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On how to miss the (next) bull market - seven golden rules to avoid excessive profits

Many investors tend to miss long-term bull markets and observe in hindsight that they were in “too little, too late”. In this edition of our #MarketsExplained series, we offer advice on how to end this half-hearted behaviour and show you how to miss the bull market in its entirety – not only the current one but also any bull market in the future. These seven golden rules – if strictly applied – will let you insulate your wealth against any major increases in the future. Finally, one less thing to worry about.




An endless back-and-forth has been taking place over the past ten years. “The easy money has been made”, CNBC has reported year after year, and yet the bull market has raged on all the same. Valuations have been quoted at lofty levels, market pundits have spotted irrational exuberance, and yet new economy stocks have moved on and not looked back.

Over these years, many private investors have told me they were reluctant to chase the bull market early on, especially after repeatedly hearing in the media that they had missed out on most of the ‘easy money’ in the first place. Memories of hurtful experiences during the ‘tech bubble’ at the turn of the century were still too close to the surface to allow investors to re-enter the space. There is no point in highlighting that most of the new market leaders of the past decade were not even quoted on a stock exchange in 1999.

JOMO: the joy of missing out

After all the relentless efforts of trying to put ‘cash to work’ and the dismal results within my sphere of influence, it dawned on me that many investors seemingly do not want to be part of the bull market. So to add value to this sizeable group of investors, I suggest the following: instead of following this half-hearted approach of being in and out of the market and having a bit of this and a bit of that but not really a significant exposure to booming assets, I think it is time for a bolder approach. In other words, enjoy missing out on the bull market entirely, i.e. embrace the Joy of Missing Out (JOMO). To raise the bar even further, I also propose ways of not only missing out on the current bull market but also on any bull markets in the future.

First risks first: Gut feeling – distinguish between risk and uncertainty
Before we start to approach this ambitious goal in a systematic way, I think it is good to agree on a toolbox to get us there. By ‘toolbox’ I mean the way in which we approach a future that is risky and uncertain. A very helpful method can be found in the proposal of Gerd Gigerenzer, a German psychologist and Director Emeritus of the Max Planck Institute for Human Development. Professor Gigerenzer differentiates between risk and uncertainty – concepts that are more than a hundred years old but not fully understood or adapted in many sectors. In a nutshell, he considers risks as situations where probabilities are known and therefore statistically manageable, such as lotteries, weather, and demographics. In such cases, Big Data and sophisticated decision modelling make a lot of sense. In contrast, uncertainty describes those situations where probabilities are not known (or are constantly shifting). Here, the best approach is to work with heuristics, i.e. simple approaches that worked in the past (rules of thumb), and adapt them continuously.

The blueprint for financial markets: Black swan or ‘42’?
In the financial community, the belief still seems to exist that markets are stable in terms of probabilities – it is as if ‘The Black Swan’ book by Nassim Nicholas Taleb was never written, published, or read by millions of market participants. And indeed, maybe one day a super- or quantum-computer will come up with the answer to everything in financial markets. Let us just hope it is not 42, as it was in the infamous episode of ‘The Hitchhiker’s Guide to the Galaxy’, where the supercomputer Deep Thought answered the ‘ultimate question of life, the universe, and everything’ in a fashion rather open to broad interpretation: ‘42’. For now, we will proceed with proven rules of thumb.

A rule of thumb for how to tell the difference between a long-term uptrend and a non-trending market is to look at simple trend signals.

Christian Gattiker, Head of Research

Seven golden rules for JOMO

Rule #1: Do everything on your own – never ever delegate
This is extremely important, as bringing an investment specialist into the equation might add value to your investing. You would, of course, involve a professional doctor if this were a matter of health – and not necessarily a generalist, but an ophthalmologist, an orthopaedist, or a cardiologist, depending on the ailment. But when it comes to wealth, most individuals prefer to do everything on their own. Whether it is oil, semiconductors, China, copper, emerging market bonds, or the Nifty 50 stocks, the ‘sell’ button on the e-banking app treats them all the same. If anyone challenges your behaviour as being irrational compared to your willingness to call in doctors, lawyers, or plumbers, your best answer is: “Investment managers often underperform the benchmark and only add costs.” You would do better to leave out the fact that benchmarks keep investment managers afloat in the first place (another dangerous success factor – but more of that in rule #4). For now, DIY (do-it yourself) rules.

