Tuesday, August 23, 2016

Look Back

It's been a tremulous year. I think I need to record some of my thoughts and experiences during the period before my memories are completely distorted and rewritten by time.

On Aug 23, 2015, I found myself was thumb-sucking and expecting a major market correction on the next Monday. I was ready to embrace the impact, but the main question I was agonized at was whether the overall market valuation was be too high (SPY P/E ratio 17~18) and whether the global economics, e.g. China, EU, were slowing down or even heading to recession.

My general feeling, completely unscientific, was that economics were still sound. Many people were still living in the traumatic experience of 2008/9, and there were still plenty of fear from the past downturn lingering around. I don't yet see the crazy euphoria of 2000 or 2007. Major companies, especially major tech companies, were very profitable and siting on record piles of cashes.  Even if there was a downturn, it wouldn't be as a free fall as 2008/9. Therefore, when a friend asked what to do tomorrow, my intuition was "buy".

However, I had no idea how bad the market would go before it turned back and how long the winter could last. Whenever I read news and listen to "experts", there were all kinds of explanations for doomsday predictions or confident predictions on how would happen next. Most of them were outright garbages, but some did make subtle arguments I couldn't dismiss easily. The fog was so thick that my mind was a bit clouded and I couldn't really see through it. I was full of fear and self-doubt and was tormented between the thoughts of jumping in right now in afraid of missing opportunities and of waiting for a while in hope of further safety margin. I realized that it's easy to say "buy" and much harder to actually executing "buy" orders.

I managed to buy some at the first dip before the market bounced back briefly by the end of October. The market went even lower in Feb, 2016. I had the fear that this might be the real beginning of a recession, but I also remembered that I was thinking, if the market just had an average return of 7~8% by the end of 2016, I could reap 40~50% if I started to buy. However, I already ran out of cash and I had to buy on margin. I hesitated to buy too much because I was worried at margin calls if the market fell as bad as 2008/9.

It was the first time since 2009 that I made significant trades in response to market fluctuations. Most of trades turn profitable today (Aug 23, 2016, +22% ), but, through the whole period, I was NEVER sure I was making the right calls.

In the past year, concerns over China, oil, Fed's interest rate decision loomed over the horizon. The most dramatic event is Brexit: UK voted to leave EU unexpectedly. The consensus was it's bad for UK and added uncertainty to global economics. The market dived on June 27/28, reminding people of the reminisce of 2008/9 crashes. However, the market bounced back quickly: not only recovering all shocks from Brexit but climbing another 6~7%. It turned out Brexit might be the last chance to enter market at the same level as July, 2014.

One thing bothering me most in the past year and more, is the long term, 5~10 years, perspective of S&P 500.  The current low interest and low inflation environment is unprecedented. It probably won't last forever. I've been following some prominent central bankers and economists closely, but I don't yet see any convincing arguments on how the economics will unfolded itself in the next decade. Perhaps, no one really know. I'm trying to prepare myself over various scenarios: slow and steady growth, rapid growth into bubble territory, or panic triggered by another recession. I'm trying to develop some mental models to identify tell-tale signs of these scenarios so that I can be prepared to deal with them. What worries me most is a prolonged dead economics, S&P just oscillates around 0. I don't think I have the strategy and the temperament to deal with a lost decade like Japan.

Another thing I learned is making profitable trades is very hard. My trades in the past year returned ~20%, but the performance is still subpar compared to leveraged do-nothing strategy, for example, UPRO and TQQQ return 30~40% in the same period. Therefore, even though I managed to initiate ~700K long positions, the gain makes only a small contribution to the return of my total portfolio.