These days, bitcoin is all over the place in the media. And the price of bitcoins against the US dollar is going through the roof. What does that tell us? The subtitle of Carl A. Futia’s famous book on investing, The art of contrarian investing, tells it all: “How to profit from crowd behavior in the financial markets”. If a crowd has formed, the media will start paying more and more attention to the investment subject around which the crowd has gathered. And you are probably too late to invest. As Futia explains in his book: “During the late 1990s, at the height of the stock market bubble, there was a constant stream of media stories describing in great detail the wealth and lifestyles of the newly minted Silicon Valley millionaires.” Check out this article (“How the Winklevoss twins became the world’s first bitcoin billionaires”) and make up your mind: to bitcoin or not to bitcoin?
The main US stock benchmarks closed moderately higher Thursday. The S&P 500 (+0.29%) snapped a four-session losing streak. Shares in technology, industrials and materials were the drivers behind the gain. The Dow also added 0.29%, while the NASDAQ almost doubled that gain (+0.54%). Volatility eased substantially with the VIX closing almost 8% lower. XIV ETNs profited and gained more than 3%. UVXY ETFs lost 6.4%.
Our four models are holding XIV. As a result, all of them were the winners of the day. Danny Daredevil saw his RSS rise above 15%. Adventurous Anny‘s RSS closed at 18.5%. Solid Suzy and Lazy Larry are approaching an RSS of 80%.
None of our models gave a trading signal at the end of yesterday’s session.
RSS = Return Since Start | YTD = Year-To-Date | QTD = Quarter-To-Date | AAR = Average Annual Return
René’s Reflections @ Friday: Beating the Greed Monster in times of bubbles — doable?
You know the story about bubbles. While they are building up, nobody recognizes them as such. At that time, there is a general perception that you are a big fool if you don’t participate. Everybody is making huge profits, so why don’t you? Pure, undiluted greed in the form of ‘FoMo’ (Fear of Missing out) will help the bubble grow. The Bandwagon effect will inflate the bubble even further, until it finally bursts. Leaving most (notably late) investors empty-handed. In the blink of an eye, the general perception switches from: ‘You’re a fool if you’re not into it’, to: ‘How on earth could we have been so stupid?’
So, could there be an investment strategy which enables us to make money from (spectacular) bubbles? And — more importantly — that enables us to survive those bubbles with a profit instead of a loss?
If there were such a strategy, it would be one in which the ‘Greed Monster’ would be caged from the start. The biggest trap any investor needs to avoid, is ‘wanting to get the most out of it’. Because more often than not, this means all or nothing in the end. And in investing, rest assured that all or nothing usually means nothing in case it concerns you, and all when it concerns the others. Think more in terms of: anything is better than a loss. Or: a profit is a profit. Or even: enough is enough. If you can think like that, you are well on your way to ‘be smarter than the rest of us’. Remember that all too often, those who want to squeeze every last drop out of everything, end up with nothing at all.
The following strategy might be worth (back) testing, to see how ‘bubble-proof’ it is. Just a handful of simple rules.
First. Ask yourself what maximum price you are willing to pay for a stupid mistake. One hundred dollars? One thousand? Ten thousand? A hundred thousand, a million? Fine. That is tutor money. You might lose it. After all, a bubble is a bubble, and nobody can guarantee you that you won’t be the last one to step on the bandwagon before it tumbles into the abyss.
Second. You take a deep breath, and invest your ‘tutor money’ in the bubble. If it is a real bubble we are talking about here, your investment should go up, and up, and up.
Third. The Greed Monster will roar at you from its cage. Ignore it. Don’t be tempted to wait and see where this ends. At 100 % return on investment, you cash out your initial investment. No sooner, no later. By doing so, you will have reduced your investment risk to zero, since you withdrew your initial investment. From this point on, you continue investing with your profit only.
Fourth. If the bubble turns against you (read: the value of your portfolio stops rising or worse: starts decreasing), then do nothing. You would like to sell, but you don’t.
Fifth. If the bubble continues, and the value of your portfolio keeps rising, you cash out a fixed percentage of your immediate profits on a frequent, planned schedule. A fixed percentage could be any percentage, but for my backtest I would typically use like 30 to 50. The frequent, planned schedule could be every week, two weeks, or every month, depending on the dynamics of the bubble.
Could this be a bubble-proof strategy? And if so, will we be able to resist the Greed Monster?