it, but I mean, this is a great example of what I’m talking about. Everybody in the universe either owns an Apple or wants to own an Apple.

And yeah, people are still going on about the iPhone, but it is beyond that. We’re talking nearly 2 billion installed devices around the world. Even if Apple didn’t produce another iPhone for eternity, they’ve still got the ability to put billions of dollars on the top line through sensor networks, data, AI, big things. I mean, that’s what Apple does. Peloton, on the other hand, is likely to be the world’s most expensive laundry hanger within a couple years.

Ed: That’s not a good business model, you don’t think?

Keith: Well, iPads on a bike? No, I don’t think so.

Ed: All right. So let’s pivot a little bit. Let’s talk about some recession fears.

Keith: Sure.

Ed: There’s a lot of talk about recession… the soft, soft landing. The Fed’s going to nail it. And then you’ve got others saying no. Every time the yield curve inverts, there’s a recession, it’s going to happen. What are your thoughts on that?

And follow-up question is, does it even matter to your process?

Keith: Funny enough, that is exactly what we were talking about on CNBC’s Power Lunch yesterday. Kelly Evans asked me, “What do you do with this information?” The answer is, it’s an academic argument.

Now, I hate to say it because lots of people think it’s important, we’ve been conditioned to think it’s important. But the reality of the situation is, it doesn’t matter. The models are busted. The Fed was wrong about transitory. They’re probably wrong about jobs and labor at this point and even rates. But the real data is the underlying company premise. Where are the companies that are changing the world, and who’s putting up the good numbers anyway?

Because if you look at a company like Pepsi, they just knocked it out of the park. Raytheon, Lockheed Martin, knocked it out of the park. Apple’s still growing. You’ve got companies out there, great CEOs that are still growing their companies at 20, 30, 40% with margins that are in that same territory, and they don’t care what the Fed does next.

This is a hypothetical construct based on an agency that arguably, I submit, has outlived its usefulness. In fact, many people are surprised to learn this is our third Fed. Data in United States economic history suggests we’ve done better as a country every time the Fed’s not existed.

So I would submit that people ought to just do like they do with Animal Planet. Watch it, turn the volume off. It’s a great substitute. You see something interesting, but it really doesn’t matter. Soft landing, hard landing. Find the right companies putting the numbers up, cash your chips with them, and you’re going to be in good shape.

Ed: So Keith, we started the conversation talking a little bit about hedge funds, which kind of reminds me, a lot of individual investors especially, they don’t hedge, right? They tend to be long only. They’re either invested, or they’re not invested.

Keith: That’s a problem.

Ed: Yeah. I mean, how do you think about hedging, especially for an individual investor? Do you do it? Are there ways to do it? How does that fit into your process?

Keith: If it fits with somebody’s individual investment risk tolerance, objective, circumstances, and they want to play along only, that’s great. But the way I look at it, again, I’m data driven. If they’re long only, number one, they’re an on/off switch. That’s not how investing works.

Investing is a continuum, and you want to be winning over time, not at moments in time. So that’s number one. But number two, if they’re playing long only, Ed, you know what? They’re missing half the profit potential. So if you flip that around knowing what we know about behavioral finance, how the big money works, in fact, the data shows that what you really want to do is have 2–5% of your portfolio continually hedged.

Now, in the past, that used to be complicated. Some people break out in hives when they hear the word, but there’s an entirely simple, brand-new class of assets, the relatively new arrivals on the scene—the inverse ETFs. Not the leverage stuff, the simple one-to-ones, 2–5%.

And here’s why you do it, right? Everybody says, “Well, it’s going to go up and down.” Totally missing the point. The reason you hedge is so that you get stability in your portfolio that allows you to stay in the game. If you’re hedging because you think you’re going to make money based on this, go to Vegas, have some fun, at least you’ll get free drinks. But if you’re interested in going forward in the marketplace, hedging helps you stay in the fight, gives you the freedom to focus on that next great dividend producer or that next great Tesla that you think you’ve found.

That’s why you hedge, not because you think it’s going to go up or down by X percent every single day.

Ed: Yeah, I couldn’t agree more. You said something else earlier too, talking about the market’s upward bias, that it’s proven. That it has a very obvious upward bias, all you have to do is pull a long-term chart, which makes me wonder, and I’m susceptible to this as much as anyone, the bear case, why is the bear case so compelling?

Keith: Well, that’s the psychology. And I’m smiling because this is hardwired into human behavior over millions of years we’ve been alive. You and I, if we heard there’s a saber-tooth tiger outside the back door, we wouldn’t stick our head out. But at some point, you’re going to have to. So the question is, how do you do it?

There’s a thing called the amygdala in your brain. That’s the thing, that’s the part of your brain that prompts the fight-or-flight response. Our special warfare operators, our aviators, anybody who’s on the edge of human behavior trains very deliberately to overcome that instinct because you know that you’ve got to learn to trust the data. And that’s where most people get hung up, is they just simply cannot believe what they’re seeing because it interferes with their version of reality. And the internet has made that worse.

So I think for example, Silicon Valley is inhabited by a bunch of spoiled brats who have never taken accountability for the technology they’ve foisted on the rest of us—and it’s been, in fact, very, very disturbing, not unifying like they thought it was going to be. The reason that applies to investment is when you start thinking about stocks, you start looking at stories without realizing your amygdala takes over and you start to self-select. You start to push away viewpoints that are different from your own. You tend to disregard data when it contradicts what your expectation is.

Now, as an investor, I’ve spent years doing this. One of the lessons that Mimi taught me is whenever I see that, that in and of itself is a valid investment signal. So it’s built into the One Bar Ahead process. When everybody knows something, one of my mentors, Jim Rogers said, “You simply go to the other side of the trade.” If everybody’s on this side of the boat, walk over and take a look at that side of the boat. You wait until you’ve got somebody setting money down in the corner of the room, then you walk over and pick it up. And that is really, really critical for most investors.

And again, it’s decades of learned behavior as a result of diversification. It’s taught as dogma, but it’s not. In fact, it is counterproductive today. Anybody diversifying may think they’ve got their bases covered, but that didn’t work out like everybody thought last year.

