How to make money from this crash - Lessons from 2008

[compoundinglife]

I would like to discuss how the most money was made from the depths of the last crisis.

 

The lesson from 2003 (after the 2000-02 deflationary bust) and 2009 (after the 2008 GFC) is --  buy the trashiest micro-caps you can and buy a bunch.  Their share prices go up the highest.

 

I'm going to use the Wilshire Equal-Weight 4500 (ie, excludes the top 500 stocks in market cap and thus is the equivalent of throwing darts at all the small-cap names).  Here's some data.

 

2003:

S&P 500 Tot. Return: +28.7%

4500 Equal-Weight:  +97.5%

 

2009:

S&P 500 Tot. Return: +26.5%

4500 Equal-Weight:  +88.0%

 

I had a study from the 2003 market that further stratified the returns.  IIRC, it stratified the 4500 small caps by debt to equity ratio.  No surprise, the bottom decile in terms of debt/equity (ie - highest debt to equity) did the best (well over 150% on average).  In fact, there was almost a perfect negative correlation -- ie low debt equity did less well (vs the overall average of 88%) and each decile of greater debt-to-equity did better.

 

FWIW,

wabuffo

 

I can't seem to find an equal weighted Wilshire 4500 or extended market (ex-SP500) etf. Do you know if one exists in ETF or Mutual fund form? The results of SP500, SP600 and RAFI equal weights don't look as good.

 

 

 

[compoundinglife]

Been playing around on Quantconnect.com writing some strategy back tests. Coming out of the bottom of 2009 (early march), 100 small caps with top dollar volume (Morning star only, must be in their smallcap core, smallcap growth or smallcap value styles), equal weighted did ~75% annualized until March 2011.

 

Here is the chart: https://www.quantconnect.com/terminal/processCache/?request=embedded_backtest_074ac30d3fd623b6acd82166a163195f.html

 

Trade report csv attached (zipped).

Similar to what was seen with the Wilshire 4500 equal weight.

 

Obviously this is time period cherry picking, but interesting.

backtest_trades_074ac30d3fd623b6acd82166a163195f.zip

[sleepydragon]

Been playing around on Quantconnect.com writing some strategy back tests. Coming out of the bottom of 2009 (early march), 100 small caps with top dollar volume (Morning star only, must be in their smallcap core, smallcap growth or smallcap value styles), equal weighted did ~75% annualized until March 2011.

 

Here is the chart: https://www.quantconnect.com/terminal/processCache/?request=embedded_backtest_074ac30d3fd623b6acd82166a163195f.html

 

Trade report csv attached (zipped).

Similar to what was seen with the Wilshire 4500 equal weight.

 

Obviously this is time period cherry picking, but interesting.

 

How’s performance after transaction fees?

 

[wabuffo]

I can't seem to find an equal weighted Wilshire 4500 or extended market (ex-SP500) etf. Do you know if one exists in ETF or Mutual fund form? The results of SP500, SP600 and RAFI equal weights don't look as good.

 

It doesn't exist.  It's a theoretical portfolio that Wilshire constructs and calculates every month:

https://www.wilshire.com/indexcalculator/index.html

 

Equal weight portfolio have one big design problem in real-life.  The monthly re-balancing to get back to equal weights for 4500 stocks imposes huge frictional costs that really punishes returns.

 

I use the Wilshire 4500 to get a feel for what the average small cap stock does each month.  I call it the dart-throwing monkey portfolio.  So my example upthread is not to suggest an ETF or fund, but rather to answer the question of what type of stocks rebound most after a sharp bear market.

 

Hope it helps,

wabuffo

 

[crastogi]

Been playing around on Quantconnect.com writing some strategy back tests. Coming out of the bottom of 2009 (early march), 100 small caps with top dollar volume (Morning star only, must be in their smallcap core, smallcap growth or smallcap value styles), equal weighted did ~75% annualized until March 2011.

 

Here is the chart: https://www.quantconnect.com/terminal/processCache/?request=embedded_backtest_074ac30d3fd623b6acd82166a163195f.html

 

Trade report csv attached (zipped).

Similar to what was seen with the Wilshire 4500 equal weight.

 

Obviously this is time period cherry picking, but interesting.

But you have to know when the bottom is in :)

 

[compoundinglife]

Been playing around on Quantconnect.com writing some strategy back tests. Coming out of the bottom of 2009 (early march), 100 small caps with top dollar volume (Morning star only, must be in their smallcap core, smallcap growth or smallcap value styles), equal weighted did ~75% annualized until March 2011.

 

Here is the chart: https://www.quantconnect.com/terminal/processCache/?request=embedded_backtest_074ac30d3fd623b6acd82166a163195f.html

 

Trade report csv attached (zipped).

