Interim Market Update Aug 22, 2021

[Cinnamon]

it took me a long time to view disaster type event as opportunities but once you do there is no going back

Astute these two songs illustrate the mass mindset when it comes to the Fed and money


https://www.youtube.com/watch?v=aWfw09EXusM


https://www.youtube.com/watch?v=8OOToZT9fCI

[Yodean]

I am just trying to find the right balance in terms of cash position, i.e. to have max cash available in case of correction without having too much cash drag on the overall performance.

There is no "one size fits all" when it comes to cash positioning. It depends on individual risk tolerance, as I am sure you have heard.

Just this year alone, my cash allocation has varied between < 3% to > 70%.

One general approach I have found useful is forcing myself to think in terms of "waves of probability," when deciding on allocation of cash, or anything else, really. Then position accordingly.

I will attempt to illustrate with the following example. Keep in mind that I am making these numbers up quickly, so don't take them too seriously (actually, don't take anything I say too seriously, lol) - however, it's the process that's important, and like anything else, the more you work at it, the more skilled you become.

Okay, let's use the Nasdaq (NDX), which just broke 15k today.

Based on everything I pretend I know (i.e. from T.I. readings, personal experience investing, other sources I read and analyze, T.I.'s technical analyses, my own half-assed TA, sentiment readings, my personal contrarian indicators - *cough* YoungAnakin - etc.), I make myself decide - approximately - what will happen, and commit to a probability % for each scenario occurring. Of course, one is free to change these numbers as new data becomes available.

For the rest of 2021:

30%: NDX challenges and possibly breaks through the 15.5k to 16.6k ranges in a final "blow-off" top in the next few months, prior to a subdued 5% to 10% correction;

35%: NDX bounces around a bit from here up to 16k or so, and then down, but the 13.8k to 14.2k support level holds;

25%: from here, NDX more or less breaks down sharply to 12.8k or so on some type of "black swan" event or perceived "bad news" (e.g. something like an emerging cv19 "ninja" variant that has a slightly higher than 0.2% mortality ratio and affects people with less than five serious comorbidities); NDX is then range-bound for a bit, before mounting a stunning rally;

5%: NDX crashes through the 12.2k to 12.5k ranges before year-end, likely due to some large, contrived global cybersecurity breach affecting many major institutions; following this, many countries push through legislation limiting internet access and free speech, in the interests of "safety"; NDX is then range-bound for many months prior to sustained rally;

5%: "unknown/miscellaneous": this category includes attempted assassinations of world leaders, etc. and all my blind spots (events I cannot perceive), like the ongoing Afghanistan fiasco, something happening to POTUS, etc., which may or may not have significant effects on the markets;

*****

So getting back to asset allocation (or cash positioning), you go through your own scenarios, assign a % probability to them, and then allocate your cash accordingly.

I think a mistake a lot of investors make is thinking that if they study enough, read the right stuff, and follow the right advisors, they will be able to come up with an 100% correct answer. I don't think that's possible. You will approach a point where further accuracy cannot be obtained - the point of uncertainty.

[nicolas]

So getting back to asset allocation (or cash positioning), you go through your own scenarios, assign a % probability to them, and then allocate your cash accordingly.

I think a mistake a lot of investors make is thinking that if they study enough, read the right stuff, and follow the right advisors, they will be able to come up with an 100% correct answer. I don't think that's possible. You will approach a point where further accuracy cannot be obtained - the point of uncertainty.

"How to decide" by Annie Duke is a good book that walks through the decision process you describe: list the possible outcomes, assign a probability to each with an educated guess, and a weight for how positive / negative they are (she calls this "preference".)

[Yodean]

"How to decide" by Annie Duke is a good book that walks through the decision process you describe: list the possible outcomes, assign a probability to each with an educated guess, and a weight for how positive / negative they are (she calls this "preference".)

@nicolas: thanks for the recommendation - I just ordered the paperback version on Amazon. I know Annie was a great poker player in her prime, and to a large extent I treat investing like a poker game, albeit one with constantly changing "hidden" rules.

Btw, have you done anything with your uranium/nuclear holdings in anticipation of a possible general equity market drawdown & USD rally?

I've taken some profits but have maintained core positions in URNM, CCJ, UROY, and of course T.I.'s BWXT.

[AstuteShift]

it took me a long time to view disaster type event as opportunities but once you do there is no going back

Astute these two songs illustrate the mass mindset when it comes to the Fed and money


https://www.youtube.com/watch?v=aWfw09EXusM


https://www.youtube.com/watch?v=8OOToZT9fCI

It requires changing perception however congrats! Once you snap out of the mass mindset, it’s like living a new life

https://youtu.be/2LQ2DNd2xoA

This song, imho signifies when you evolve for the first time as a trend player

[nicolas]

Btw, have you done anything with your uranium/nuclear holdings in anticipation of a possible general equity market drawdown & USD rally?