The real wealth is built by people who concentrate on winning, not playing not to lose. And there has been plenty of history, plenty of people over time who have beat the markets for long periods of time because they concentrate, starting with Mr. Warren Buffett himself.

Ed: Okay. You just touched on a couple things that I’ve been wanting to ask you about. First, let’s talk about playing to win. I think that’s one of the most important phrases that you have. But unpack that a little bit. What do you mean specifically when you say investors need to play to win?

Keith: Okay, so this gets to the absolute core of where most investors trip up. They’re doing it unknowingly, and it’s not their fault, but it is a very, very important psychological change, a shift, really. Diversification was created by Markowitz in the ‘50s, right? And it was two asset classes. The theory was, spread your money around. Not everything goes up and down at once, therefore you’re going to protect yourself.

This is like picking a baseball team based on the worst possible player. You’re playing to even things out. Now, the rise of computers, you fast forward 10, 20, 30, 40 years, everybody’s adding more and more stuff into the mix. Suddenly you’ve got large caps, small caps. You’ve got Mongolian slots, Chinese tea leaves, London Door, and China. You’ve got all these things that people are adding into the portfolio because they’re diversifying. But the rise of computerization took all of this motion out, Ed.

And so even Markowitz himself said, “All correlations go to one when the stuff hits the fan.” And what that means in plain English is that if you yell fire, everybody runs for the same exit at the same moment. That’s the problem with diversification. So if you flip that around from an investing psychology standpoint but also from a quantitative standpoint, if you play to those companies, those 50 companies that are poised to win and you are stacking the deck using tactics and strategy and selection, now all of a sudden you got a real shot at that.

And so Warren Buffett, for example, concentrates 75% of his portfolio in just four stocks. I mean, so here you’ve got a great example. Everybody wants to be like Buffett, and then suddenly they start talking about diversifying. It doesn’t work.

If you’ve got Sir John Templeton, his famous maxims. Again, another mentor of mine. One of his maxims was you buy when people are despondently selling. Same kind of thing, psychology. Everybody’s unloading. I’m going to go pick up the wreckage. I’m going to go see what’s out there. Today there’s a big sell-off. Same kind of thinking applies. What’s on sale that’s still got a great fundamental argument for me to own it? And right now, that is the big, liquid companies because the institutions want to own the same thing. You’ve got to be in to win. You want to play to lose, that’s fine. I play to win because that’s what history, that’s what the data shows is the better, and literally, quite literally, the more profitable alternative.

Ed: Let’s do this. Do you mind if I toss some company names to you, just kind of rapid fire, you tell me what you think?

Keith: Sure.

Ed: Okay. Let’s start with Microsoft.

Keith: Well, let’s get the caveat out there first, right?

Ed: Sure.

Keith: Any company I mention, any of my takes here, this does not construe individualized investment advice because I obviously have no idea what anybody watching this… so it’s your money and your responsibility out there, Mr. Audience. Let’s talk about the stocks in general terms. I’ll give you my observations, and then I want you guys to take responsibility for your own actions, if you do take action.

Ed: That sounds fair. So Microsoft, that will be the first one.

Keith: Company is about bringing people together. It’s not about software. The 5D is digitalization. It’s impacting everything from medicine, to your hair-cleaning products, to your refrigerator. It’s all being driven by data. Huge legacy contracts. Massive engagement with very sticky Fortune 500 contracts.

It’s a company that with ChatGPT is literally going to rewire the software world as we know it. I mentioned this a couple weeks ago on TV, and people thought I was joking. But the narrative’s coming: ChatGPT is a Google killer. So own Microsoft, but be very, very careful with Google.

Ed: Okay. How about Goldman Sachs?

Keith: Oh man, so the nickname for Goldman Sachs is the Vampire Squid, right?

Ed: Right. Right. Matt Taibbi, I think, coined that.

Keith: Yeah, I can’t recall who did that. But what you’re talking about is a longtime Wall Street insider firm that suddenly decided to get into the consumer game. It didn’t go very well. They’re under pressure. I personally wouldn’t touch it with a 10-foot pole because I don’t think that particular company is going forward. I think that’s a mirror of the past, even though it’s a household name.

Ed: Okay, here’s a curve ball for you. Stock’s up about 80% since last summer. GE, General Electric.

Keith: GE is a really interesting one. So GE wrote the book under Neutron Jack for conglomerated management. The theory back in the ‘60s and ‘70s was, a good manager can manage anything. Neutron Jack injected financial engineering, was one of the most capable managers in the history of managerial authority. But the problem is GE, I think, is a component business at its heart. I think there’s bigger fish to fry. I would rather move on to an Apple or a Microsoft that really is engaged with a 5D as opposed to deal with tiny little component businesses that may or may not pay off.

Ed: Okay, last company. Another company just off of a massive, massive rally: Facebook.

Keith: That one for me is a no-go. I mean, I called that one a bug in search of a windshield at 350 bucks and people thought I’d lost my marbles. I did that on national television, much to the amusement of several of my colleagues. I said it would go under $100. They really lost their marbles at that point. But that’s exactly what happened. Now the company has risen back. I personally think Mr. Zuckerberg, despite the fact that he seems to have been doing some adulting lately, has got a real challenge on his hands.

Apple rewrote the book underlying Facebook’s advertising model. In fact, Facebook has now got tremendous legislative pressure. It’s got angry consumers dealing with it. I don’t see how that one wins. But if you’re a short-term trader, that’s the kind of stock Wall Street is going to defend because they think that they can create enough volatility to separate all the weak hands.

So anybody running trailing stocks, anybody running profit targets, the short squeezes, the meme stocks, that’s Meta at its core. The whole thing about the Metaverse, that was a bait-and-switch tactic to take the heat off them in a legislative capacity.

Ed: Oh, interesting. That’s a really interesting view.

Keith: Yeah. Well, the question is whether or not it’s profitable. We’ll find out.

Ed: Yeah. Right. So this isn’t a company, but it’s a country. China. Coming out, they’re reopening after three years of COVID lockdowns, a lot of pent-up demand just like we saw here last year. Question for you though is, are Chinese companies investible, at least to an American or a European?

