Dear investors,
September was another weak one for the AEX, with - 5.83%.
RVM Strategy was + 0.65% in September, RVM Retirement - 4.02%.
We can see that strictly following the rules of the system has paid off again.
RVM Strategy set a new all-time high.
This has actually been happening since the start of early 2019, it's nice, but it should never be taken for granted.
Each time position is chosen, the question is whether it will prove to be the right one.
After all, we don't have a crystal ball; no one does.
We only follow a well-tested algorithm, which is very strict.
At RVM Retirement, yes, there are long-term investments in portfolios that therefore thrive only when there are positive trends in underlying values. Those struggled in September, with near-market declines.
Yet here was some good news, too.
The cash return on positions based on the algorithm in September was higher at RVM Retirement than at RVM Strategy.
We at RVM Retirement may take a little more risk with downside momentum positions at this time as the bear market for equities continues, precisely because there are stocks in portfolio that can act as a hedge.
The cash return still allowed the Retirement Portfolio to outperform the AEX index and the S&P 500 in September.
WHAT ARE THE PROSPECTS?
This update is written on Oct. 7, after a huge 2-day rally in the market, which pushed everything several percent higher, then two days of consolidation, and today a sharp drop after poorly received jobs figures from the US.
On balance, it was a somewhat higher week, from which the Retirement portfolio was able to benefit.
And RVM Strategy is also higher again.
But it ended up being a snapped rally and with it a week of doubts. We have to be extremely cautious in this market. In late September, there was a certain impending pattern in leading Western stock markets, a pattern we see before a market gets a capitulation sell-off.
At the same time, we are also looking at certain long-term technical signals, and they are downright positive right now.
Both things cannot be true at the same time; the coming period will show which scenario we will start to see, that of the capitulation sell-off or that of the perfect buy signal on decline, or a combination of both, because of course, it is also possible, it can go together.
QUESTIONS FROM INVESTORS
Investors in a bad market may stare sadly at their accounts that continue to decline in value. Some anxiously call their investment manager.
"What are you doing? My investment account is getting worth less and less! You are there to prevent that, aren't you? You are a professional, aren't you?"
Indeed, someone who invests for the long term, and does so for others, should be expected to know what he or she is doing.
But of course that does not mean that the portfolio cannot become worth less. Warren Buffett never tired of explaining that anyone who cannot stand a halving of the value of the stock portfolio, or worse, that such a person should not invest.
I myself (RvM) received the first lessons in this sense in the 1987 crash. Still relatively inexperienced, after that crash I spoke to an elderly gentleman who had a large stock portfolio. I asked him if he had not been panicked by those huge drops in value. His wealth that was invested in the stock market had shrunk tremendously in the crash.
Smiling, the older gentleman answered stoically:
"What should I be worried about? I still have the same amount of shares I had before the crash, right?"
Later, when I really started learning the trade, I understood this gentleman better, and it was clear that he was right in the vast majority of cases.
But we include all known course history in our research.
And in the 20th century, we could see that the 1929 to 1932 Wall Street crisis was the exception to the rule.
THE BEARMARKET OF 1929 - 1932 SHOULD BE THE SCHOOL OF LEARNING
The stoic answer that the quantity of stocks was still the same had been a wrong answer between 1929 and 1932 in the US, and actually in the rest of the world, but good data are available from the Dow jones.
This period should always be object of study for anyone who wants to become a good asset manager.
What can you learn from this worst market in history?
That insurance is sometimes necessary, even if it costs money.
And further that there should be a playbook ready that provides that long before the major loss of value has occurred, the investor is out of positions.
The Dow Jones fell by a staggering percentage at the time, almost hitting the - 90% mark.
This never happened again after that, but that doesn't matter. It can happen again, because it happened before, and that is all that matters.
The key characteristics of this particular market should be known to asset managers.
So because we know how bad things can get in the marketplace, the response to worried customers has to be one of understanding. And you should always give explanations.
So it is then explained to the client who complains about declines in value in a bad market, that the interests have indeed become worth less, and that they have chosen not to insure or exit (yet) because the trading protocol has not yet mandated it.
The opposite can also happen. The worried client calls, because he has seen on the news that prices are rising very fast, and when checking the managed account, had to find, that the account is down a bit instead of up. And that with an increase of more than 4% for the market!
"What do I see now? The market is up by many percent today, it was on the news. But my account is just down by percent. What are you doing? Can you explain this?"
As mentioned, at RVM Retirement we do not insure, but this is a true example from a wealth management practice.
The asset manager's explanation was: the client was protected in time for a market decline after the protocol required insurance; the portfolio otherwise remained intact.
Then a longer market decline had occurred over several months, so the insurance was working well. There was little or no decline in the value of the account, even though the equity interests in the portfolio became much less valuable.
The customer didn't notice anything. After all, that drop did not occur in the account. The customer was not an active stock market follower, so he did not know that the manager had managed it perfectly.
Then the account became slightly less valuable after the big rise in the market that made the news, leading to the insurance being stopped out.
At the moment of plugging out, a moment therefore when the account is almost certainly losing value, the customer noticed this and called in worried.
In the above case, the client could be reassured: thanks to the insurance, the market had outperformed by + 15%, including the loss of capping that insurance.
Unfortunately, most people only look at the return of the system they follow. How that return comes about interests a minority.
RISK MANAGEMENT
But we never tire of repeating it: return is secondary to how that return is sought.
Suppose a return is good year after year, but the system behind it has not actually been sufficiently tested for all possible market situations.
Meanwhile, the asset manager's client is satisfied.
"Not tested well? We've had declines and rises in the market, and the returns have always been good."
Then comes, say, the Corona crash of 2020, or the crash of 2008. The client who was so satisfied with returns that were good for years gets a tremendous loss in front of them that actually blows up the account. The manager can only stammer, that such a crash could not have been foreseen. And that margin calls had come, there was simply nothing left to do against the misery.
A familiar English phrase from wealth management aptly describes what can be wrong under the hood, while the client thinks everything is fine because the returns are so nice:
"When the tide turns, you can see who has been swimming naked".
In short, the advice to investors is always: try to look under the hood at your investment manager. And try to understand the basics of risk management. You as an investor can always ask the investment manager: how do you deal with market risk? Do you ever insure? If yes, how? If no, why not?
Dealing with money, and managing funds, that really should be taught as early as high school.
It is not a dry matter, even though RVM Strategy and Retirement, for example, uses an algorithm, and that has a mathematical background.
But math is far from boring.
Duly noted!
Sincerely,
Ruud van Megen.