Similar to what was seen with the Wilshire 4500 equal weight.

 

Obviously this is time period cherry picking, but interesting.

But you have to know when the bottom is in :)

 

Yep. That is why I called out that I was cherry picking the timing.

Easier said than done. On different time frames the SPY is the better pick.

[compoundinglife]

Been playing around on Quantconnect.com writing some strategy back tests. Coming out of the bottom of 2009 (early march), 100 small caps with top dollar volume (Morning star only, must be in their smallcap core, smallcap growth or smallcap value styles), equal weighted did ~75% annualized until March 2011.

 

Here is the chart: https://www.quantconnect.com/terminal/processCache/?request=embedded_backtest_074ac30d3fd623b6acd82166a163195f.html

 

Trade report csv attached (zipped).

Similar to what was seen with the Wilshire 4500 equal weight.

 

Obviously this is time period cherry picking, but interesting.

 

How’s performance after transaction fees?

 

That performance included quant connects default brokerage model which models in some fees. I have not dug in to see how realistic they are. They have an Interactive Brokers model that I believe I can also use in back test mode. I have mostly been playing around with their platform as a learning experience and don’t expect I would actually use it to implement automated trading strategies so I haven’t dug to deep on frictional costs.

[Kaegi2011]

Been playing around on Quantconnect.com writing some strategy back tests. Coming out of the bottom of 2009 (early march), 100 small caps with top dollar volume (Morning star only, must be in their smallcap core, smallcap growth or smallcap value styles), equal weighted did ~75% annualized until March 2011.

 

Here is the chart: https://www.quantconnect.com/terminal/processCache/?request=embedded_backtest_074ac30d3fd623b6acd82166a163195f.html

 

Trade report csv attached (zipped).

Similar to what was seen with the Wilshire 4500 equal weight.

 

Obviously this is time period cherry picking, but interesting.

 

Does anyone have access to historical options pricing data?  I wonder what deep in the money calls on large, cash rich corporates would have done during the same period.  On a risk adjusted basis it feels like it wouldn't be more risky than a bunch of levered small caps?

[Kaegi2011]

Also, I'm curious to see if anyone has an opinion on this.  It was pretty surprising to see actually...  Would also be a lot less stressful vs. legging into the market. 

 

https://rbadvisors.com/images/pdfs/RBA_QuickInsight_Dont_panic_03.20.pdf

 

 

[IceCreamMan]

How do you avoid being too early? The market can always decline further.

 

Also, I'm curious to see if anyone has an opinion on this.  It was pretty surprising to see actually...  Would also be a lot less stressful vs. legging into the market. 

 

https://rbadvisors.com/images/pdfs/RBA_QuickInsight_Dont_panic_03.20.pdf

 

 

[Kaegi2011]

How do you avoid being too early? The market can always decline further.

 

Also, I'm curious to see if anyone has an opinion on this.  It was pretty surprising to see actually...  Would also be a lot less stressful vs. legging into the market. 

 

https://rbadvisors.com/images/pdfs/RBA_QuickInsight_Dont_panic_03.20.pdf

 

 

 

???  Did you read the article and the table?

[compoundinglife]

Been playing around on Quantconnect.com writing some strategy back tests. Coming out of the bottom of 2009 (early march), 100 small caps with top dollar volume (Morning star only, must be in their smallcap core, smallcap growth or smallcap value styles), equal weighted did ~75% annualized until March 2011.

 

Here is the chart: https://www.quantconnect.com/terminal/processCache/?request=embedded_backtest_074ac30d3fd623b6acd82166a163195f.html

 

Trade report csv attached (zipped).

Similar to what was seen with the Wilshire 4500 equal weight.

 

Obviously this is time period cherry picking, but interesting.

 

Does anyone have access to historical options pricing data?  I wonder what deep in the money calls on large, cash rich corporates would have done during the same period.  On a risk adjusted basis it feels like it wouldn't be more risky than a bunch of levered small caps?

 

Unfortunately the platform I am using (Quantconnect) only has options data going back to 2010. Otherwise I could easily put this together.

[spartansaver]

Also, I'm curious to see if anyone has an opinion on this.  It was pretty surprising to see actually...  Would also be a lot less stressful vs. legging into the market. 

 

https://rbadvisors.com/images/pdfs/RBA_QuickInsight_Dont_panic_03.20.pdf

 

This is backwards looking.

 

Hypothetical: The market goes up 10% (you invest after it goes up - investment moment A). After 6 months, it then declines 11% and hits the bottom. Over the next six months it then rises 10% (you invest at the end of those 6 months - investment moment B).

 

12 month returns will be flat for investment moment A. B will likely outperform A, but we don't know if we are at A or B in the midst of things.

