Reblog: Waiting for the Market to Crash is a Terrible Strategy


In my experience, investors sitting on a lot of cash are usually worried about equity valuations or the economy, and tell themselves and others that they’re going to buy gobs of stock after a crash. The strategy sounds prudent and has common sense appeal—everyone knows that one should be fearful when others are greedy, greedy when others are fearful. But historically waiting for the market to fall has been an abysmal strategy, far worse than buying and holding in both absolute and risk-adjusted terms.

Using monthly U.S. stock market total returns from mid-1926 to 2016-end (from the ever-useful French Data Library), I simulated variations of the strategy, changing both the drawdown thresholds before buying and the holding periods after a buy. For example, a simple version of the strategy is to wait for a 10% peak-to-trough loss before buying, then holding for at least 12 months or until the drawdown threshold is exceeded before returning to cash. This strategy would have put you in cash about 47% of the time, so if our switches were random, we’d expect to earn about half the market return with half the volatility.

The chart below shows the cumulative excess return (that is, return above cash) of this variation of the strategy versus the market. Buy-the-dip returned 2.2% annualized with a 15.7% annualized standard deviation, while buy-and-hold returned 6.3% with an 18.6% standard deviation. Their respective Sharpe ratios, a measure of risk-adjusted return, are 0.14 and 0.34, meaning for each percentage point of volatility buy-the-dip yielded 0.14% in additional annualized return and buy-and-hold yielded 0.34%.

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stockarchitect August 5, 2019

Buy / Crash / data / Hold / Market / SVRN /

Reblog: The Anatomy of Market Tops


Daniel Kahneman once said, “Hindsight makes surprises vanish.” The hindsight bias can lead investors to constantly fight the last war. Since the financial crisis the last war has made top calling in the markets a cottage industry. Looking back now the peak before the prior crash looks easy. It was not. Predicting when the music will stop is not easy. This piece I wrote for Bloomberg shows why.

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There’s a simple reason the future always feels uncertain but the past seems relatively orderly: No one has any idea what the future holds, while hindsight allows us to assume that the past was more predictable that it actually was.

Take the Great Financial Crisis. The majority of investors, economists, policy makers and regulators were completely blindsided by the worst economic and stock-market downturn since the Great Depression. Yet when these same people look back at that fateful 2007-2009 period, it seems many of them now believe that they knew it was coming and called it in advance.

It can be very lucrative to be right about major market events. Many who actually did see the crisis coming became household names in the finance industry and parlayed that success into book deals, keynote speeches, television appearances and “thought leader” status. Since so many people were cheerleading right up until the market crash, no one wants to get caught flat-footed again, leading to a steady increase in the number of people now calling for a market top.

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stockarchitect February 27, 2019

awealthofcommonsense.com / Ben Carlson / Fundamental / Market / Sentiment / Tops / Trend /

Reblog: Three Lessons for Investors in Turbulent Markets


The global stocks roller-coaster of recent days reminded me of three lessons I learned many years ago as an investor in emerging markets. If well understood and applied, these precepts can turn unsettling volatility surges into longer-term opportunities.

  1. Long periods of market calm create the technical conditions for violent air pockets. Until last week, the most distinctive feature of many market segments was historically low volatility, both implied and realized. Although several economic and corporate reasons were liberally cited for this development (including the convergence of inflation rates worldwide and eternally supportive central banks, as well as healthy balance sheets and synchronized growth), an important determinant was the conditioning of the investor base to believe that every dip had become a buying opportunity, a simple investment strategy that had proven very remunerative for the last few years.The more investors believed, the greater the willingness to “buy the dip.” Over time, the frequency, duration and severity of the dips diminished significantly. That reinforced the behavior further.The economist Hyman Minsky had a lot to say about the phenomenon of prolonged stability breeding complacency as a precursor to instability. This phenomenon is reinforced by the insights of behavioral finance and can lead markets to embrace paradigms that ultimately prove unsustainable and harmful (such as the idea well more than a decade ago that policy making had totally overcome the business cycle, and the notion that volatility had been flushed or hedged out of the financial system). Continue Reading →

stockarchitect October 15, 2018

Bloomberg.com / George Akerlof / Hyman Minsky / Investor / John Maynard Keynes / Joseph Stiglitz / Market / Michael Spence / Mohamed A. El-Erian / Turbulent / VIX / Warren Buffet /

Reblog: 9 books about financial markets you really should read


Earlier this week I wrote (again) about the importance of understanding financial market history. This prompted a few people to ask for some of my favourite books on the topic. Here goes:

“Devil Take the Hindmost: A History of Financial Speculation”

If I had to pick just one book to read on the topic, this would be the one. Edward Chancellor weaves history, psychology, and economics beautifully in what is also one of the better-named finance books I’ve come across.