Keith: That depends on your tolerance for risk and your assessment as to whether China is friend or foe. Now, as you know, I’ve spent a lot of my career in the Pacific Rim. I’ve spent a lot of time in mainland China. Most people who are writing about China or talking about China have never visited, or they’ve visited very little, and they’ve had cornflakes at the hotel as opposed to gotten into some places where… I mean, I literally have been in parts of China where I was the first Caucasian the villagers had ever seen.

Ed: Wow.

Keith: So it’s a very different perspective when you get your boots on the ground, you get out, like Mimi would say, beyond your garage. My take right now is that China is exceptionally dangerous. So to me, there’s only two Chinese companies that I would invest in, and that’s because they are modeling themselves after Toyota in the 1970s under similar economic circumstances with a similar plan to break into global markets.

Beyond that, here’s how I sum up China for investors. The Dragon is coming to dinner on Tuesday, and the decision you’ve got to make is, do you want to be at the table or on the menu?

Ed: Let’s change things up a little now. We’ve covered a lot of ground here. I want to talk about your research service. It’s called One Bar Ahead.

 

Keith: Oh, thank you. Yeah.

Ed: Tell me how you started it. What is it? How does it work? How would you describe One Bar Ahead? Because it’s different.

Keith: It is. It’s very different. One Bar Ahead is an experience. It is not a newsletter. We are in the bespoke research business. What we do is, we provide knowledge expansion and connections. What I want to do, I’ve always believed—because I’m living proof of this—I think that anybody can be fabulously successful in the market when they are armed with the right knowledge, education, and tactics.

And so One Bar Ahead is about creating a community of like-minded people around the world who are having real conversations about real stocks, who understand the quantitative, data-driven elements that we’ve just talked about—like the upside bias, the need to be in to win, the power that lining up with thematic investing gives you. And that’s the framework. So we’ve seen a remarkable growth in this. It’s been humbling as all heck because I had no idea that this thing would be as successful as it’s proving to be. But it’s a journal, it’s an experience.

Every month, you get an in-depth review, new recommendations, portfolios. There’s some proprietary indicators that I’ve developed that I share with the One Bar Ahead family. There’s weekly updates on Mondays and Fridays. There’s a feature called the AMAs, Ask Me Anything, which literally is ask me anything because we’re a community, we’re a family.

This goes back to my earliest days of publishing research, Ed. I began writing about the markets late in 1999 on a yellow pad in the corner of my dining room. I called what I wrote “Keith’s Corner,” because that’s where I wrote it. And I used to fax it around to family and friends.

Today, it’s a worldwide family. I just cannot believe we’re where we are. We’ve seen great friendships develop, camaraderie. You ought to see the One Bar Ahead® family when we get together at the occasional trade show or convention. People travel together.

I mean, it’s become really truly a community of people. It’s very, very different than the research you’re going to see on Wall Street, than anything else you’re going to get anywhere else, because it’s the experience that counts. And it’s paying off. People tell us all the time what a change it’s made in their lives.

Ed: Yeah. No, I’ve been enjoying reading it myself.

Keith: Thank you.

Ed: One of the things I like most is, you’re a really good teacher. Actually, a coach. I would almost describe you as—

Keith: Thank you. Thank you.

Ed: —a coach, because you just help investors stay the course, which is more than half the game. Can you talk a little bit about your approach to teaching and coaching for people that are in One Bar Ahead?

Keith: Absolutely. Again, I believe that any investor can be fabulously successful if they’ve got the right tools, education, and tactics to do it. Part of that is continually reinforcing those messages that we talk about, the upside bias, the quality selection, the need to own the best, not the rest, the constantly sitting in an exit row. I mean, these are things that just over time become ingrained in your behavior.

So my role is part cheerleader, part coach, part developer, part researcher, but all I am is the Pied Piper. The One Bar Ahead community is really the special people. I just simply have the good fortune of being the linchpin that holds it all together, because, really, it’s the One Bar Ahead members who make it such a great place to be. I just have the honor of leading everybody.

Ed: So a few weeks ago, you showed me some of the underpinnings, if you will, on the quant side of your stock selection process. And it’s sophisticated. You’ve even built yourself an AI-driven algorithm that analyzes market signals. I mean, it kind of blew me away.

So with that, I think anyone listening might be wondering, “Is this a technical product? Is it a product for professionals?” Or how do you deliver that sophisticated analysis and turn it into actionable information?

Keith: That’s a great question. In fact, we’ve got people who are just starting out, who’ve got just a couple hundred bucks to work with. We’ve got people with, I’m told, hundreds of millions of dollars at their disposal. We’ve got amateurs and professionals alike reading along because knowledge makes us all more powerful. This is why One Bar Ahead is what it is.

The technical indicators are there to support all of the commentary and vice versa. So we’re investment driven. We’re opportunity identifiers. We’re connection builders because it all factors together. There’s not one thing. You can’t say, “I’m just working on this kind of analysis” because that means you’re missing all of this. You can’t say, “I’m behavioral driven” because it means you’re missing all of that.

So as we bring One Bar Ahead, if I’m doing my job correctly, I’m explaining it in plain English, no PhDs or $5 words required. We’ve had a long history and been very fortunate. People literally write me all the time saying, “I knew nothing when I joined you, and now I’m financially secure.” I mean, that doesn’t happen by accident, and I’m extraordinarily humbled to have played a small part of that.

Ed: What about things like position sizing? How big of a position with some of your others.

Keith: Oh, we get into that.

Ed: You do? Okay.

Keith: Yeah, you bet we do. Because again, people think of investing—and I submit this is a huge mistake, and it’s a mistake that’s not their own fault. It’s a mistake that’s been pre-conditioned, driven into by Wall Street, accelerated by a whole cottage industry of advertisers and clickbait artists. You don’t go all in on anything.

My great-grandfather, who was a fighter pilot in World War I, used to say, “You never stick your hand out of the cockpit farther than you can pull it back in.” And I’ve lived by that law. It doesn’t matter whether you’re talking about life or investing, right?

And so the mistake people make a lot, particularly in today’s markets, is they don’t take the time to understand the data that we’ve talked about, the upside bias, the need for quality, the distinction between a must-have like Apple and a nice-to-have like Peloton. That works against them because Wall Street knows all of those things, and they’ve got very sophisticated algorithms, and all they do all day long is separate you from your money if you’re falling prey to their shenanigans.

