Saturday, October 31, 2015

Needing bots, having bots, superseding bots

Before I talk about the mega-bubble which will eventually become the most important story on the planet, I want to put my new investment strategy in context by reviewing my history of learning about, and interacting with, the stock market.

The first time I ever paid real attention to the market was in the late 1990's when I had my first 403(b) retirement account with TIAA-CREF.  Some time around 1998 I noticed that TIAA-CREF's growth fund was outperforming its value fund, and so I naturally moved all of my savings over to the growth fund(?!).  Soon after that I started reading and following the Motley Fools to try my hand at individual stock picking, and in 2000 I invested in my first four companies, all of them members of the Dow 30.

Everybody knows what happened next; the stock market tanked.  Although the worst damage was done to the dot-com stocks in the NASDAQ exchange, growth stocks in general and the large companies of the Dow 30 were pretty much the next worst places to be.  By 2002 I was thoroughly discouraged, and I put my stock market research on ice.

Around 2005 I learned that an investment adviser named Bob Brinker had predicted both the market top in 2000 and the market bottom in 2003.  I subscribed to his newsletter after that, but more importantly I realized that it was indeed possible to time the stock market, and thereby avoid losses during bear markets.  Since my natural talent is for finding patterns in complex data, I immediately set out to learn why Bob Brinker's method worked, and then to improve on it if possible.  After a couple of years I was back in business; I had found additional market-timing factors which (to my knowledge) were not used by Bob Brinker, including a pre-crash signal in market data that I've never seen anyone else illustrate or otherwise talk about.

In 2007 I started going public on this blog with my own buy and sell signals, albeit still backed up by Bob Brinker's overall view of the market.  Unfortunately I was still doing everything by eye, rather than by impartial calculations, meaning all of my decisions still had to pass through my own emotional filter and hubris.  Even though I had discovered an important pre-crash signal that preceded the crashes of 1929 and 1987, I didn't notice when it happened right under my nose in late 2007 right before the plunge of January 2008.  Once again I was suffering during a bear market despite having put considerable effort into avoiding just that.  To my additional horror, the great Bob Brinker remained 100% invested in stocks all the way through the 2007-2009 bear market.  That ended my trust in Brinker's method.  Fortunately I gathered my wits and clawed back with timely bear fund purchases over the next several months.

I emerged from two stock market bubbles and two bear markets with the following perspectives:
  1. Sometimes economic distortions cause parallel distortions in the stock market, as happened in the late 2000's with the sub-prime housing bubble, but sometimes the stock market experiences a "mania" bubble just from hype, as it did in the late 1990's.  (I'm less convinced about this latter point now.)
  2. Regardless of whether particular market moves are driven by real economics or short-term enthusiasm/panic of the herd, I had found market data "indicators" that correctly signaled market tops and market bottoms in each case.  In other words, it's possible to see the beginning of a buying frenzy or a selloff before it's reflected in the price of stocks, regardless of the cause.  (I remain convinced of this.)
My next goal had to be the design and implementation of an automated market timing method that, once running on a computer, wouldn't rely on me personally to collect data, interpret data, or produce a forecast. After much effort and several starts and stops, the first version of my "market bots" went online in June 2013.

Oh, if only the perfect stock market bot was the only thing we needed to maximize our retirement savings!

Incredibly, now that I have the exact tool I that I've wished for since 1998, I'm suddenly convinced that it's going to be moot when the next bubble pops.  The dot-com bubble was focused on a subset of U.S. stocks; the sub-prime bubble combined a housing bubble with a global stock market bubble; and now I fear the next bubble involves ... just about everything.   Most importantly for investors who wish to preserve a nest egg for retirement, I think the next bear market will include a steep plunge in the value of the U.S. dollar, meaning that even if you preserve the numerical value of your 401(k) by staying out of plunging U.S. stocks, you will still lose your purchasing power anyways because the dollars you managed to hang on to will become almost worthless.

This mega-bubble and my strategy for avoiding it will constitute the next few posts.

1 comment:

Cathy said...

It was a worthy run, Hodar. And now we bobbing corks settle into retirement wondering what this new order will bring. We grow more aware of some of the antecedents to this challenging and potentially quite difficult time:
http://pjmedia.com/victordavishanson/community-organizing-america/2/
I look forward to your next posts. We'll need all the advice we can get.