Rule #2: Always hold excessive cash positions
‘Cash is king’ is a favoured saying of the JOMO tribe, for there is always a reason to be cautious. It is a similar tactic to believing that staying in bed every morning is the safest way to avoid the dangerous world in which we live. Of course, a quarter of all personal accidents happen at home. Furthermore, if you stay in bed for a prolonged period, your probability of developing health issues soon soars – due to the lack of exercise. The same holds true for holding on to cash for too long: it makes your purchasing power run like sand through your fingers. But on the other hand, it prevents those pesky excess returns you could earn from investing in a booming financial asset.

Rule #3: ‘Be in’ or ‘be out’ of the market
“Is it still time to chase the market?” or “Is this an entry opportunity?” are two of the favourite concluding questions I have heard from journalists in most of my interviews over the past 25 years. The assumption is that stock markets are like casinos, where you go in and put everything down on the roulette table on red – and then cash the cheque, at least 48.6% of the time. Timing markets is one of the rare capabilities of money managers. The main reason may be that markets tend not to fall any further if all the sellers have unloaded their positions, regardless of how dismal the prospects may still be. The reverse is true for bull markets, when everybody and their dog is fully loaded with the booming asset and even the best news flow will not lift prices further. So trying to time the market yourself is another useful tool in the quest for missing out on big, long-term trends, especially if you include the rules below.

Rule #4: Do not run investment plans, and more importantly, if you have a plan, do not stick to it
Planning provides discipline, and a plan gives you guidance in times of turbulence. That is also the reason why investment professionals stick to benchmarks. It gives them the certainty that they are sticking to the plan, which is, for example, something like being 100% invested in the S&P 500 or running a 60/40 portfolio (which traditionally invests 60% in the S&P 500 and the rest in benchmark US Treasuries). First of all, such a plan allows investment professionals to stay the course in times of doubt and uncertainty. Second, it gives them the opportunity to reap the benefits of long-term risk premia (payments you receive for investing in the long run – see the previous rule). And third, investment managers can be measured against benchmarks in terms of what value they have added. And yes, they underperform on average, as they represent plus/minus the overall market. So the benchmark minus average management fees is the expected return. Looking at the reasons outlined above, you may still be tempted to have a plan. But do not worry. If you insist on a plan all the same, there is a loophole, of course: just do not stick to it. Remember to do this especially in times of turbulence, when it can be extremely costly to deviate from the plan – yet another helpful puzzle piece in how to avoid success in the long run.

Rule #5: Always wait for more evidence
There are endless discussions in this regard. Of course, “Why now? Let us wait for more evidence” is another very helpful approach for missing bull markets, since by the time the evidence comes in and is tried and tested, financial markets will have already priced it in long beforehand. So this feels a bit like the tortoise and the hare tale, where the tortoise is already there when the hare rushes in panting. Waiting for more evidence is an absolute evergreen in the world of JOMO.

Rule #6: Sell the winners – stick to the losers
This is a great rule to apply at the single investment level. Just think of the early 2000s, when mining stocks were recovering after a 20-year bear market. The best way to miss out on the subsequent multiyear bull was to sell these stocks after a minor rebound while holding onto the information technology stocks that were overpriced at the time and kept ticking down month after month. The same applies in the reverse for sticking to gold while taking profits on the S&P 500 during the 1980s. Such actions allow you to sit with the shelf warmers and miss the high-flyers.

Rule #7: Bargain hunting, bottom fishing, averaging down – chasing the tail
A helpful add-on to rule #6: in case you are not holding all the losers in your portfolio yet, this is your best way of getting there. By chasing the most oversold issues, you are quite likely to hit the area that will not go anywhere in the long run. Averaging down is an absolute boost, because it allows you to double up on your losing streak.

Fantastic bulls - and how to spot them

“Got you”, you may say, “but how do I know we are in a bull market in the first place?” Some of the rules outlined above about holding excessive cash, selling into strength, and buying the dips may make perfect sense in non-trending markets or even in bear markets. Yes indeed. Moreover, it is quite surprising how difficult it actually is to spot a bull market while it is alive and kicking. It goes hand-in-hand with being able to spot a good marriage or a great professional career – you may only know for sure in hindsight. Then again, can it really be that difficult? As opposed to marriages and careers, bull markets can be measured in dollars, euros, francs, or yuans when they are underway. In addition, as suggested by Gigerenzer, simple rules may make all the difference. Therefore, I asked my head of technical analysis what he would suggest are the simple rules for spotting a current bull market. I have known my colleague for more than 15 years, and he has identified all of the important trends in financial markets during this period – and that was while the trend was on, not afterwards (in hindsight, it is easy). His answer somewhat surprised me, as he scratched his head and took quite a while to come up with an answer. At first, I thought he may only be afraid of giving away the recipe to his secret sauce, but then he came up with two simple rules.