So a huge part of One Bar Ahead is communicating clearly, is sharing knowledge effectively, and teaching people how to stay out of the way and not fall prey to the shenaniganry because there’s a lot of it out there.

So if you can eliminate those things, counterintuitively, that actually increases your probability of success. And that’s the “in to win” part because there’s always a way into the fight. Doesn’t matter how tough the day is, doesn’t matter how impressive the headlines are, there is always going to be an opportunity out there. And you just have to train yourself to look for them because when you see it, everybody else won’t, and that’s your opening, nine times out of 10.

Ed: Keith, I want to get to some reader questions because we literally received hundreds of questions.

Keith: Wow!

Ed: But first, I just I want to quickly mention this discussion that you and I are having. It’s really about properly introducing you and your research to our audience, okay? This isn’t a sales pitch.

Keith: No.

Ed: But if anyone who’s watching, if they like what they’ve heard and they want to check out One Bar Ahead®, great. You are more than welcome to.

You can click here to learn more about One Bar Ahead. You’ll see a special offer as a thank-you for watching this today. But that’s it. There’s no big sales pitch here today. If you want to learn more, click here, and you’ll learn everything you need to know about One Bar Ahead. So, with that said…

Keith: Well, and…

Ed: Go ahead. Go ahead.

Keith: For the record, if I may, Ed?

Ed: Yeah, please.

Keith: To everybody watching, I’m not the smartest guy in the bunch, right? I would be honored to earn your trust, your goodwill, and your business. We’ve got people reading my work who’ve been doing so for more than 20 years, and that doesn’t happen by accident.

Am I right for you? I don’t know. That’s your call, but I’d love to earn the chance to earn your business and your trust and your goodwill every single day that I write about the markets.

Ed: Thank you, Keith. I appreciate you saying that. I know it’s your favorite topic.

Keith: It is. I love this stuff. I mean, where else can you take somebody who has nothing and turn them into a millionaire or even a billionaire? I mean, the stock market… this is the really cool part—excuse me for digressing…

Ed: No, no.

Keith: The stock market is the greatest single wealth-creation mechanism in the history of mankind. And if you can get the right companies and the right CEOs and the right cash flow, then all of that risk goes away, and the financial future you deserve, that you want, that comes. That gets to you because you get the knowledge. If you invest in it, it will invest in you. And that’s how the markets work. I love this stuff.

I’m up at 4:30 in the gym every single day. I don’t have to be, but I want to be because I can’t wait to turn my screens on, see what the headlines look like, see what’s on page 12, and then look for those opportunities because there’s nothing more exciting than changing the world. And that’s really what investing is about. It’s about tapping into that psychology, that human spirit.

One Bar Ahead—Ed, I don’t talk about this very often, but I probably should—One Bar Ahead is about investing in optimism, and it’s about controlling your financial destiny. That’s why we do what we do, because pessimism, frankly, is a terrible way to live and unfortunately not very profitable. But optimism, on the other hand, you look at that, the greatest wealth creation in the history of the world is built on optimists who start from a position of, “Hey, I can do this,” not all the reasons why they shouldn’t.

Ed: If I could add one more thing?

Keith: Yeah.

Ed: It builds your confidence too, which is so important for an investor.

Keith: Absolutely. Absolutely. That’s a huge part of what we do, because when the markets get tough and the headlines get raging, it’s scary. I mean, I’ve been doing this 42 years. There are days where even I look at the headlines and go, “Woo!” But you trust the system, you trust the data, you trust the investment selection, you know what you’re doing. You take a deep breath, and you go swimming anyway.

But even there, Ed, I mean, I get asked about this all the time, like, “What do you do on a really big down day if you don’t want to buy?” Here’s a trick. Just to keep the discipline involved, buy one share. I don’t care what company. Pick a company that you are interested in and buy one share. And why? This is like riding a bike when you’re five years old. You have the training wheels on. Every time you fall off, your parents probably say, “Get back on the bike and start riding again.” That’s what that is.

So take a $50 share, $100 share, whatever your budget is. It doesn’t matter. Just buy one share because doing so is positive affirmation, positive reinforcement for the behavior that we really want to instill as part of the One Bar Ahead® process. When there’s a dip, it’s an opportunity, not a chance for the door to close.

Ed: Okay, Keith, let’s get into some questions.

Keith: Okay.

Ed: So these are reader questions. I’ve got a lot. I’m going to ask you questions until you fall over and I can’t see you on the screen. Fair enough?

Keith: Okay. Fair enough. Fair enough.

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Ed: All right. I’ve got some questions down here on my screen. Let me get the first one. “Keith, what do you think about a weakening dollar and the recent enthusiasm for international stocks? Does it fit in with your 50-stock thesis?”

Keith: Oh, absolutely. It’s front and center because the strength of the dollar creates a quantitative wave, right? And so the world’s best companies, particularly those based in the US, draw 50%–53% of their sales from overseas. That’s not going to change anytime soon. But what is going to change is that when the Fed blinks, all of that strength in the dollar is going to go somewhere else.

So that’s the premise. That’s why international stocks, emerging stocks have been hot lately, is because everybody’s betting on that outcome. I personally think that the better bet is to go with those bigger names and keep it close to home for now because of China and Russia. But quantitatively, that makes an awful lot of sense. It is front and center in my thinking and my analysis.

Ed: Next question. “Could the effect of AI and automation on the job market over the next decade be the largest geopolitical influence of all?”

Keith: No question in my mind. In fact, I think that that is actually going to happen. So what we’re seeing with ChatGPT is just a tiny glimmer of where we’re going because what we’re really talking about is, we’re talking about implantable technology. We’re talking about a lawyer being able to access case documents in the middle of a trial that are literally implanted or data driven in their skull. You may get to the point within the next five years where you’re looking at hiring comparable candidates.

You’re going to take the one with the latest updates and the best chips, not necessarily the best employment record. We’re going to talk about human-machine interaction from driving cars, flying planes, medicine. There are already cases where, this is really cool, they’re using medically driven AI powered (not coincidentally) by Microsoft and Apple—this is why we go back to them—to make better decisions than human doctors could make on their own.

