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This time it IS different!

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Just picking up here from a conversation with @TrendFollower started on the Crude Oil thread about calling bottoms, investing strategies etc.  Summary of conversation so far below.

TrendFollower wrote:

I will personally see any crash in stock markets as an opportunity to invest lump sums into such large corrections. I invest monthly into equities but would supplement this with lump sum investments should there be a large and rather aggressive downward drop like one would see in recessions. I did exactly this during the Financial Crisis and it amplified my profits when the upward move came. I shall be doing the same should a similar scenario present itself

Mercury replied:

That's the thing to do alright @TrendFollower but the trick is to figure out where the bottom is.  For my part I am taking a different approach this time because I think this is going to be much more than a correction so I am all in cash until the dust settles...  Will take a few years I think.


Figuring out bottoms is extremely difficult. Also if you are a full time investor / trader then fine but if you work full time then to have the time to even try and find bottoms is extremely time consuming. When one tries to find bottoms they can end up missing any major upside that usually occurs. Time out of the market can sometimes be costly. 

I invest monthly using 'pound cost averaging' strategy. I then only invest lump sums on any major corrections / downturns. Otherwise my monthly payments just get invested per month. On those major corrections / downturns I will make a judgement and usually I have not invested right at the bottom but generally I am not too far off. That is fine for me as my investment strategy is for the long term. Also I am not a seller looking to sell anything. I am only looking to invest and build up my investment side of the portfolio for long term wealth creation. 

I am not suggesting my method is right or anything. It seems to work for me as this strategy as enabled my investment portfolio to always be in profit overall and my annualised return each year has always been in double digits but your method may be more prudent and sensible. I would not want to be out of the equities market for a few years. If equities had a major drop over the next few years I would want to be accumulating on each of those large drops as predicting bottoms will get you a 'slap'! 



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I think that is right @TrendFollower and certainly the professional advisers will say the same.  Over the past 30+years this was exactly the right strategy, just look at a price chart.  However, what happens if there is a depression?  I don’t mean the farce we had in 2007 I mean a proper recession that is deflationary in nature?  Our memory of such an event is clouded in the sepia coloured mists of time, the 1929 crash and great depression is something that happened in the black and white photos era, not now!  Few can even bear to contemplate it much less speak about it as a possibility.  People say we fear change but actually we fear fear!

If you take a look at what happened in 1929 you will see that it took 3 years for the markets to reach the bottom (15 months for 2007 and only 1 month in 1987! – we haven’t seen anything like 1929 since 1929).  And what a bottom!  The SP500 went down to 80ish, can you imagine!  That was from a high of crica 450 so an 80% drop.  Now that’s what I call a crash!  We then got the predictable relief rally but asset values did not recover back to pre crash levels until 1956 (27 years!) and the index only made 500 in 1960 (30 years).  After that it rose up to the giddy heights of 700ish before crashing back down to 300 in 1982 (another 22 years and still under water if you held, excluding inflation and dividend compounding).  In 1985/6 the index rose again above 500.  In 1987 it crashed back down to 500 and from there on, well you know the rest.  That is in total 58 years for the SP to regain and stay above the 1929 highs, excluding inflation and dividend compounding.

The 1929 economic depression lasted about 10 years, there are different calculations of this but in any case, things didn’t really get going in terms of production etc until WW2.

I am not smart enough to know this going to happen this time, nor if not now, when.  It may well be that we “just” get a correction like some are saying will happen (35/40%), even that will be large given where we are.  BUT, because I don’t know but I do know that history has a habit of repeating itself and human nature is never to learn from our mistakes and there are may signs of rampant consumerism, over production, pollution, over population etc etc I fear the worst and risk mitigate accordingly.

In such circumstances, not being in my 20s anymore and therefore not having time to recover, I look at the risks and my management approach is to go to cash and wait and see.  I can always get back in.  Mind you if it takes another 58 years to recover the 20 year olds will also struggle, different is they typically don’t have much wealth to protect and have a lifetime to make it, there are always opportunities coming out of the ashes of destruction…


I believe if we do get a crash, a proper crash, that the Central Banks will not be able to do anything about it.  Interest rates will rise (are rising) because they have to normalise away from this artificial, manipulative, position and the economists banging on about the “new normal” (because they can’t contemplate a reset that will blow their theories away) will be exposed.  There is no safety net.  Consumers are debt ridden.  Prices are way, way to high and we seem to have forgot that economics (and asset markets) go in cycles.  Bretton Woods was the catalyst for an **** of a debt creation fueled spending spree but I believe we are about to wake up to the mother of all nightmare hangovers…

If anyone can come up with a credible fundamentals case for why this time it really is different and asset prices will just continue to go up and up and up with “healthy” (yeah right!) 10/20% correction ad infinitum and how ZIRP/NIRP is credibly the “new normal” I’d love to hear it but as for me I do think this time it IS different because this time we are getting a proper recession (probably depression) and a proper markets crash.

