Investment - A medium term concept
TAKEAWAYS:
Momentum Asset Management- “the Santa Claus rally”- statistics indicate that Santa does exist in US equities.
In time for Christmas: with the help of a Nobel Prize winner, we capture the way of making more money than everyone else.
J.P Morgan: missing the 10 best trading days on the S&P 500 (2002 to 2022) has a severe performance cost. The day trader who gets this right is a genius.
Introducing the tortoise: “time in the market is better than timing the market”.
Old money vs New money- defence and attack in volatile times.
Like dogs- markets are not just for Christmas.
Firstly, we start with Yuletide felicitations to all our clients and readers. For investors (outside of our wine portfolios- “Looking through the red”, August Newsletter) the performance scene has been poor. The Yuletide season and the impending arrival of Santa is reason to cheer.
Like the warnings from staff at the Dogs Home “a dog isn’t just for Christmas”- we state the same theme for markets. This despite this weeks Chart of the week- (“When does Christmas arrive on Wall Street?”) which draws attention to the “Santa Claus rally”, which for no clear reason, seems to give US equities the same allure as the cutest of dogs. Diagram 1- illustrates the “ah!- equities are cute factor” showing that periods before and after Christmas do so much better than the average of other weeks in the year.
DIAGRAM 1- When does Christmas arrive on Wall Street?- Momentum Asset Managers.
With the plethora of trading platforms sprouting around, especially seemingly in the UAE, the number of day traders sniffing an opportunity out of Santa's arrival might be on the increase. At Mondial – honoring the spirit of our tortoise logo- we stick with the (admittedly boring) same conclusion as Momentum:
“Short-term bets on market movements are not a sustainable investment strategy. Having a well-diversified portfolio with a longer-term outlook can help investors ride short-term market fluctuations and enjoy more sustainable returns, meaning more enjoyable Christmases for years to come.”
Believe in the Tortoise- not Santa!
This article therefore treads into the controversial: Santa does exist but not for very long. We go further to say that most day-traders end up in the doghouse in terms of performance over medium term periods. If success was abundant and easy there would (should) be government insistence and regulatory enforcement on day-traders running social services departments as that would take a heap of worry off the shoulders of those managing poverty. It would make government hugely popular.
Understanding why the tortoise is happy with its pace compared to the cheetah (average life spans: 50 years for the former to 10 years for the latter) is the simile we wish to make with comparing the day-trader with the medium-term investor. Today’s advisory piece focuses on two angles of understanding the role of time: missing the best days in the market; and understanding “old money versus new money” as a risk management philosophy for the current time.
Missing the best days in the stock market.
In Diagram 2- we take an extract from J.P Morgan Asset Management covering the best 10 days in the S&P 500 market over the period 2002 to 2022. Given there are 365 days in the year (normally) then the best return in Diagram 2 is 423% annualised, and the tenth best is 229% annualised.
DIAGRAM 2- The 10 best days in the market from 2002 through 2022.
The day-trader who got these days correct would be an absolute genius. Evidence to support the genius tag: firstly, in the Markowitz papers on Portfolio Selection (good enough for a Nobel Prize) and the later edit “Portfolio selection: efficient diversification”, he states that he knows how to make more money than everyone else. Specifically, this means investing 100% in the asset that goes up the most. Unhelpfully, Markowitz admits to not knowing which asset to select in the first place. Hence his drift towards diversification. Secondly, we refer to Warren Buffet and his three big mistakes “selling Coca-Cola, selling Coca-Cola and selling Coca-Cola”. The admission made by Buffet is that he never knew when to sell or buy a top stock- his aim is to buy a stock he believes is “fair value” on the basis that it will grow in value -despite volatility- over time. Thirdly, the financial advisers who survive with a client base over periods of time all support the adage “time in the market is better than timing the market”. They take their lead from a mix of academic Markowitz style support and pure experience.
In short, at Mondial we are geared to medium term steady-eddy growth, absorbing turbulence as and when it arrives, and relying on multi-asset research departments for jumping on opportunities presented by shorter term dynamics. This leads us into the Old Money v New Money philosophy which we believe will be of valuable in 2023.
2023- old money versus new money: combining defence and attack.
One shadow lurking over the horrible market performance of 2022- is the possibility of a recession in the US, and the world, working its way into another market headwind into 2023. This will force many Mondial advisors to turn their attention to an “old money versus v new money” discussion seeking to combine defence and attack
Old- Money- Capital- think defence.
We define “old money” as capital which has typically been built up and which has grown over time. The enemy of capital is falling markets, downside deviation. Experienced investors looking for protection from falling markets typically seek out fund Fact Sheets to inspect the stats which indicate historical largest drawdowns. What are the worst-case capital loss statistics?
Financial advisers will also seek out volatility measurements with perhaps the most common (or easiest to explain) being standard deviation – the movement of a price around its mean. In Diagram 3- the graph shows the impact of downside deviation on capital in terms of the recovery required to get your capital back. A 50% fall in markets for example requires a 100% gain to recover the initial position. Excessive volatility hurts capital.
DIAGRAM 3- Gain required to make up for loss.
At Mondial our Investment Policy for protecting capital is based on trusting the research departments of multi-asset managers. The aim of multi-asset managers is close to Markowitz’s original thinking of diversification to reduce volatility by mixing different assets. A 50-50 split of Asset A producing 5% over a period and an Asset B producing 20% is more likely to produce a number between the two, improving the return on asset A and reducing the downside deviation on B. That is what our multi-asset managers aim to do. They will not “knock the lights out” on returns- but they should reduce the impact of excessive downside risk. Boring and defensive- but it seeks to keep performance out of the doghouse.
New Money- Cash/future savings- think attack.
We define New Money as money that has not been invested yet. Either cash from future income or cash sitting defensively in a portfolio. At the time of writing the S&P 500, the benchmark for “risk- on US assets” is minus 16% YTD. Given that this market dominates somewhere around 65% of the world’s equity market, entry at such a discount seems the “no-brainer” advice of current times for those who can be patient on investment performance for one or two or more years.
In one form or another this remains the Mondial go-to advice over the year 2022-. At the risk of excessive repetition, we return to two graphs used in our “Newsletter Year” more than once to nail the point. In Diagram 4 we re-print two graphs:
Diagram 4.1- the lost decades…. The Diagram reflecting that despite periods of poor performance the US market has a habit of recovery or “reversion to mean” and inflating back up.
Diagram 4.2- despite the “lost decades” annual S&P returns remain strong .
DIAGRAM 4- Repetition- yes- markets are down. The opportunity of the year- investing in US equities.
Further, dripping cash (i.e., monthly payments) into relevant base currency equity trackers during the expected volatility of the coming months, leans the “New Money” part of the discussion towards the critical KPI (Key Performance Indicator) , being the actual collection of units- not the valuation. Collecting units in a falling or volatile market for selling when prices recover should be the name of the game for the New Money component. Cost-price averaging to name the rose differently.
End
For more details, or to contact Sean Kelleher CEO, Mondial Dubai LLC,
please contact us at
+971 56 2228 535