So there’s a case in Japan, for example, doctors couldn’t figure out this particular cancer or treatment for this patient. They uploaded the records into the AI engines. Within 20 minutes, they cross referenced hundreds of thousands, millions of medical records around the world, found effective treatment, delivered it, and the patient’s alive today. So that’s the kind of stuff that AI is going to enable. It’s going to change our labor markets, it’s going to change how we do things.

And, more importantly, it’s going to drive profit opportunities that most people are not yet thinking about. You can either go after these specific companies and the jobs, or, like we‘re doing, we‘re going right to the source. We‘re going to the Apples, we‘re going to the Microsofts. And don‘t forget, you got to protect all that. So corporate security is a big outgrowth of that. So digitalization wraps up all three of those things.

Ed: I‘m laughing because I have to point something out to our viewers. Keith has not seen any of these questions in advance. You are unflappable. That‘s pretty impressive.

Keith: Thank you, sir.

Ed: All right. I‘m going to keep going, then. “Keith, I’m worried about Federal Reserve policy and a recession tanking the markets. I want to retire someday. Lately I’ve been up at night worried about my portfolio. What’s your advice on how to succeed?”

Keith: Well, first of all, I share your concerns. I think the Fed is a failed institution, and it should be disbanded. But that’s just me, and I’m not on Jerome Powell’s speed dial list, so that ain’t going to happen. But second, you’re not alone, right? I mean, you really are not alone.

These fears are keeping a lot of people up. Now, I would respectfully submit—not knowing anything about your portfolio—is that maybe you’ve got too much money on the table. Maybe you’re invested in stocks that are too volatile. I don’t know the answer to these things. But one way to handle that is to flip it around and say, okay, rather than worry about all the things that could go wrong, imagine yourself sitting at a barbecue five or 10 years from now when you retire.

Think positively. Paint a picture. “When I’m retired, what stocks are you going to kick yourself in the butt for that you don’t buy today?” It’s a very short list.

So chances are, I would submit, again, from the nature of your question, having gotten thousands of these in the course of my career… From the nature of your question, I would submit you probably got some riskier companies than you’d hope to, and you found out the hard way.

Maybe you got a little too much speculation when you thought you were investing. But again, you’re not alone. This is a fixable problem. What you need to do is hunt down the low-beta stocks, the dividend producers, the stuff that’s tied into those 5Ds because that’s the stuff that’s going to power higher no matter who does what.

Ed: Here’s another one that ties in with the 5Ds. “Keith, I’m curious about how crypto fits in with the 5Ds. On its face, the rise of crypto tech is the most disruptive thing any of us have seen up to this point since personal computers and mobile phones. But given the lack of regulation and bad actors, et cetera, how do you square crypto with the disruptive attributes you look for before investing?” That’s a good question.

Keith: That’s a really interesting question, and I would change the terminology a little bit. I wouldn’t say disruptive. What I would say is accommodative or innovational. And so crypto is like many other industries we’ve seen over time, right? You get the first one or two entrants, they spend all the money, they make a lot of noise. We call that “seagull investing” because they fly in, they make a lot of noise, they poop all over everything, and either they disappear and fall off the pier or they fly away into the sunset and you never see them again.

The real power for a situation like crypto is who’s going to get in next and what that’s going to look like. The FTX situation was a spectacular blowup. There are going to be some big names that come out in the depositions that are undoubtedly going to catch a lot of people by surprise. The degree of manipulation is going to be jaw-dropping when that’s finally disclosed.

But here’s the key: Digitalization is inevitable. Digital money is inevitable. So why not take a look at a bank like JPMorgan that has been investing in digital clearing since at least 2017 because all of that money’s got to move.

Or for example, take a look at what I’m calling Crypto 2.0. We’ve seen the first example of this that was an agreement between Starbucks and Alaska Airlines. Now you’ve got something that is uniquely identifiable at the customer level and influenceable in real time. If you’re a frequent flyer, your miles can be used for Starbucks products instantly. It is a free-interest loan—billions of dollars’ worth to both Starbucks and Alaska because all those customers preload their customer cards. You get them in your Christmas stocking. You go through an airport. “I’m going to buy a $20 Starbucks card.” That’s all free money. It’s just attached with crypto and with value you’ve already deposited.

So I’m very excited by it, but it’s not going to be the Altcoins… it’s not probably even going to be bitcoin or Ethereum at this point until the wreckage settles and until there’s proper regulation, and that’s coming.

Ed: Interesting. Okay, next question. “Hey Keith, I really love your Morning 5 with Fitz letter.”

Keith: Thank you.

Ed: “My question is, however, what makes One Bar Ahead—so that’s your paid research service—what makes One Bar Ahead so different from what you write each day?”

Keith: Oh, that’s a good question. One of the things I struggle with, frankly, is the 5 with Fitz are literally trading notes that come out of my brain every single morning when I sit down. I had no idea they’d be as popular as they are, but I don’t do anything at 50%, 70%. I’m wired to go Mach 5 with my hair on fire because I want to bring the A-game every single day.

People tell me they’ve had very good fortune just from the 5 with Fitz, but One Bar Ahead takes it a step further because there I can issue-specific research. I can share proprietary indicators that are not otherwise made available in public. I can do a deep dive on researching specific companies. I can answer questions that are beyond the pale of what I can do in public for a letter like 5 with Fitz.

Ed: And just a reminder, if you’re watching, you can click hereand get all the information that you would need and all your questions answered on One Bar Ahead. What else should I add? There’s a money-back guarantee on One Bar Ahead, 90-day money-back guarantee. So not a lot of risk as well.

Keith: Well, yeah, I mean, because that’s the other thing, right? I’m not going anywhere, Ed. This is personal for me. I don’t work for a big investment house. I’m a researcher. I’ve been involved in the markets for 42 years as a private trader and investor.

I don’t run anybody’s money. I don’t have the conflicts of interest. I don’t ever want to be in a position where somebody says, “Keith sold me out because his money’s in it.” I want to provide the best information I can because my vision and my mission is to empower individual investors to the point where they are confident when they approach the markets and can make profitable decisions on their own. My research is just the gravy.

Ed: Well said. Keith, what’s your view on gold?

Keith: Yeah, okay… This is an interesting one. All right, so legions of late-night quick-buck artists would have you convinced that it’s going to be the next greatest thing since canned beer or greased lightning. Not so. Here’s why every investor should own gold, it’s just not for the reasons you think. Gold is not the thing you want to own because you think it’s going to go to $5,000 an ounce.

