VI Quant Fund - The Perfect Storm: What To Do?

The Perfect Storm - What To Do?

“When It Rains, It Pours”

The Fed ending asset purchases and starting their interest rates hikes, Russia is at war with Ukraine, USA issues sanctions against Russia, and subsequent retaliatory export bans send oil, wheat, and nickel prices soaring.

As if this was not sufficiently bad, the ripple from the surging energy costs, supply curtailments, and trade policies also affected fertilizer prices, which could exert inflationary pressures on food prices.

"The world is in for a "perfect long storm" that will not pass any time soon.." said Senior Minister Tharman at the IMAS-Bloomberg Investment Conference on 9 March 2022.

In summary, the world faces a 'perfect long storm' of food shortages, recurring pandemics, stagflation & climate change. The question in every investor’s mind for the markets can be represented by the aim of the limbo (dance): “How low can you go?”

how low can you go

When doom and gloom on the news constantly bombard us, it is easy to lose sight of the bigger picture. While hindsight is always 20/20, the market has survived more catastrophes than we can remember with every event’s “very good” reasons for us to be jumping out of the market.


And yet, had we jumped out of the market and had permanently taken the loss - and entered back in too late, or worse, forget to jump back in due to fear, the market would have moved on and continued to compound with or without us.


“I thought my stocks were the highest of quality. How could they have dropped that much?”

Study on Drops

A study on some proven long-term compounders shows the frequency of drops an investor would have ridden if they held on to them. Over a 20-year period, the largest 52-week drop Apple (AAPL) experienced was -57% during the Global Financial Crisis (2009), with 2 other -40% drops in 2003 and 2013 and a -30% drop in 2016.

In fact, drops from the peak are almost a norm - with investors experiencing more than -20% downturn from 52-week highs almost a quarter (22%) of the time.

Yet those who bought and held on to Apple, as they innovated with industry-changing products year after year, saw an average compounded returns of 35% (a 40 bagger) over these same 20-year periods.

In investing and the markets, volatility is a feature of the market, and not a bug.


Some might be thinking: "Hey, since it keeps going down with no end in sight, maybe I'll wait for a little while longer to catch the bottom."

For that, let me introduce you to three friends: Britney, Priscilla & Stephanie. All three friends saved $300 per month and invested in S&P 500 index over a 35-year period (1985 - 2020) and cash held yields 5% per annum. However, each had differing strategies in the market.

Britney holds cash and attempts to time the market. However, her timing always gets her on the wrong side of the market cycle, and she always ends up buying at the peak, but she holds on.

Priscilla also holds cash and attempts to time the market. However, her timing and skills are spot-on and she would load up all her savings into the market at each crash.

Stephanie, on the other hand, thinks timing the market is too complex and just dollar-cost averaged her monthly savings into the market or a basket of strong companies, whether in a bubble or a crash.

The results were astounding. One might think that for all the extra effort of waiting and timing the bottoms, precise Priscilla would have performed the best. However, steady Stephanie’s results topped all three friends.

This is because, in dollar-cost averaging, a lot more of Stephanie’s savings were exposed to the power of compounding in the markets over time, whereas for the other 2, their savings were just sitting in the bank at a lower rate of return.

Time in the market beats timing the market. -- Kenneth Fisher


“Enough of this hindsight bias nonsense. Just tell me where we are at given the current market conditions.”

The correct answer to be getting from any professional is “I don’t know”. Nobody has that crystal ball to accurately predict the future consistently, and if they do, the lottery would be the best asset class and not equities in terms of returns on investment.

However, while history does not repeat itself, it often rhymes. A “Market Breadth Analysis” looks at the number of companies within an index trading above their moving average.

Market Breadth Analysis - Percentage of S&P500 above their 100 Day Moving Average

From the S&P500 chart above, we usually consider the markets generally bullish if 80% of the companies trade above their 100-day average price and consider it bearish if less than 20% of the companies trade above their 100-day average.

For the S&P 500, drops from a bullish 80% to a bearish 20% only occurred 7 times over the past 15 years, and each crash was historically followed on by monster rallies, especially for a portfolio that is holding a basket of high-quality companies.

If we are to match the S&P 500 market breadth analysis with historical lows, the chart suggests the crash is not done yet with the market breadth analysis currently at around 39%. From a current affairs point of view, sanctions have yet to fully take effect and the Russia-Ukraine war continues to stretch on.

Market Breadth Analysis - Percentage of NASDAQ100 above their 100 Day Moving Average

For those into tech/growth stocks and funds, the crash hit even harder due to the nature of a growth portfolio, the end of quantitative easing, and the spike in interest rates. The market breadth for Nasdaq 100 seems to suggest the same, given how historical lows averages at approximately 10%.

But then again, who is to say peace talks will not take place? Those who attempted to time the bottom of the March 2020 Covid crash sorely regretted converting to cash to time the bottom when the market recovered sharply to new highs, leaving many cash-exposed investors in the dust.

If we are already vested in the markets and have been storing ammo, now is the best time to draw out on your additional “bullets” and spread out the shots over the next 3-6 months over your watchlist of companies (if you DIY) or into the fund (if you get your portfolio professionally picked and monitored for quality).

And since it is proven no one can time the market, if not now, then when?

To a successful long-term compounding journey,

Joshua Zhang | Investment Manager, VI Quant Series

VI Fund Management

The above references an opinion and is for information purposes only. It is not intended to be investment advice.

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