Capturing Upsides

The Talk

A few days ago, I’ve a chit-chat with a friend where it goes like this:

Friend:”Eh, why did the market drop so suddenly ah?”

Me:”Because of the ‘Trump Turmoil’ lor, the market fell out of love with Trump, FBI investigate him for Russian connections, he failed to replace Obamacare, etc. etc.

Friend:” Why ah? Why this news can make the market drop?

Me:”It’s like the Tide lar, the ocean waves, it rises and it falls. Sometimes the news make the market rise, this time the news make the market drop lor.

Friend:”But it’s not like the Tide lar! The ocean waves got science one, follow the moon cycle, weather, but stock market not like that one leh…

The Science

That remark caught me off guard. Which makes me think of the difference how a layman and a professional sees the market.

Take for example, a Totally Generic and Completely Diversified Asset Portfolio (TGCDAP) movement:

capturing upsides 1 mth

Looks like a two mountains, right? Seems like completely random movement up and down.

Warren Buffet describe it like this:” There’s a person, his name is Mr Market, he is a bit crazy. Everyday he sell the same product, but Tuesday he might sell it 1 dollar, Wednesday he might buy it 2 dollar.”

So we being clever people, we would buy from Mr Market on Tuesday for 1 dollar, then sell back to Mr Market on Wednesday at 2 dollars for 1 dollar profit:

capturing upsides 1 mth - Copy

BUT…. for those of us who actually try to do this, we find that it is actually very difficult to buy and sell at the right time. At the minimum, there are 4 general reasons why markets rise and fall:

  1. Population Growth
  2. Productivity Growth
  3. News
  4. Sentiment

Or

Price movement = Population + Productivity + News + Sentiment

And here’s the fun part, when we extend the TGCDAP graph from 1 month to 3 months it gets more difficult to determine when to buy and when to sell:

capturing upsides 3 mth

3 months to 6 months:

capturing upsides 6 mth

1, 3, 5 years!!!???!!!

capturing upsides 1 3 5 years

But this is not to say no one can do it well. There are those who are able to trade the market. And they have been doing this as their DAY JOB, 24 hours a day, 7 days a week. For those of us who don’t have the time, knowledge and stamina to follow the news and sentiment, we need a simpler entry and exit strategy. We need to simplify our formula to:

Price movement = population + productivity + news + sentiment

If we get rid of news and sentiment as noises, as irrelevant waves and tides, our perspective will change:

capturing upsides 1 3 5 years monthly sampling

(Similiar graph but at a monthly monitoring instead of daily monitoring)

capturing upsides 1 3 5 years quarterly sampling

(Quarterly / 3 months once monitoring)

If we zoom in on the 5 years data, our entry and exit point is clear:

capturing upsides conclusion

In fact, when we talk about capturing upsides, what we really mean is: invest as early as possible and exit only when the money is required to meet financial goals.

Of course, we should always construct our portfolio in a legit manner and avoid illegal money game schemes. The returns from those schemes are usually from unpredictable news + sentiment type which can wipe out our capital at any moment.

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