I mean, that’s just not why we do it. Because if gold goes to $5,000 ounce, we’re going to have to worry about a lot of other things other than gold, probably like power, water, food, bullets, medicine, and diapers. So gold is a critical portfolio stabilizer, and that’s how I view it.

I think every investor should have some gold, particularly, to reference an earlier question, as we head into this point where the dollar is eventually going to blink. That’s going to be great because what we’re really doing with a move to gold, why I encourage people to buy it now, is because we are moving two and three steps out onto page 12.

We know China wants to dominate the currency. We know China wants to dethrone the US dollar, that’s going to play into gold. We know that the Fed’s eventually going to blink, that’s going to play into gold. But gold is going to become this stabilizer that controls the value of your portfolio, not necessarily in sync with price. It’s a convoluted way of thinking about it, but we’re three steps ahead of where the rest of the market’s thinking on this.

Ed: I happen to agree with you 100% on that. I’ve always felt like gold—

Keith: Thank you.

Ed: It’s great in hyperinflation, but I think it confused a lot of people because it didn’t necessarily rally when we had inflation a couple years ago, and that threw people off. It’s a currency hedge. And it’s a hedge for your portfolio.

Keith: Yeah, it’s a value hedge. Right. And remember our definition of hedging, it’s not an on/off switch. It gives you the freedom to stay in the game. That’s why gold exists. That’s why gold is valuable.

Ed: Another question. “Keith, I love your passion for education.” So he’s obviously someone that reads you. “Do you have any videos or programs that could help us understand how to view the markets?”

Keith: Oh wow. Okay. So, two answers to that. Yes, we actually have an entire series of masterclasses for the One Bar Ahead Family.

Ed: Oh, cool.

Keith: In deference and fairness to the One Bar Ahead Family, I’ve got to keep that behind the veil because that’s part of the One Bar Ahead process, but many of the quantitative things we talk about are all involved in that. Now, occasionally, you’ll see me speak at conferences around the world. I do that.

As part of the One Bar Ahead process, we have a quarterly or once-every-few-months Chalk Talk. So I’m a huge believer in doing that.

When I go out and present at conferences around the world, that’s an opportunity to see me out in public talking about this stuff.

So, the second part of that question is, I hope to have a whole series of courses, everything from how to buy the very first stock you intend to hold for the rest of your life to the finer points of how to use options to enhance your yield, or control risk, or take profits. Those are all things that we have in the works right now, and courtesy of our partners at Mauldin Economics, we hope to have out very, very soon.

Ed: I can help with that.

Keith: Excellent.

Ed: Okay, here’s a long question, “Keith. I’m enjoying your Morning 5 with Fitz and I’m seriously considering an upgrade to One Bar Ahead.”

Keith: Thank you.

Ed: “Here’s my question, Warren Buffett’s number one investing rule is ‘Don’t lose money.’ Rule number two is, ‘Remember rule number one.’ As an experienced investor in my mid-sixties, I fully understand that investing involves risk. That‘s why even before I came upon your work, I‘ve largely been investing in strong dividend-paying stocks of the best companies in industries that make things or provide services that people have to have.“

Keith: Excellent.

Ed: “This strategy helps my wife and I sleep easy during the market tumble of 2022. However, I am increasingly convinced that we are on a collision course with China that will likely lead to a catastrophic result within the next few years. Here‘s the question. How does an investor structure a portfolio now that can weather such an event, preserving capital and still providing reliable income?” Whew!

Keith: Okay, so there are a number of very significant and very real concerns there. That is a super-sharp question and is something I’m thinking about a lot because I share that view. I think the showdown’s coming. I think China may go hot on Taiwan by 2025. At the latest; maybe ‘24. I think they’re going to use the presidential election as a distraction, particularly if we’re still involved in Ukraine.

I think with Russia, the only reason they haven’t rolled is because Ukraine is kicking Russia’s watussi at the moment, and they’re standing up to them. So I think that’s why China has not rolled yet because they didn’t anticipate that.

But going forward there, there are two nuances that I would encourage any investor who has those concerns to think about.

Number one, the rise in computerization is going to make it all but impossible to bail out, okay? You’re just simply not going to get the shot. Because if you look at what happened in 9/11, you look at any of the fat-fingers trades, the global financial crisis, moments in time where panic hit the button, that quantitatively is now computers are going to trade so fast, humans can‘t keep up.

That said, One Bar Ahead is already building to this. And I intend to use any corresponding falloff as an advantage and an opportunity, just the way Sir John Templeton did on the eve of World War II. The parallels are staggering.

I don’t know if you know that story, but Sir John Templeton borrowed some money, bought every stock trading, I think it was under a buck on the New York Stock Exchange. Some 400 securities in all or something, including 34 companies that were already bankrupt if my memory serves. He sold all but two at a profit several years later. That formed the basis for what became his investing philosophy and a huge influence on mine, is you buy when people are despondently selling.

So yeah, it’s not going to be fun. Yeah, it’s going to be scary. Yeah, it’s going to change the world, but we’ve been through several world wars, multiple regional conflicts, we’ve seen lots of things come and go. And over time, the markets have always come back.

What that looks like, I don’t know, but that’s where the quality companies come in. That’s why I’m so specific about the OBA 50, why our recommendation list is very, very tight and very, very high on quality. Because I want every possible advantage for when the sun comes up, because I know that there’s not going to be a lot to do if the sun goes down.

Ed: Next question here. I’m just looking through. There’s a lot. How are you doing? You doing all right? You want to keep going?

Keith: Well, let’s go. I’m having fun. If you’re having fun, I’m having fun.

Ed: It is fun. No, it is fun. “Keith, thank you for the session. Can you share your views and insights on seemingly irrational market price movements in short term on events: market forces, volatility plays, participants positioning and psychology that affect price movements in the short term?”

Keith: Wow, I would love to know who asked that at some point because that’s a brilliant question. There’s some really good nuggets in the core of this.

