Markets are simple, not easy. There are really only two trades — continuity or mean reversion. Ultimately, all of your financial success depends much more on market regime rather than any specific strategy. That’s why guys like Richard Dennis could take $400 to $200 million in the early 1970s and 1980 ’s and then puke it all back in the late 1980’s and early 1990’s.
I still remember as a young pup at Drexel Burnham being told to sell the s-t of out Dennis’s fund because the guy was “genius”. He, of course, managed to blow up every single dollar of the $80 million Drexel raised for him, some of it on remarkably stupid plays like selling out of the money puts on the last day of expiry — a move that is more a hallmark of dentist trading his TD Ameritrade account, then the “Prince of the Pits”. By the 1990’s he had blown up his second trading fund and was never heard from again.
Dennis of course, like so many of the “genius” turtles, was a very fortunate beneficiary of a very unique market regime. Late 1970’s and 1980’s saw price persistence in commodities that was never to be seen again. Trends worked because prices went only one way for a very long time. Once the regime changed to mean reversion with its bewildering twists and turns, trend trading lost all of its luster. Suffice it to say that if turtle traders showed up 15 years late to the game you would never hear or know about any of them. That’s why all of their strategies are less than useless now, generating nothing but losses and commissions. The few rare wins never cover the multitude of losses created by fake breakouts.
Market regime can make the stupidest people look brilliant and the smartest people look like idiots. Right now your uncle Morty, who has been investing all his 401-K money in SPY, is ready to light a fat Cuban with a hundred dollar bill and celebrate the fact that he has beaten every hedge fund in the world by 1000 basis points every year for the past decade running.
Everywhere you look, the advice from every financial advisor is to just buy the index and you will be rich by retirement. I may not know much, but after 35 years on Wall Street, I do know one thing. If everyone is telling you to do something, it has to be the single worst advice you can take. The market has been in an uninterrupted rally for 10 years. Buying the index is simply believing that this trend will persist.
Allow me to take you back to 1966 to 1981 — a period of 15 years during which the Dow just traded back and forth around 1000 destroying more wealth than at any time since the Great Depression. Or perhaps you would like to consider the Nikkei which has not made it back to its old highs in 40 years and still trades for half its peak value. If Japan is the social vanguard of the industrialized world, where adult diapers outsell the baby ones, then perhaps this is our future as well?
Or perhaps, you will remember my own lovely experience in “responsible” investing when I happened to buy 529 funds for my kid’s college education right at the peak of the Internet bubble. The total cumulative return? 2.49%. Not per year. Total over the 12 years those funds stayed invested. Yes, I know that funds would have probably doubled had I held them til now, but I needed the money for college then. I couldn’t tell the schools — oh please wait another five years and capital returns will be sure to kick in and I will pay your tuition in full. I am good for it.
If the market takes a swan dive from which it doesn’t come back this, I am afraid may be the fate of many investors who are blindly following the index route. Buy the f-king dip is just a strategy — just like the turtle strategy and it will lose its value eventually. Markets are simple, but they are not easy.