I've taken some profits but have maintained core positions in URNM, CCJ, UROY, and of course T.I.'s BWXT.

With commodities in general (including cryptos) I tend to trim regularly (like 10% of the position) when it runs hot on daily / weekly charts, to build cash for buying opportunities. Smaller uranium cos have run faster than the commodity price so I might trim a bit more if and when the USD breaks out, although they already pulled back 30% since May and are far from overbought on weekly charts, so it could be already priced in. I'll see what the signal says. Also, it's something I could hold for 5-10 years so I'm not too stressed about timing each up and down of the bull market. I went in accepting there would be volatility along the way and 50% drawdowns likely to happen. Already happened once and I survived so I can survive more of those punches.

[DrSven]

Yodean: "I think a mistake a lot of investors make is thinking that if they study enough, read the right stuff, and follow the right advisors, they will be able to come up with an 100% correct answer. I don't think that's possible. You will approach a point where further accuracy cannot be obtained - the point of uncertainty."

You caught me there. Though I know it is not possible, I still try. As Friedrich Dürrenmatt once said (my translation from German): The rational thing about humans is the insights which they have. The irrational thing about humans is that they do not act according to these insights.

Thank you all for sharing your insights, approaches and the book tip. I will work on that to make better decisions and get another few steps closer to ninja trader level.

[AstuteShift]

Dividing your money into 3 lots is a great way to always have some cash available for a juicy opportunity

For my 401k, I mostly just stick to ETFs and play conservative

For my roth and taxable, i stick to riskier plays and options. I don’t mind if I lose with options as long as the winners are bigger, it’s a jungle and you can’t win in option land all the time.

SOLs analysis is pretty on point with direction however even if there is a flash crash, the only thing to do is buy when the trend is up.

[Yodean]

"How to decide" by Annie Duke is a good book that walks through the decision process you describe: list the possible outcomes, assign a probability to each with an educated guess, and a weight for how positive / negative they are (she calls this "preference".)

Finished the book yesterday. Great level 3.33 reading - directly applicable to investing decision-making.

Pp. 135-6 (paperback version) alone on "motivated reasoning" more than pays for the book.

The parts on "Resulting," "Quarantining Opinions in a Group Setting," and the "Halo Effect" were quite excellent as well.

[MarkD]

Currently reading, "Thinking in Bets". A pretty good read as well.

[SOL]

"How to decide" by Annie Duke is a good book that walks through the decision process you describe: list the possible outcomes, assign a probability to each with an educated guess, and a weight for how positive / negative they are (she calls this "preference".)

Finished the book yesterday. Great level 3.33 reading - directly applicable to investing decision-making.

Pp. 135-6 (paperback version) alone on "motivated reasoning" more than pays for the book.

The parts on "Resulting," "Quarantining Opinions in a Group Setting," and the "Halo Effect" were quite excellent as well.

I just re-read Machievlli from a level 4 and a slightly level 5 perspective and the book is simply awesome lol

[AstuteShift]

"How to decide" by Annie Duke is a good book that walks through the decision process you describe: list the possible outcomes, assign a probability to each with an educated guess, and a weight for how positive / negative they are (she calls this "preference".)

Finished the book yesterday. Great level 3.33 reading - directly applicable to investing decision-making.

Pp. 135-6 (paperback version) alone on "motivated reasoning" more than pays for the book.

The parts on "Resulting," "Quarantining Opinions in a Group Setting," and the "Halo Effect" were quite excellent as well.

I just re-read Machievlli from a level 4 and a slightly level 5 perspective and the book is simply awesome lol

The Prince is priceless

[houstonremote]

[I just re-read Machievlli from a level 4 and a slightly level 5 perspective and the book is simply awesome lol
[/quote]

Sol, Which Machievlli book are you referring to? They all sound interesting.

[SOL]

[I just re-read Machievlli from a level 4 and a slightly level 5 perspective and the book is simply awesome lol

Sol, Which Machievlli book are you referring to? They all sound interesting.



The New Machiavelli: Renaissance Realpolitik for Modern Managers

Machiavelli was if nothing else a politician. He understood politics and, after his death, the publication of The Prince changed politics in such a way that politics would never be the same again. My career has been both in politics and in business for 15 years when treasurer of the Conservative Party, at the nexus of both these arts. Arts indeed they truly are, for Machiavelli regarded politics with much the same enthusiasm that his colleagues in Renaissance Florence regarded paintings and sculptures. His approach to politics and its conduct was as painstaking as the approach of the great painters and sculptors, his contemporaries, to their art. Machiavelli refined the art of government to a point where it was no longer a job, rather a scientific occupation based on the experience of history, changed and adapted to apply to the lives of his contemporaries.