Most of the short-term noise is now driven by computers who are—that are programmed. I say who because they’re almost living AI… But they’re programmed to capitalize on word count, flows, option pin risk. They can see the retail order flow. And the computers are not so concerned about long-term profits like we are. The concern for a computer is, how do I separate that next unsuspecting weak hand from his or her money? And so the volatility you see is actually by design—and funny enough, oddly predictable if you understand how to look at it.

Now, I talk about an indicator in One Bar Ahead called the Keltner Bands, and that’s volatility around trend… different from the Bollinger Bands, which are volatility around price. The reason why this can be a great tool for any investor who has the concerns you have is that when price stretches above or below those lower bands, you know… you just know that that’s where the computers are going to yank the steering wheel the other direction, or there‘s a high probability they‘re going to do it.

So that‘s a logical point where you can start looking for an entry or looking to take some money off the table because you know that like a rubber band, it‘s stretched, and it’s going to snap back. So you’re not imagining things. It’s a very real phenomenon. It’s very quantitative, it’s very precise, and it’s driven by the computers.

Now, the psychology that goes into that, that’s an overlay. This is something I get to all the time. People say you can’t time the markets, and that’s absolutely true. But you can time, and somewhat there’s an element of predictability to these computers using what I just described with the Bollinger Bands.

If you know where that volatility is stretched, and you know where the computers are likely to yank the thing the other way, then you can take action on it. And if you’re a short-term trader, you can do that on a tick level data, 15-minute bars, five-minute bars, whatever your personal preference is… It’s a little harder to do it as a swing trader because now you’ve got to introduce something called cyclicality. So it used to be a 21-day cycle, then sometimes it goes to 17, but lately it’s 28–29 days.

So again, this stuff changes constantly depending on the behavioral psychology of the market, but you’re on the right track. There’s a real explanation for it. You’re not imagining it. Volatility is unprecedented right now because of all the computers and the fact that those computers pick off the individual investors.

And finally, the last nuance is another key to them. When in doubt, zoom out. Because all of the noise in that short-term trading is actually to your advantage as an investor thinking longer-term.

Because if you know where the computers are likely to yank the handle, you know the volatility that freaks everybody out, you can begin to buy when you identify points on their own low, you begin to take profits when they’re high because you know that’s what the big computers are going to be trying to do.

Because all of the other money, the non-OBA money, the people who don’t know what we’re talking about today, they’re going to get scared and they’re going to sell at the wrong time, or they’re going to get FOMO and buy into the rally. Nope, you buy when everybody’s looking the other direction. You sell when they can’t stand it. That’s how the game’s played.

Ed: Great advice. “Keith, with 26-week T-bills paying almost 5%, why bother buying a stock or a fund and take the risk of a recession or a depression in these uncertain times?”

Keith: Okay. So that comes down to something in your individual background that I don’t know. So, full caveat, if you can live off 5% of whatever your investing is and not have a worry in the world, then fantastic, more power to you.

But here’s why I think that’s a problem, is that you may live longer than you think. You may have to stay in the game longer than you think. But the markets, importantly, have an upside bias. So if you try to go to the sidelines, now you actually have two problems. Because odds are, the market is not going to fall as far and as fast as you think it might. But two, it’s probably going to take off without you.

And so I saw a lot of people at the end of the internet dot-com crash, or the global financial crisis, or even COVID, who never got back in the markets. They thought they were being smart because it felt good to be safe.

But one of the things that my research shows very clearly and beyond any shadow of a doubt is that missing opportunity is always more expensive than trying to avoid risks you can’t control. The markets have an upside bias, and you need to play to that, regardless of how you feel about the situation. Risk management is how you handle your emotions.

Ed: So I’m scrolling through here to find ones that I think I can get a rise out of you with. Here. “I’m an old, retired tax accountant, Keith. Can you please explain how anyone can believe in Modern Monetary Theory? Have people never heard of the Weimar Republic or Zimbabwe?”

Keith: Sounds like you and I would have a good time over a beer and lunch sometime. The short answer is no. I can’t possibly fathom how people would believe in this stuff. As far as I’m concerned, it’s economic voodoo at this point. Modern Monetary Theory is probably going to go down when they review this 100–200 years from now.

I think a couple things are going to be very clear. Number one, I think that they’re going to realize that this may have been the greatest single common misunderstanding in economic history. It doesn’t work. It doesn’t reflect real money. It certainly doesn’t reflect where the world’s going.

Second, haven’t they heard about Zimbabwe and these other things? I had a friend of mine send me a screenshot. He had lunch in Ruwa or something. I can’t remember where he was, but he said, “I had two beers and a sandwich that cost me two and a half million dollars.”

And I was like, “What?” But it’s a very real problem, right? Because here’s the thing, is if you make stuff up, that’s what you get. Garbage in, garbage out. My two cents on this, particularly to an accountant such as yourself, is your job was tasked with finding real money, real value, putting all the right beans in the right baskets for the appropriate reasons.

Economic brainiacs in Washington—inside the Beltway–don’t play to that rule book. They make it up as they go along, using models that reflect a society that, I submit, is one that no longer exists. So they continually try to adjust in the rear-view mirror, whereas as investors, we have to think going forward.

So personally, I would love to see us get back to real money. I’d like to see a partially backed asset, currency-based global trading system. I mean, I do think we’re going to get there, but I think it’s going to be a little bit more challenge ahead. People have got to simply understand that this stuff is nonsense, and I don’t know what that’s going to take.

Ed: Keith, I recently spoke with Andrew Yang, the former presidential candidate, and he was a big proponent of Modern Monetary Theory. And so I asked him, “Look, in the face of inflation that, I would argue is, in large part, caused by a lot of free money being sent by the government to people who didn’t necessarily need it, how do you feel about MMT?” And he acknowledged that probably that argument and that idea probably needed some fine-tuning.

Keith: Well, Mr. Yang is a wonderfully intelligent guy and very articulate as well. But I think fine-tuning is the understatement of the year. I think that argument needs to go right out the damn window. If you have to deal with real money, you can’t go trade goodwill in a credit for a cheeseburger at Burger King, but you absolutely can trade a dollar. The question is, what is it worth?

And so if I look at this, and I say economic illiteracy… As far as I’m concerned, we need what I would call a J.P. Morgan moment. This led to the creation of the Fed under very different circumstances. But J.P. Morgan famously locked most of the bankers into his private library and said, “You jokers are not leaving until we have solution that is going to save the monetary system, the banking system.”