 

[Kaegi2011]

Also, I'm curious to see if anyone has an opinion on this.  It was pretty surprising to see actually...  Would also be a lot less stressful vs. legging into the market. 

 

https://rbadvisors.com/images/pdfs/RBA_QuickInsight_Dont_panic_03.20.pdf

 

This is backwards looking.

 

Hypothetical: The market goes up 10% (you invest after it goes up - investment moment A). After 6 months, it then declines 11% and hits the bottom. Over the next six months it then rises 10% (you invest at the end of those 6 months - investment moment B).

 

12 month returns will be flat for investment moment A. B will likely outperform A, but we don't know if we are at A or B in the midst of things.

 

Well there's no certainty, which is why I think they used a time based test vs. a % increase test.  Anything is possible and should not be ruled out.  The results were just surprising for me b/c I thought waiting 6 months after the bottom would've caught as much of the gains. 

[Xerxes]

There is a new episode for PV podcast.

For those interested in Exor this could be interesting.

As a Canadian the name is too illiquid for me.

 

https://podcasts.apple.com/us/podcast/price-to-value-podcast-southeastern-asset-management/id1434613123

[compoundinglife]

There is a new episode for PV podcast.

For those interested in Exor this could be interesting.

As a Canadian the name is too illiquid for me.

 

https://podcasts.apple.com/us/podcast/price-to-value-podcast-southeastern-asset-management/id1434613123

 

Thanks Xerxes

 

Another recent and relevant podcast episode I liked: Invest like the Best (Patrick O'Shaughnessy), episode 163 "Investing through a Crisis with Dan Rasmussen"

 

https://podcasts.apple.com/us/podcast/dan-rasmussen-investing-through-crisis-invest-like/id1154105909?i=1000468532281

 

 

[netnet]

There is a new episode for PV podcast.

For those interested in Exor this could be interesting.

As a Canadian the name is too illiquid for me.

 

https://podcasts.apple.com/us/podcast/price-to-value-podcast-southeastern-asset-management/id1434613123

 

Thanks Xerxes

 

 

Another recent and relevant podcast episode I liked: Invest like the Best (Patrick O'Shaughnessy), episode 163 "Investing through a Crisis with Dan Rasmussen"

 

https://podcasts.apple.com/us/podcast/dan-rasmussen-investing-through-crisis-invest-like/id1154105909?i=1000468532281

 

Here is Rasmussen's paper: https://mcusercontent.com/6dc62f307511d466ff78a94fe/files/b12058f7-afbd-4078-8604-52c9cbc1b592/Crisis_Investing_Verdad_Advisers_Ebook.01.pdf

[elliott]

will/can any of those strategies work?

 

I mentioned this in another thread, but everybody wants to buy quality names now, saying buy them now that they are on sale. but if enough of us are doing that, will we get the cheap prices we are looking for? (sure, prices have dropped a lot vs just a couple of months ago, but are business fundamentals and prospects the same?)

 

the same goes for, for example, airlines and hospitality stocks. just here, how many of us are following those stocks guns ready?

 

maybe pessimism is weighing on on me these days (I fear my country is going to have to face a very bleak future, after CV is gone), but I see all kinds of people, from friends who bro-invest to people who know what they are doing (such as all of you guys!), thinking they are going to make good money out of this. but who does even know when markets will recover?

[mcliu]

There's reason for optimism. Spanish flu killed 100 million people in the midst of WWI and yet society did not collapse, the world goes on. Plus we have better science and technology today, so things should be better 5 to 10 years from now. Unless this is truly the beginning of the end and we all die.. then all bets are off.

 

Which country are you in and why do think it has a bleak future?

[Viking]

will/can any of those strategies work?

 

I mentioned this in another thread, but everybody wants to buy quality names now, saying buy them now that they are on sale. but if enough of us are doing that, will we get the cheap prices we are looking for? (sure, prices have dropped a lot vs just a couple of months ago, but are business fundamentals and prospects the same?)

 

the same goes for, for example, airlines and hospitality stocks. just here, how many of us are following those stocks guns ready?

 

maybe pessimism is weighing on on me these days (I fear my country is going to have to face a very bleak future, after CV is gone), but I see all kinds of people, from friends who bro-invest to people who know what they are doing (such as all of you guys!), thinking they are going to make good money out of this. but who does even know when markets will recover?

 

I think indexing/eTF investing has been pretty popular the last 10 years. The big selling will hit everything. Yes, quality will sell off less but it will still go lower on weakness.

[Viking]

There's reason for optimism. Spanish flu killed 100 million people in the midst of WWI and yet society did not collapse, the world goes on. Plus we have better science and technology today, so things should be better 5 to 10 years from now. Unless this is truly the beginning of the end and we all die.. then all bets are off.

