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Global Macro Trading Journal
- Thread starter Daal
- Start date
It was volatile as shit though, there were a couple -70% yearly returns (in USD) along with years of returns of +120%, +150% and +288% (all USD). But that's exactly why one should not be afraid of the market now. That volatility suggest stocks were fluctuating from undervalued to overvalued. So the way to earn excess returns is to buy when everybody hates that market (and its down huge in USD terms) and sell when its up huge and everybody likes it. But even if one didnt do that, just bought and forgot about it, they did just fine
I believe Shiller talks about this in his book Animal Spirits. Markets tend to fluctuate widely even though the fundamentals are not flutuacting that much
The 80's experience in Brazil (and in a lot of other countries) suggests those issues (fiscal problems, hyperinflation, debt defaults) might have an impact on long-term stock returns but they are problably not that significant (after all, they happened and yet corporations continued to deliver strong returns to stockholders).
Certaintly that impact is a fraction of what the market actually does when they happen. Markets will drop 50% in what they should be dropping maybe 10-20%. Then it will correct that overshoot by rallying 130% at some point in the future. What pretty much can't happen is for markets to keep overshooting downward forever, at some point the economic forces driving the market are so strong, stock prices pretty much have to rise (otherwise dividend yields would be huge, M&A would be rampant, companies would buy back themselves with profits etc).
So, in my view/model of how stocks work, to be worried about XYZ and avoid the market is a timing strategy. It can pay off if you do it well (you can then buy back cheaper) but it can burn you badly if you dont do it well (you watch the market rip 50% without you). It certainly it not an investment strategy. An investment strategy is to look at valuations/sentiment and maybe the trend.
But given that politics are so uncertain, to avoid a cheap market (that already had a significant drop) because you think this or that vote wont happen and maybe it will give you a chance to buy a market even more cheaply, it might be even a poor TIMING strategy.
The 80's experience in Brazil (and in a lot of other countries) suggests those issues (fiscal problems, hyperinflation, debt defaults) might have an impact on long-term stock returns but they are problably not that significant (after all, they happened and yet corporations continued to deliver strong returns to stockholders).
Certaintly that impact is a fraction of what the market actually does when they happen. Markets will drop 50% in what they should be dropping maybe 10-20%. Then it will correct that overshoot by rallying 130% at some point in the future. What pretty much can't happen is for markets to keep overshooting downward forever, at some point the economic forces driving the market are so strong, stock prices pretty much have to rise (otherwise dividend yields would be huge, M&A would be rampant, companies would buy back themselves with profits etc).
So, in my view/model of how stocks work, to be worried about XYZ and avoid the market is a timing strategy. It can pay off if you do it well (you can then buy back cheaper) but it can burn you badly if you dont do it well (you watch the market rip 50% without you). It certainly it not an investment strategy. An investment strategy is to look at valuations/sentiment and maybe the trend.
But given that politics are so uncertain, to avoid a cheap market (that already had a significant drop) because you think this or that vote wont happen and maybe it will give you a chance to buy a market even more cheaply, it might be even a poor TIMING strategy.
This is due to the fact that in a cheap market if your worry plays out and then markets overshoot down, that is an opportunity to buy more. Stocks go from, say, 15% expected real returns, to 20% expected real returns. But if you are wrong and your worry dont play out (which happens most of the time), stocks could go from 15% to 10% expected return and you miss out on the multiple expansion. Of course, its possible that stocks grind up without a multiple expansion, in that case, they just grind higher by 15%.
So there is a distribution of possible scenarios ranging from multiple expansion, to continuation of the current multiples to a contraction. But in a cheap market, I'd argue that that distribution is tilted towards the first two and there is a bias against the latter (contraction). These things tend to be mean reverting, specially in inflationary economies (where deflationary depressions are very difficult to happen)
So its a gamed RIGGED against the market timer. You are already fighting 10-15% risk premium against you (plus the tendency toward multiple expansion due mean reversion). Why would want to predict/forecast politics as a reason to stay out of the market in such game?
So there is a distribution of possible scenarios ranging from multiple expansion, to continuation of the current multiples to a contraction. But in a cheap market, I'd argue that that distribution is tilted towards the first two and there is a bias against the latter (contraction). These things tend to be mean reverting, specially in inflationary economies (where deflationary depressions are very difficult to happen)
So its a gamed RIGGED against the market timer. You are already fighting 10-15% risk premium against you (plus the tendency toward multiple expansion due mean reversion). Why would want to predict/forecast politics as a reason to stay out of the market in such game?
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What's funny is that if you look at my posting history, you would see that I was the biggest market timer proponent around. I avoided US stocks for a long-time because I was 'worried about this or that'. But the market taught me very well to not play that game. I watched the S&P500 go up almost four fold since the low and I captured very little of it. But on the bright side, at least I developed a view of how stocks work and how to best extract premiums from it while at the same time protecting your downside. Staying out is something to be reserved to expensive markets, not cheap ones
The way I think about this is to consider the risk premium a transaction cost. If a broker charged you a huge commissions and spreads were massive, no one would want to trade that market. But thats is pretty much what trying to time a cheap market to buy it lower is
The way I think about this is to consider the risk premium a transaction cost. If a broker charged you a huge commissions and spreads were massive, no one would want to trade that market. But thats is pretty much what trying to time a cheap market to buy it lower is
One has to remember that in Brazil, to match that benchmark is so easy. All you got to do is to buy SELIC bonds and you earn the overnight rate (14% a year now). I believe the issue here is that he predicted the crisis so well (earned 28% last year vs 13% of the benchmark, due being out of the BRL) that changing your tune and saying things have bottomed is a difficult thing to do. As Howard Mark says, you can count in one hand the amount of people that predicted the 2008 crisis but also profited from turn around in 2009The manager I mentioned is up 9.5% YTD (BRL) against 10.5% of the short-term interest rate benchmark rate (his benchmark, even though he is a multi-asset manager) and ~50% of the Bovespa. He would be making his job a lot easier if I owned SOME equities
I believe that also has to do with the Soros reflexivity theory. Markets create the fundamentals and if you dont update your forecast, the forecasts will be off
Its very intoxicating to be MAKING money while everybody is losing. you feel like a genius, you are the phophet that predicted the apocalypse, the media wants to talk to you all the time, and then all of the sudden you got to change your mind and buy everything and give up on that drug. Its hard, very hard to do
I understand your point. The thing is, I got a plan and I have to stick with it. My investment analysis sayis its not time to sell, therefore I cant. Brazilian stocks are probably due for a drop but that will be an opportunity to buy more. As a matter of fact, I hope you are right and I'm being an contrarian indicator. I really wish I had bought a lot more at the beginning of the year. I put 12% of capital or so, but I should have bought 20-30%, it was such an unique opportunity (for me anyway, due my income in USD, which hedges out Brazil risk). I hope I get the chance to add more at good pricesDaal, I'm gonna share something I've noticed about myself that I now see in you.
Hubris comes before the fall.
I know you are talking about other managers, but you have all the red flags that I catch myself doing before I take a drawdown. I would lighten up your exposure IMO.