“The Panic of 1907: Lessons Learned From the Market’s Perfect Storm”

The story behind the banking crisis most people probably aren’t familiar with. This book shows how primitive the financial markets were before banking regulations and the Fed came around.

“The Great Depression: A Diary”

This first-person account of what life was like during the Great Depression is not only a lesson in financial market history but also how difficult that period in history was for those living through it. I can’t recommend this one enough.

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stockarchitect September 25, 2017

Books / Bull Market / Crash / Depression / Investment / Learning / Market / Stocks /

2016 Budget day is back for Indians


The Union Budget of India – a financial exercise in the largest democracy of the world! It is the day when the Finance Minister of India cracks the whip as he presents the Annual Financial Statement. The Indian hoi polloi are so used to increase (well sometimes decrease too) in taxes, duties etc. It is that day of the year that holds so much of hope and despair too. 11 am IST and the markets watch with bated breath as stocks either soar high or come hurtling down.

As we approach the budget day of 2016, the question on top of everyone’s mind then always is how will the stock market behave this year? At Stock Architect, we are always gleaning through information trying to bring you something interesting. We found this post which we are sure you will love to read and understand. May this Budget Day ring in prosperity for all investors.

How Stock market behaves during budget?

Panic in the stock market? Historical budget data says NO

Market is going to go down substantially!!

Government is going to give this time a very good budget !!

This budget is very very unique and a game changer !!!

Above three are most running rumors or humors that move around stock market, but they are present for all budgets. The following table indicates data of returns by Sensex in pre and post budget sessions for recent four budgets.

Pre-Post 2012 2013 2014 2015
1st day -1.55% 0.17% 1.25% 0.63%
2nd day -1.09% 0.69% 0.40% 0.48%
3rd day -0.16% 0.04% 1.27% -0.78%
4th day 2.09% -1.62% -0.07% -0.88%
5th day 0.48% -0.04% 0.54% 0.10%
6th day 1.28% 0.08% 0.53% 0.01%
7th day 0.59% -1.64% -1.98% -0.90%
8th day -1.36% 0.72% -0.54% 1.65%
Budget -1.19% -1.52% -0.28% 0.48%
10th day -1.10% 0.30% -1.37% 0.33%
11th day 0.25% -0.21% -0.07% 0.46%
12th day 1.65% 1.40% 0.89% -0.72%
13th day -2.30% 0.57% 1.27% 0.23%
14th day 0.96% 0.84% 0.04% -2.05%
15th day -1.78% 1.39% 0.31% -0.47%
16th day 1.20% -0.19% 0.29% -0.18%
17th day -0.79% -0.41% 1.21% 0.95%
Average 17 days -0.17% 0.03% 0.22% -0.04%
Change(1st day till 17th day) -3.28% -0.54% 4.17% -2.17%
Pre Budget – Market Performance

(Expectation )

(1st to 8th day)

 Market was neutral Market was down Market was

up

 Market was

Neutral
Post Budget-Market performance

(Reaction)

(9th to 17th day)

 Market

went

down

 Market went

up

 Market

went

up

 Market

went

down

Data for sensex pre budget 8 sessions and post budget 8 sessions as shown in the table provides following takeaways,

  1. Highest closing loss was 2.30% viz previous day closing in last four years data during budget period
  2. Highest closing Gain was 2.09% viz previous day closing in last four years data during budget period
  3. 1st day to 17th  day keeping the budget session in centre; Gain was maximum 4.17% during 2014 and loss was maximum -3.28% in year 2012
  4.  Market expectation and market reaction over 17 trading sessions as shown in table clearly show that market did factor in plus and minus viz pre and post but it was not huge number

What should be done in pre budget and post budget rally??

  • Data indicates it is better to be patient nothing big is going to happen in pre or post budget sessions, if you think long-term (it is important event but over long-term)
  • Data suggests stay away from intraday positions and sector specific calls as it is very difficult to time market especially during Budget days
  • In case of trading don’t get exposed to single sector, have diversified calls
  • Even after budget declaration, you can buy from the market. The market is not going to close immediately after.
  • Even if looking to invest in the hope that budget will be good, go and buy Nifty or Nifty ETF to play safe.

Although, there is a risk reward relationship, it is better to keep away from short-term greed for gains and if at all trade be initiated, it should be under the guidance of your expert, who can guide you for the long-term. As Trading / calls / investment decisions will be sole responsibility of readers, readers are advised to consult their expert before taking any action / decision.

The original article appears here – https://expertmile.com/arti.php?article_id=1016&title=How-Stock-market-behaves-during-budget#sthash.hbdGUH4d.dpuf

stockarchitect February 25, 2016

2016 / Budget / Expertmile / historical / history / India / Market / Nifty / sensex / Stock /