Rule A: Golden cross
A rule of thumb for how to tell the difference between a long-term uptrend and a non-trending market is to look at simple trend signals. One of the best-known trend patterns is the golden cross. By plotting the 50-day moving average against the 200-day moving average, you can identify longer-term price patterns. If the 50-day moving average is above the 200-day moving average, it shows you that the asset price has been trading higher in the past two months (or 50 trading days) than in the past 9–10 months (roughly 200 days). The place where the two lines intersect is the cross – a golden one if the 50-day average crosses the longer-dated average on the upside (= acceleration to the upside) but a death cross if it crosses to the downside (= deceleration).

In table 1, we have listed the markets that made it to the shortlist for bull markets from their recent golden crosses in the first half of October 2020. In addition, we have added in the annualised returns following the golden or death crosses, respectively.

Rule B: Reality check – 52-week highs
This may seem crude to many observers. However, it may make sense to double-check with another simple rule of thumb: how long has it been since the asset posted a 52-week high? Why should this be important? Well, under rule A, the signals may take a long time to reverse. So it is worth taking into account shorterterm signals too. Looking at recent 52-week highs may seem counterintuitive, since it suggests that the asset has not been trading at a much higher price than it is trading at right now. This does not sound like a buying opportunity, right? Sure, but that is the idea: long-term bull-market investors are already invested by then. A bull market is about a sequence of new highs in prices. Therefore, if it is alive and kicking, it will keep posting new highs. If an asset has not posted any new 52-week highs, the bull market assumption is worth revisiting. In table 2, we have plotted various assets and their 52-week highs this autumn. In addition, we show the performance statistics after the last 52-week high, less than or equal to 20 weeks ago. You can see here that the longer ago that the last high in prices was reached, the less likely it is that we will see positive returns in the future. This is again counterintuitive, but it just shows you that strong trends tend to persist. Taking the latest readings from autumn 2020 (rules A and B together), we should assume that global stocks, US large caps, the Nasdaq, and gold are all currently in bull-market territory. So the floor is yours to apply rules #1–#7 in order to avoid gaining further benefits from these trends. Moreover, going forward, please do not forget to check that you are not suddenly caught in a commodity bull market or one in European stocks. If any of the latter flashes up as a ‘bull’ in rules A and B, you know to steer safely away from them.

Taking it to the next level: 'The pursuit of unhappiness'

Those who like the sound of this approach to managing their financial assets may want to consider taking it to the next level – to life overall. The Austrian born communications scientist and psychotherapist Paul Watzlawick collected a whole group of rules and behaviours that are designed to make your life miserable and unhappy. My favourite example is the story of a parent who was able to make every present a complete failure. This parent gave his child both a blue shirt and a red shirt as a gift. When the child dutifully showed up the next day wearing the blue shirt, the parent looked at her with a sad face and said: “So you did not like the red one?” Needless to say, this works splendidly with the colours also reversed.

At the very end of his book, Watzlawick quotes Fyodor Dostoevsky (the most distinguished psychologist of all time, according to Sigmund Freud): “Man is unhappy because he doesn’t know he’s happy; only because of that. It’s everything, everything! Whoever learns will at once immediately become happy, that same moment.” Putting this back into financial terms, it could mean that “man is poor because he does not know he is rich. Whoever learns will at once immediately become rich, that same moment.” But that might be stretching it.

In the meantime, we hope we have supplied you with powerful tools to avoid an overproportionate increase of your wealth in this bull market or the next. And that is at least one thing less to worry about.

Further reading
Gigerenzer, Gerd (2013). ‘Risk Savvy: How to Make Good Decisions’, Penguin
Taleb, Nassim Nicholas (2007). ‘The Black Swan: The Impact of the Highly Improbable’, Penguin
Watzlawick, Paul (1993). ‘The Situation is Hopeless But Not Serious: The Pursuit of Unhappiness’, W. W. Norton & Company


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