Note: chart courtesy of Macrotrends.net (link below)



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No problem @TrendFollower, as you say divergent view points make for a discussion.  BTW, I am not saying I am right so it is fine if you think I am not.  What I am doing is looking for scenarios that fit the information I have.  That is both historic trends, the current set of fundamentals and the fact that, while things are not the same as in 1929 and the next crash will not play out exactly the same way, human nature is unchanged.  Also the cyclical nature of things is unchanged.  Therefore I cannot see any other scenario other than there will be a cyclical down turn.  The question I pose myself is when and how bad?  The answers out there (put forward by a variety of very experience and credentialed people) are seemingly as follows:

  1. You ARE wrong, this time it is really different - I disregard this as the ostrich approach to being faced with the prospect of something bad happening
  2. A "healthy" correction - this I consider to be an oxymoronic position put forward by people who cannot deny a downturn but a recognition of anything worse than a correction, and advising their clients as such, would be counter to their own interests, Turkeys don't vote for Christmas (or thanksgiving really) sort of thing
  3. A significant bearish phase, say the 35% or so that someone like a David Stockman talks about, and get disparaged for, chiefly because he has been doing so for too long now
  4. And a deflationary recession, or what I like to call a reset.

One thing is certain, we agree, the price action will reveal all.  However for me it is about being open to the possibilities and prepared to take advantage of price action when it reveals a scenario to be most likely.  This is intrinsic to my trading strategy and method and because I trade long term positions makes perfect sense to leverage it into investment.  I see no difference between the two, both have at their heart the concept of buy low, sell high.  You cannot make a profit from an investment unless you sell at some point.  The strategy of buy and never sell..?  Hmm, maybe if you want to leave stuff to your children, less massive inheritance tax (unless you move to Malaysia before you die that is...).

I think it was Bruce Kovner who said one of the important success factors for him was the ability to imagine configurations of the world different from today and really believe it can happen.  Many of the greats talk about having an open mind when it comes to trading, t not get locked into a single narrative that clouds your judgement.  This is a key thing for me so my mind is open to all but scenario 1 above (well there is having an open mind and then there is drinking the cool-ade...).

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It has always been the case that the financial services companies have had an edge over retail traders for one reason or another.  Computerised trading is not new, been around since the late 80s or so.  They have become more refined and more all encompassing it is true and may impact the market in perhaps unusual ways that might not have happened in the past (e.g. the massive bullish pin bars you can see in 2015, early 2016 and in 2018, which some people believe is the algos kicking in).  I would judge (unscientifically) that one of the reasons the Bull has been prolonged is the programming of the algos, which, it seems to me, were all programmed to take advantage of the Greenspan Put.  I wonder how they will work if the World turns nastily Bearish?  All systems work until they don't anymore and need to be adjusted to the new reality (relative to the current assumptions that is - things rarely really change long term).  Humans can, in this scenario, react faster than alogs can be reprogrammed.

So a few observations on your comments here and elsewhere about this algo topic:

  1. I don't know and will never know how they work so keeping them in mind is not of value to me, except as an interesting discussion topic and possible explanation for weird moves.  BTW, it is support for scenario 4 in my previous list if the algos have been propping up the market, when they stop oh oh!
  2. It hasn't changed much, if anything, in term of chart patterns, maybe because, as you say, the algos are programmed with technical analytical techniques.  I will never try to out process them but that doesn't mean I can't compete either in anticipation or as a fast follower.  I will say the moves are fast now when they do break but perhaps they always have been relatively so...  One reason I do not day trade is I don' feel I have an edge over the high processing speeds of the alogs.  On a longer time frame however the patterns and trading entry points are easier to manage in this regard.
  3. The problem with computer programmes is that they are rigid in the basis of the set up and have the biases of the programmers built in (i.e. they are just as prone to human error because humans programme them).  I know learning functions exist now but the kind of AI that we see in the movies does not yet exist and flaws int he programming eventually get exposed ("computer says no").
  4. A point you made elsewhere was about algos not having to deal with human psychology but that doesn't change what humans have to do, which is to have methods for managing risk and money and a methodology overall that they follow, especially when they are getting ichy palms about taking a trade.  So algos or not that exists as an issue.
  5. The biggest advantage retail traders have over algos and professionals is that we do not have to be in the market.  Using my investing example, because I don't have to worry about shareholders or fund stats I can happily take all my investments to cash and hold that for several years if needs be to protect myself against a massive crash.  I don't mind losing some upside to avoid a 50%+ downside.  Algos cannot do that.  Similarly in trading we can wait for the best set up according to out method and if the Algos also go for that so much the better.

In short Algos, fine, who cares?  If you believe in your methods and it is tried and tested and is still working then it is all about self discipline and trading what you see.  If you don't then find another methods(or adjust what you have) of get out of trading all together. 

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