I submit there needs to be a similar moment for both the Fed and for Congress, for our elected officials, every one of whom should be required to pass a basic economics course and understand how real money works. Most of them have never made payroll. They don’t understand how an accrual process works. They don’t understand the difference between real cash. Their answer to everything is, “We’ll just get more money. It’ll be cheaper.” It’s like, “No, that’s not how it works.”

And I kid you not, firsthand example. So, right after the whole “$15 an hour minimum wage” thing got going in Seattle, I was due at FOX Studios that morning, 5:30, for an interview. I usually pulled into McDonald’s so I could get a cup of coffee and Egg McMuffin before I went to the studio.

They had passed the “$15 an hour thing” here in Seattle the prior week. There was a sign on the drive-through that said, “Our prices will be higher than the national average because of Seattle’s $15 minimum wage. We have to pay our workers and buy our supplies.” Bang, real money less than 24 hours later. Real example, real piece. That’s being played out at a national level, right now—at an international level.

Ed: Sure.

Keith: It makes me nuts. It makes my brain explode. I just can’t process how this works, and I think it needs to go right out the window.

Ed: You have been so generous with your time, I appreciate it. I’ve got one last question teed up for you here.

Keith: Sure.

Ed: So this starts with some quotes.

Keith: Uh-oh.

Ed: “Don’t do what Wall Street says. Do what Wall Street does.”

Keith: Yep, that’s mine.

Ed: “Earnings don’t drive the markets; it’s liquidity.” So then he goes on, or he or she goes on to say, “The Fed is raising interest rates and tightening, but the S&P was up 6% in January. It appears that there may be a lot of liquidity available in spite of the Fed. If this is the case, where is the liquidity coming from?”

Keith: That is an awesome question. Okay, so this gets to the heart of all the daily volatility that we just talked about, right? So, not many people understand this because this isn’t how individual investing works—but at the institutional level, the big-money level, how much you buy and sell is directly related to the amount of leverage you carry.

Now, the $5 way of explaining that is that these traders are leveraged up to their eyeballs every single day because that’s how they maximize returns because the system rewards them for doing that. So they take $1, borrow $9. If rates are dropping, the cost of that debt is lower. So they get on the gas and they buy as much as they can get their hands on. Usually tech because it’s big and it’s liquid and it’s well known. Again, you’re starting to see the intersections here as to why we do One Bar Ahead the way we do.

So, rates up, the debt gets more expensive. First thing they do is get on the gas and sell everything because they, like us, don’t want a margin call in the middle of the night. And it happens at the institutional level. So much of the volatility that we’re experiencing today is being driven by all of this leverage, and it’s being created out of thin air. That’s one of the problems with the Modern Monetary Theory, is it’s like pushing on a rope, and about as effective.

But from an investing standpoint, you need to understand this because it can clearly identify opportunity. If rates go up, the first thing these big-money guys are going to do is, they’re going to slam out, sell most of the Big Tech and highly liquid issues they can get their hands on. What they sell has nothing, zero, zippo, nada to do with the quality of the underlying business. All they’re trying to do is get out of the way of the bus that’s bearing down on them. That’s the leverage that they have to pay back or avoid every single night.

When the rates drop, they get right on the gas because they can borrow that money and immediately put it back in the market. That’s why you have these massive swings. And as an investor, you step back. When in doubt, you zoom out. We know that all that liquidity is coming from the banking system. We know it’s coming from the Fed. We know that there’s $4 trillion in institutional funding sitting on the sidelines last time I looked.

One of these days, they’re going to figure out that it’s going to go from really terrible to less bad and then all of a sudden, “Hey, this is pretty good.” And when that happens, all of that money is going to come flooding in, which is why to bring it all home, Ed, you want to be in to win.

Because in the old days, you could wait for confirmation, you could get cool earnings, you could have some headline, but you got to be ”Rule of the Back Page,” you got to be in the fight when it starts, you’re going to miss 20%, 30%, 40%, 50% of the run-up.

And that’s why, even on a limited basis, you go out buy one, two, three, four, five shares—just so you have a toe in the water. Because the last thing you want in today’s markets is to be on the sidelines when the bus leaves. You’ve got to be on board. The institutions know that, which is why they coincidentally do a lot of buying, even though the markets are going down.

It’s a two-way street. Think about this. Everybody’s like, “Oh, selling, selling, selling.” You can’t have a seller without a buyer, and you can’t have a buyer without a seller. So if you know that 85% of all individual investment decisions are wrong, doesn’t it make sense to flip around and look at the other side of that and say, “Who’s buying, or what do I want to get my hands on?” Best, not rest. That’s how it works. Touchdown. Jordan goes through the fade, two points.

Ed: I like it.

Keith: That’s how you play the game. Again, it’s so funny, and it’s ironic that we’ve arrived in this space, but psychology is absolutely critical. It’s critical for two reasons in today’s game. You want to pick battles that Wall Street has no interest in fighting. If you are a confident investor investing in the quality stocks that you know are going to be there, you are harder to separate from your money, and they’re going to go elsewhere.

But if you’re a weak hand, if you’re a speculator, if you’re a meme stock trader, if you’re just fading the little stuff, you’re going to get separated from your money every single time. It may take a little while, but the principle of gambler’s ruin comes into effect. You’re going to get separated sooner or later. The strong feed when the weak retreat.

So I submit, One Bar Ahead style, it’s better to be the strong every day of the week. It takes guts. It’s uncomfortable. Sometimes you hate every minute of it, but that is the path to profitability.

Ed: Viewers, you’ve just gotten a great primer into how Keith Fitz-Gerald approaches the markets. If you’re still with us, my guess is you’re probably interested in what you heard, so take a minute to click here. It will take you to a page where you can read more, get all the details on One Bar Ahead.

We’ve got a special offer for you. You actually can get two years for the price of one. I can’t recommend One Bar Ahead enough.

Keith, awesome hanging out with you today. Thank you so much for taking the time. It’s always good to see you, my friend.

Keith: Likewise. This has been a blast. And to everybody out there watching, thank you for spending a few minutes of your valuable day with me and with Ed today. Hope to see you again soon.

Ed: Cheers.