The year is 2015.
We’re a year into Russia invading Crimea.
We’re well into the Presidential campaign that saw Trump end up being the victor.
Zero interest rate policy was still going pretty strongly…
And WOKE was really starting to take speed.
Brexit arguing was also going full guns blazing.
I remember this year as being the year investors went truly insane.
But ironically not because of any of these economic or geopolitical factors.
No, something far more dangerous happened in 2015.
A movie was released.
A movie which has ended up DECIMATING investors’ minds ever since.
This is the scene in the movie which has captured an entire generation of crazies to keep losing money.
In my view, The Big Short has been the thing which has caused investors to lose the most money over the past 20 years.
The Burryfication of the market has sent many doolally.
No market move has really caused this for the individual.
But betting on every broad rally as being a bubble that’s about to pop has been SO dangerous to investor portfolios.
We even see it happening now – Yahoo released a news article last week, syndicated from another website, showing warning over the ‘Buffett Indicator’ (market cap of all US stocks as a percentage of GDP) being at 207%.
What this indicator is failing to account for right now though, is the extent to which concentration is driving this market.
It’s a very different situation right now…
But for many investors, the sight of a market going higher boggles their mind.
But why?
Well at the base level, it’s because they still view the stock market as being related to the current economy.
This could not be further from the truth.
The stock market is a view on whether companies will make more or less money in the future…
And you tend to find that the US has a nice stranglehold on growth, growth which tends to be defined by… companies making more money than they did last year…
Why then, do people keep betting on companies like Nvidia, which are objectively making a shit tonne of money each quarter, all of a sudden reversing and collapsing, just because their price has gone up?
Simple.
It’s because of the second sinful piece of media ever made.
This book might have been great in a world where value was a concept to find hidden gems.
But in today’s world of systematics, algorithms, real money buying (pension funds, sovereign wealth funds, the Swiss National Bank) and the passive complex (buying SP500 via cheap ETFs), it doesn’t make sense.
Get into your head if you are still stuck in a world of bubble-popping mania…
MOMENTUM IS THE FACTOR TO FOCUS ON.
Whether you take it from a perspective of money printing, or huge US tech companies simply dominating the market, or as I said above, forced buying looking for the path of least resistance, the fact of the matter is, running a trend following strategy with a momentum focus is your route to wealth from the market…
Not trying to bottom fish for value.
Now, Robeco found something interesting…
Building on previous academic research and nearly a century’s worth of US stock data spanning 49 industries, the authors identified 51 industry bubbles in US equity markets from (see Figure 2, blue line).4
Studying their aftermaths, only half of these ended in a burst – defined as a drawdown in returns of more than 40% in the two years following an industry’s stock-price run (Figure 2, magenta line). Examples include utilities (1929), gold (1980), software (1999), and steel (2007). Buzzing bubbles on the other hand, experienced a similar two-year run up in prices but saw no subsequent price drawdown in the two-years following. In fact, returns continued to rise (Figure 2, green line).
Initially, there is little to distinguish between bursting and buzzing bubbles as they expand. However, things get interesting at month nine, where bubble behavior diverges. Bursting bubbles begin to lose a bit of steam, ultimately ending with negative return of about 30% in the two-years following. Returns of buzzing bubbles continue upwards gaining an additional 50% positive return.
So what’s the learning point of this.
Well, those of you with your risk to reward hat on will see that taking a longer term view on sectors which have experienced drastic run ups, and being a bit selective over which sectors you’re in is likely to give you outperformance.
Bursting bubbles give a negative return of 30% while buzzing bubbles 50% in the two years post the bubble burst.
That looks like a good system to me.
Which is probably why Soros said to buy bubbles.
But how do you know what to buy?
Well that’s why we made the Academy.
Book a call to see if following actual processes on trade selection, risk management and trade management is right for you (rather than just guessing and hoping for the best).