--- title: 'Probabilistic Thinking' category: investing tags: - investment published: true date: 2025-08-18 06:04:48 description: 'Logical investing can still lose money, but the higher-probability side wins out over time. Input to frame to output, applied to gold versus gold-miner ETFs by scenario.' --- **Even investing logically and diligently can lead to losses.** ### Conversely, illogical investments like meme coins can also lead to profits. Still, I think the former carries a higher **"probability"** of turning a profit, and as those results pile up, logical investing is bound to win out over the long run. The macro view is the "input" layer of investing. Value investing is a complete investment strategy, a philosophy, and a decision-making process. It's an "end-to-end" process of estimating an asset's fair value and, when it's undervalued beyond the margin of safety, buying it and then managing it. How you read the macro and what you do about it depend on your own investment philosophy and strategy. An output only emerges once you have a "frame" in place to respond to the input. Input → frame → output Information gathered from various media → the information-processing engine called the brain → investment decisions But without that frame, sound investment judgment is hard to reach. \*Investing is the product of quiet, steady effort, day after day. ------------------------------------------------------------------------ ## **An Example of the Investment Process** **1. Comparing the Characteristics of Asset Classes, Products, and ETFs** Comparing gold and gold-miner ETFs The starting assumption here is that gold-miner stocks are a lousy investment. → While gold returned 52% after COVID, the gold-miner ETF (ticker: GDXJ) managed only a 9% return → On a 15-year basis, while gold rose 111%, the gold-miner ETF recorded -42% → Gold miners have all kinds of problems: budget overruns, poor cost management, embezzlement, and equity dilution through paid-in capital increases. ## **2. Establishing the Rationale from the Characteristics Comparison** Gold-miner ETFs show "superior returns" when the price of gold surges. But by the same logic, if the price of gold is flat or falling, that price just melts away. ex) Early 2016, gold +30% → gold miners +155% ex) End of 2018, gold +70% → gold miners +118% ex) Recently, while gold rose +18%, the gold-miner ETF (GDXJ) rose 32% Why? Their fixed-cost ratio is high, so if they can't sell, it's a big loss, but once they clear break-even, most of the revenue turns into profit margin. That's because a gold miner's costs are mostly "fixed costs." Whether or not they sell gold, whether the price of gold is high or low → CAPEX (capital expenditure) on exploration, development, and infrastructure gets poured in at a fixed rate. So when the price of gold surges → enormous profits and dividends grow → the stock price skyrockets. + On top of that, because they're undervalued when gold is flat, the move in a bull market looks explosive. ## **3. Overall Macro Analysis** From Q3, Yellen keeps spraying fiscal spending all the way to the presidential election → inflation returns → the potential for gold prices to rise emerges. So I think gold miners can rise to match → and of the two, I see "gold miners" as having slightly more upside than gold. Still, my baseline stays that gold miners are not a good investment in normal times. (\* High potential returns come with high risk.) ## **4. Stock Price Direction by Scenario** ### Best-Case Scenario for the U.S. Stock Market (Gradual Rise) 1\) A very mild recession arrives, and inflation and long-term interest rates come under downward pressure. 2) Yellen runs fiscal spending that moderately supports growth, but only to a degree that does not bring on inflation. 3) The Fed provides covering fire through monetary policy so that long-term rates do not spike because of the fiscal spending. ### Worst-Case Scenario for the U.S. Stock Market (Crash) 1\) Yellen pumps in liquidity, and inflation reignites. 2) Long-term interest rates rise due to an oversupply of Treasuries. 3) To help his reelection, Biden cracks down on illegal immigrants, and through immigration policy and the like, the unemployment rate rises and retail sales decline. 4) The Fed, hemmed in by inflation, finds it hard to ease monetary policy and wavers back and forth. ### So What? - Best-case scenario → gold/gold miners can mostly do well; at worst, they stay around flat. - Worst-case scenario → the environment becomes very favorable for gold/gold miners. A liquidity party fueled by fiscal spending and stagflation has generally driven surges in gold and silver. So a high-expected-value situation is one where the conditions for gold to leap take shape alongside favorable supply and demand. ## **5. Building a Portfolio from the Conclusion** So gold or gold-miner ETFs can soften a little when U.S. stocks do well, and surge sharply when they do poorly. Given the macro environment that will unfold going forward, buying gold-miner ETFs makes for an attractive portfolio from an investment standpoint. No one knows how the macro will play out. But by weighting each of the probabilities, we can make the investment choice with the currently higher expected value and raise our investment multiplier. ------------------------------------------------------------------------ In the next post, I'll build on this example to update my analysis of the holdings currently in my portfolio, and of ones I plan to add.