Are you ready for the next market crash?
I came across an interesting interview from Kirk report (requires subscription, $100/year):
Q&A With Mebane Faber - http://www.kirkreport.com/membersonly/2 ... ane-faber/
Faber is a portfolio manager who focuses on quantitative investment strategies.
Here are a couple of my favorite lines from the interview:
Kirk: In your opinion, what is the most important lesson you’ve learned so far?
Mebane Faber: The real pain of losing money. I don’t care how many times you’ve read Mackay’s or Zweig’s books, you don’t know what risk is until you feel the very real pain of losing money.
Kirk: Very interesting Mebane, especially concerning the issue of volatility and sentiment during the inevitable bear markets we have seen.
To make the point clear, however, the bottom line is that in your view we won’t have an “all-clear” signal for knowing when to get 100% long the market again until we see the S&P 500 close above its 10 month moving average. Is there anything you can imagine that would force you to ignore this signal because you thought a whipsaw as at hand instead?
Mebane Faber: Let me back up and say that this isn’t some sort of Holy Grail or something that predicts where the markets are going. It is mainly a method of risk management and avoiding a massive hole to climb out of. Losses get exponentially harder to recover from the bigger they get. Every G-7 country has seen its market decline by at least 75% at some point. That takes a 300% gain to get back to even. (Let me add here – do you really think you are just going to sit tight the next time this happens if you are using a buy and hold strategy or are you just hoping it doesn’t happen again?)
Everybody thinks they are John Wayne when assessing their risk tolerance on paper yet when drawdowns actually occur I’ve watched even the most self-acclaimed “risk tolerant” over my time in this business make extremely fearful, impatient, and downright irrational (aka stupid) decisions at the worst possible times. It’s why the foundation of any strategy should be protecting the capital before thinking about growing it. With that said the financial industry tends to have so much emotional baggage attached to terms like market timing that their brain tends to hit the off switch anytime someone makes a case for it. Call it what you want, but most of our systems do exactly this – time the market – in an attempt to preserve capital from the massive drawdowns that occur in every asset class at some point in your lifetime. Every asset class is a fantastic investment at certain times, and absolutely horrible at other times.
A quantitative system is NOT designed to avoid the 5% or even 10% normal market corrections that occur just about every year, but instead, the 40%, 50%, or larger declines that tend to occur a few times during every investors lifetime that can absolutely devastate someone both emotionally and financially.
Q&A With Mebane Faber - http://www.kirkreport.com/membersonly/2 ... ane-faber/
Faber is a portfolio manager who focuses on quantitative investment strategies.
Here are a couple of my favorite lines from the interview:
Kirk: In your opinion, what is the most important lesson you’ve learned so far?
Mebane Faber: The real pain of losing money. I don’t care how many times you’ve read Mackay’s or Zweig’s books, you don’t know what risk is until you feel the very real pain of losing money.
Kirk: Very interesting Mebane, especially concerning the issue of volatility and sentiment during the inevitable bear markets we have seen.
To make the point clear, however, the bottom line is that in your view we won’t have an “all-clear” signal for knowing when to get 100% long the market again until we see the S&P 500 close above its 10 month moving average. Is there anything you can imagine that would force you to ignore this signal because you thought a whipsaw as at hand instead?
Mebane Faber: Let me back up and say that this isn’t some sort of Holy Grail or something that predicts where the markets are going. It is mainly a method of risk management and avoiding a massive hole to climb out of. Losses get exponentially harder to recover from the bigger they get. Every G-7 country has seen its market decline by at least 75% at some point. That takes a 300% gain to get back to even. (Let me add here – do you really think you are just going to sit tight the next time this happens if you are using a buy and hold strategy or are you just hoping it doesn’t happen again?)
Everybody thinks they are John Wayne when assessing their risk tolerance on paper yet when drawdowns actually occur I’ve watched even the most self-acclaimed “risk tolerant” over my time in this business make extremely fearful, impatient, and downright irrational (aka stupid) decisions at the worst possible times. It’s why the foundation of any strategy should be protecting the capital before thinking about growing it. With that said the financial industry tends to have so much emotional baggage attached to terms like market timing that their brain tends to hit the off switch anytime someone makes a case for it. Call it what you want, but most of our systems do exactly this – time the market – in an attempt to preserve capital from the massive drawdowns that occur in every asset class at some point in your lifetime. Every asset class is a fantastic investment at certain times, and absolutely horrible at other times.
A quantitative system is NOT designed to avoid the 5% or even 10% normal market corrections that occur just about every year, but instead, the 40%, 50%, or larger declines that tend to occur a few times during every investors lifetime that can absolutely devastate someone both emotionally and financially.