 

Which country are you in and why do think it has a bleak future?

 

Agreed. If you are young you are likely going to get the buying opportunity of a lifetime to buy stocks, just like in 2008. Also, if you live in Canada and you wanted to buy real estate you will likely get your chance in the next 12-18 months, especially if the recession is severe. The key is to reframe the situation amd look at it through a new lense (not the old one).

[elliott]

There's reason for optimism. Spanish flu killed 100 million people in the midst of WWI and yet society did not collapse, the world goes on. Plus we have better science and technology today, so things should be better 5 to 10 years from now. Unless this is truly the beginning of the end and we all die.. then all bets are off.

 

Which country are you in and why do think it has a bleak future?

 

Look at it with a wider perspective maybe you are right. Maybe I just listened too much doomsaying :-)

 

I am in Spain. 13 million people working in the private sector vs 14 million people comprising retirees receiving a rent from the government + unemployed receiving some type of subsidy + public administration employees (data as of december 2018, but its been like that for a few years). For how long can that situation be sustained?

 

https://www.libremercado.com/2018-12-19/insostenible-13-millones-de-trabajadores-del-sector-privado-mantienen-a-otros-14-que-dependen-del-publico-1276630056/

(in spanish)

[Viking]

There's reason for optimism. Spanish flu killed 100 million people in the midst of WWI and yet society did not collapse, the world goes on. Plus we have better science and technology today, so things should be better 5 to 10 years from now. Unless this is truly the beginning of the end and we all die.. then all bets are off.

 

Which country are you in and why do think it has a bleak future?

 

Look at it with a wider perspective maybe you are right. Maybe I just listened too much doomsaying :-)

 

I am in Spain. 13 million people working in the private sector vs 14 million people comprising retirees receiving a rent from the government + unemployed receiving some type of subsidy + public administration employees (data as of december 2018, but its been like that for a few years). For how long can that situation be sustained?

 

https://www.libremercado.com/2018-12-19/insostenible-13-millones-de-trabajadores-del-sector-privado-mantienen-a-otros-14-que-dependen-del-publico-1276630056/

(in spanish)

 

Elliot, what you are describing is a situation for you, not a problem. There is a big difference. You need to reframe and come at the variables you can do something about, of which there are many. Sorry to get teachy preachy. You might find the following useful (a framework to think about the future, which lots of great mental models)

 

Designing Your Life - Bill Burnett - Ted Talk

-

[Uccmal]

will/can any of those strategies work?

 

I mentioned this in another thread, but everybody wants to buy quality names now, saying buy them now that they are on sale. but if enough of us are doing that, will we get the cheap prices we are looking for? (sure, prices have dropped a lot vs just a couple of months ago, but are business fundamentals and prospects the same?)

 

the same goes for, for example, airlines and hospitality stocks. just here, how many of us are following those stocks guns ready?

 

maybe pessimism is weighing on on me these days (I fear my country is going to have to face a very bleak future, after CV is gone), but I see all kinds of people, from friends who bro-invest to people who know what they are doing (such as all of you guys!), thinking they are going to make good money out of this. but who does even know when markets will recover?

 

I think indexing/eTF investing has been pretty popular the last 10 years. The big selling will hit everything. Yes, quality will sell off less but it will still go lower on weakness.

 

I think this is what we will see.  I sold Netflix and Costco on Friday, at a profit.  I bought them within a week of selling.  As markets tank, and indexes tank, even the very best names will get taken down.  Not as much perhaps but that is where one puts to work their valuation skills, and understanding of where things are headed.  Netflix makes their money by subscription so they should be immune, but they won’t be.  People with margin calls, and those who can’t handle this will sell indiscriminately. 

 

FB, for example has sold off a lot.  People are still using the service, probably more than usual, but advertising revenues will drop off somewhat.  I expect it to go lower, along with all the best megacaps.  I have puts on FB right now. 

 

Markets are going to gyrate all over for awhile yet.  Pop on stimulus plans, drop on major layoff and closure announcements.  The only White Swan I can see is a sudden discovery that some existing drug firewalls Covid 19, or an outright vaccine. 

[Xerxes]

There is a new episode for PV podcast.

For those interested in Exor this could be interesting.

As a Canadian the name is too illiquid for me.

 

https://podcasts.apple.com/us/podcast/price-to-value-podcast-southeastern-asset-management/id1434613123

 

Thanks Xerxes

 

Another recent and relevant podcast episode I liked: Invest like the Best (Patrick O'Shaughnessy), episode 163 "Investing through a Crisis with Dan Rasmussen"

 

https://podcasts.apple.com/us/podcast/dan-rasmussen-investing-through-crisis-invest-like/id1154105909?i=1000468532281

 

thank you