Update 2020-08-11

Some general updates regarding how I'm positioning myself.

I'm still remaining long Calls in some depressed stock - it rallied for a burst in May but it was very short-lived. The risks still remain and the play remains viable in the long term (to recap, I'm looking at next Jan). The virus itself may be more long-drawn than initially expected, but it's ok because the market seems ever ready to reward any good news. Keep riding on the disconnect.

The newer idea is OTM Verticals on pharma stocks, since there's nothing else much to do now.

The curve steepener idea initiated some time ago is now expiring for what is likely a small gain or loss. The curve never steepened fast enough for the index to capture it. The only thing wasted on this trade was the tied up capital but that's easily managed.

In the FX space, it seems like the dollar has formed a mid term bottom and I would go long the USD for a bit here. The EUR rally is no doubt warranted so I won't contest that.

I remain underweight SG stocks - it's quite clear that it's an asymmetric play to the downside - has been since the financial crisis.

I think the next 5-10 years or so, we will have to be more active in managing our portfolios - it's hard to see where returns are going to be attractive in the passive space.

The Way Forward

The rally is firmly in place now despite "common sense" that we should be seeing a 2nd wave down. I've mentioned in previous posts that we should find ways we can position ourselves should the rally happen and I've mainly done that through Calls which I believe give the best risk-reward in this lower volatility environment. VIX was then about 38.

Now that some of the Calls are ITM, I have to increasingly take care of the downside. The risks of another downturn are still there - I am still suspicious of the strength of the rally. Some say it's priced for perfection, and so the surprises are to the downside. Given the lower volatility environment we still find ourselves in, with VIX being at 25, we can consider a few things: (a) buying Puts, and (b) rolling the Calls to further OTM ones. I'm using strategy (b) for individual counters which have seen their prices severely depressed e.g. cruise liners for which I've already bought Calls for, so I don't want to be paying double premiums. Strategy (a) is more for general downside protection on indices.

These are just nascent ideas as of now, spurred by Friday's strong rally. Subject to correction in the future when I've thought through them more.

Price prediction using historical trajectories

Was curious what it would look like if I simply scanned through all of history, look for price movements within the same 60-day window that are similar to current movements, and then see what happened to them 30 days later. The results are above.

Each line is a 90-day price trajectory. I used the first 60 days to fit the pattern to current price movements, and selected the top 14 where the patterns matched the closest. The decimal in the parenthesis is the range of the movement, denominated by the starting price (on day 0). The patterns are filtered such that only ranges of >15% are selected.

Some current caveats: is not a quant study - nothing very rigorous about this nor will I place any bets on it. Another caveat: I simply normalized the frame by min and max values - and simply filtered them to be > 15%, judge for yourselves how representative each move is with respect to the current one (35%).


Investing in stocks – better than holding cash?

While it is true that investing in equities yield better returns than holding cash, it does not mean that you will always do better investing than doing nothing.

When factoring in the realities of how people invest (not speaking about biases /flaws but simply how life works), the returns of stocks do not translate as well to investors' portfolios.

The main reason is that people tend to quote stock market returns (e.g. 150% gain from 10 years ago), but rarely do investors dump in their full investable amount in one shot. Rather, they slowly accrue investable cash over time, and they can only decide at that time how they want to deploy that cash.

Below I've simulated 3 portfolios: (1) a buy-on-the-dip strategy, (2) using dollar-cost averaging, and (3) simply not investing the cash.

Each start out with 10k investable cash, and accrue $50 of investable cash every trading day (≈ setting aside 1k each month to invest). The investable instrument is the S&P index.

For simplicity, dividends are not included in the returns, and this is offset by the cash portfolio not being invested in bonds. One of the reasons for simplicity is that this is not meant to be a research piece on how we should invest, but rather just to give a sense of what investing looks like in reality, with an appreciation of its worst-of-times where being fully invested over 15 years can approach the gains obtained by simply doing nothing (can you stomach that?).


Summary of findings:

  1. For the past 30 years, the difference between being invested vs doing nothing is only evident in the 12-year super bull run of 2009-2020
  2. Before that (from 1990 to 2008) any gains were largely wiped out by the downturns of the 2000 and 2008 (depending on when you started)
  3. DCA introduces more risk because it stays fully invested throughout, but yields better total returns; the Sharpe however is slightly lower than the buy-the-dip strategy (but the different is not big and retail investors like us rarely care for such a small difference in Sharpe; total returns to us is more of a priority)
  4. Comparing dollar-cost-averaging and buy-the-dip: in very bad downturns (2008), the decades of gains using the DCA can be easily wiped out, and strategy total returns can be the same as BTD
  5. Depending on when you started, the drawdowns have different impact (how much strategies 1 and 2 loses compared to the all-cash portfolio)

What this means:

  • Widen your range of expectations for future market returns (next 30 years), as we don't know if we can get the same 12-year bull run we had. Be prepared that investment returns may not be as good for the next 20 years or so.
  • There is no universal strategy that is better - see below charts to get a sense of the variabiliy of 'which strategy is better' - see how starting at different times can change your conclusions. That's just one variable; others are: initial capital, how to BTD, and most importantly what is the magnitude of the next bull run.
  • Stay invested anyway - the degree to that (full DCA or BTD) is up to you -  your psychological comfort and anticipated circumstances



  • Start with $10,000 cash, immediately invest to the target equity ratio (e.g. 70% equity)
  • Daily inflow of $50; if DCA, invest immediately, if not, save it for the next dip
  • If actual equity ratio is higher than target equity ratio, wait for next market recovery (makes new all-time-highs) to unwind (sell) equity positions at a rate of 0.1% of entire equity portfolio every day, and stop unwinding if market dips down again (back to buying mode)
  • Charts start at 1990, 1995, 2000, and 2005


Grey line: dollar-cost-averaging strategy
Black line: total portfolio value of equities (blue) and cash (dark green)
Lime green line: cash-only portfolio

From 1990

Notice how all 3 strategies go back to square 1 in 2008

From 1995

Now, both equity strategies fare worse than cash in 2008 just because we started 5 years late

From 2000

A worse picture

From 2005

Needles to show starting at 2010 - would have been spectacular

Refining Fire

This market downturn has taught me some things.

First, don't do bargain buys in any part of the bull cycle. I had to cut a few of these positions because the downturn was like a refining fire - only the good ones recover - the bad ones keep going down. Bargain buying in a bull cycle is tempting because everything else looks expensive, and there's thing hunt for yield / returns. But it's only a matter of time before the fire burns away the dross, leaving only the pure elements. It's more important to buy strong companies (even if they're expensive) rather than bargain buy weak companies (hoping they will yield a higher % return).

Second, percentage returns for the rallies are misleading - e.g. "oil is up 50% from its lows". It's not uncommon to see severely beaten down stuff rally in double digits, leading you to think you should have bought beaten down stuff. But we often forget we can hardly ever pick the bottom, and so these returns are only relevant to the minority who did catch the bottom. For the rest of us, we are likely to have endured some double digit drawdown, before seeing some double digit rally (from the bottom), leaving our position pretty much near breakevent.

Third, think carefully and clearly on the next steps. This is a WIP as I consider whether I should bet big on a down move, or start putting money back into equities. We have to give ourselves the leeway to be wrong about things. Some decisions are psychologically more difficult than others (e.g. make a bear call while it's rallying, and missing a once-in-a-decade opportunity to buy), but I have to weigh things out as I best can, and make the mental decision and not waver. Rigour is not always rewarded - accept that. Be content that you've made your best decision, regardless of outcome.