Updated: Mar 7
Warren Buffett is known for having two investing rules. Rule number one is “Don’t Lose Money.” Rule #2 is “Don’t Forget Rule #1.” This philosophy drives our investing system as well.
If you’re at or near retirement age, these rules take on more importance. When we’re older, we have less time left for the markets to recover. Big and long downturns can have a significant impact on retirement plans for people already in retirement.
Big and long downturns can cause damage to long-term rates of return for young people as well. Let’s look at the annual stock market returns (S&P 500) for the five-year period from 2007 through 2011. If an investor had $100,000 at the beginning of 2007 in an S&P index fund, they would have had only $88,618 five years later due to the huge decline (-38.5%) in 2008. Those five years of performance produced a fund that was probably well below what this person was assuming for their long-term financial plan at the time. Those results change the retirement calculations significantly.
But let’s say that you had a way to cut the losses of 2008 in half. Rather than losing 38.5% in 2008, let’s say you lost 19.3% instead. Rather than finishing the period with only $88,618, you would have ended up with $116,284 at the end of 2011 (or 31% more).
A loss of 19.3% is still significant, but at the end of the five years you would have probably still been close to your financial targets. This is a great illustration of Warren Buffett’s rules.
Our Beyond Buy & Hold system is designed specifically for the investing challenge of bear market collapses. The back test of our model in these five years produces an even better result. Our model would have generated a balance of $128,500 at the end of 2011, 45% more than what the market delivered ($89K). This is because our automated trading system would have only lost 10.8% in 2008 compared to the 38.5% loss for the S&P 500.
Big losses in bear markets are the main reason why “Buy & Hold” is such a mediocre investing strategy. Buy & Hold proponents tell us to just ride out these bear market storms despite the fact that your investments can lose 30% or 40% or more in a bear market collapse. And it can take as much as six or seven years for the value of your investments to recover. It is simple math. If the goal is to have your portfolio increase over time, you can’t afford to have the value of your portfolio go backwards.
Until now with our Beyond Buy & Hold system, investors had no other options to the standard “Buy & Hold” approach. Bear market declines only represent about 14% of the stock market’s trading cycles but those declines average out to annual losses of 39% per year. About 86% of the time, the stock market is rising at an average return rate of 15% per year. With a proven quantitative system like ours that is constantly on the lookout for bear market crashes, it makes sense to be 100% invested in the stock market most of the time. You want to be able to capture those 15% annual gains (86% of the time) and avoid those 39% annual losses (14% of the time).
Our system can’t totally avoid losses in those bear market declines but we avoid most of the losses. And while “Buy & Hold” investors have to wait an average of 4.5 years for the value of their portfolios to recover, our system recovers in just over one year. If you can benefit fully from the bull market runs and avoid the big losses in the bear market declines, you can almost double the performance of the market as a whole.
Happy Investing,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
We are still in the middle of this messy bear market. As of Friday, February 10th, the S&P 500 is still down 14.1%, the Russell 2000 is 21.3% off its previous peak and the Nasdaq is 26.0% off its previous peak.
January was a good month for the stock market, however, as all the major indices moved higher. It is possible that the market put in a bottom in October of 2022. You can see the low points for the S&P, the Nasdaq and the Russell 2000 below. All the indices have risen between 13% and 15% since the lows in October.
Let’s look at another view of the S&P this year to see what the technical analysts are seeing. Charts like the one below show what are called price support (lower line) and price resistance (upper line) levels. You can see that the S&P has broken through the top line on the graph (resistance) which is a positive sign. This could be another signal that the bear market bottom was reached in October of 2022. But we have a long way to go.
Throughout 2022, we have been comparing this bear market with the bear market of the 1970’s. The graphs line up well as you can see below, and the seventies were the last period where we experienced high rates of inflation. The 1970’s market was only halfway through its decline at this point and continued falling for another year. It bottomed out with a price drop of 45%. This year’s market is still following the slow and steady decline we observed in the early 1970’s. You can see the recent uptick in the current 2022 line where it is beginning to separate from the 1973 line, but you can also see where that happened earlier in the 1973 cycle. That move in 1973 did not hold up, however, and the market continued to trend downward.
When we compare the current bear market to the full 1970s bear market the picture is not so optimistic. Even though recent activity has been positive for the current market, the patterns are still very similar.
We are now just about thirteen months from the pre-crash peak for the S&P and about fifteen months from the peaks of the Nasdaq and the Russell 2000. The average length of a bear market decline is eleven months, so it is possible that we are in the late stages of this crash. But we just saw that the 1970’s bear market decline lasted two years.
The reality is that no one knows if the worst is over or not for the stock market. The direction of inflation and the economy and corporate profits will likely dictate when we begin the inevitable rebound. Because of the uncertainty, it is important to follow a disciplined approach to stock market investing. Our approach to investing relies only on quantitative measures of actual price trends. We make no predictions about which way the market will head in the future. We simply react to what the market is telling us. Stay disciplined, my friends.
Happy Investing,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
The so-called experts from the financial services industry say that what we do in our investing system can’t be done. They base this opinion on the findings related to an investment strategy called market timing.
Market timing has proved to be impossible for anyone that has ever attempted it. We totally agree with that assessment. Market timing means that the investor attempts to sell at every market peak and buy at every market bottom. The stock market is too volatile and unpredictable for anyone to succeed with this approach.
These “experts” are confusing what we do with market timing. We don’t attempt to sell at tops and buy at bottoms. Our model is only on the lookout for one thing: the dreaded bear market. We don’t attempt to trade minor market corrections of 10%, for example. Because markets are so volatile and unpredictable, there’s simply not enough of a spread in a 10% correction to get out near the top and to get back in near the bottom. Our system is not that good. Nobody’s system is that good.
We simply look out for major bear market corrections, where the stock market falls by 37% on average but often as much as 50% or more. There’s a large enough spread in those market drops and subsequent recoveries to “trade the crash.”
Look at the charts for the S&P 500 in both the 2000 dot-com crash and the 2008 financial crash. Between 2000 and 2002, the S&P 500 dropped by 48%. That drop is highlighted in the graph. We knew there had to be a way to attempt to trade a huge spread like 48% to outperform the “Buy & Hold” gold standard. One does not need to be perfect or even that good to profit off this kind of volatility.
The 2008 financial collapse was even more dramatic, with the S&P 500 falling by more than 55% in less than 18 months. There’s a lot of room for error in attempting to trade a 55% move.
Our model is 100% focused on getting out as early as possible when the risk of a major bear market decline is imminent. On the flip side, our model includes another set of algorithms to get back in as early as possible when markets inevitably recover, as they did in both 2003 and 2009 (see charts above).
And because we’re continuously protected by our algorithms against a collapse, we can go “all in” when our model flashes a signal of low risk. There’s no reason not to invest aggressively when you’re protected against big losses. We’re also very comfortable going “all in” on the market when risk is low, because the long-term direction of the market is always higher.
It would take a complete breakdown of our political and economic system for the long-term direction of the stock market to be negative. And if that ever happens, every investing method except ours would be in trouble. In that extreme situation, the BB&H system would get out of the market before the worst of the damage is done. It’s the only strategy that protects your money in this way.
We’re no better at predicting the short-term direction of the stock market than anyone else. We don’t even attempt to predict short-term trends. We simply react to the risk assessments of our model based on what is happening in the markets. Bear market collapses typically last a long time—roughly 11 months from peak to trough. Markets tend to move gradually downward and gradually upward. There’s plenty of time to read and react to these trends and price moves.
Happy Investing,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
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