Dear investors,
UPDATE DECEMBER 2023: RVM RETIREMENT AT A NEW ALL-TIME HIGH
December was a good month for the AEX, with a value increase of +2.85%.
RVM Strategy gained +1.95% and RVM Retirement +1.90%.
RVM Retirement reached a new all-time high, while RVM Strategy was just below its all-time high at the end of December.
At the end of December 2023, the AEX index was 5.17% below its all-time high from 2021.
DECEMBER DEVELOPMENTS AND A LOOK BACK AT 2023
2023 was a particularly difficult trading year in our view at Van Megen Systematic Trading. The main reason for this was the wide divergence in trends in underlying values on the AEX index, resulting in major differences across various sectors of the economy. The semiconductor sector performed fantastically, publishers (AI!) did well, but more traditional sectors of the economy did not have a particularly good year, and this was not only visible in Amsterdam, but also in the US and elsewhere in Europe. Only a few very successful companies are driving the indices, which is evident everywhere. Price-earnings ratios for companies that are not in vogue for investment are exceptionally low, resulting in dividend yields that have become very attractive.
But that divergence between investments that are very fashionable and "the forgotten sectors" led to great unpredictability.
A WORD ABOUT DIVIDENDS
There are now companies listed in Amsterdam with dividend yields of over 8%, and we see the same thing further afield in Europe (and to a slightly lesser extent in the US). For many companies, the logic behind such high dividends and very low price-earnings ratios is understandable: these companies are not expected to experience significant growth, which may be one of the factors. The fact that the company is well managed and highly profitable is apparently of less interest to investors: they are primarily interested in growth opportunities.
However, in the two webinars I gave in collaboration with Simeon Hoefnagels of Systems2Follow, as well as in a presentation at Erasmus University in Rotterdam, I highlighted the importance of dividends.
Investing is not about the past month, the past year, or even the past few years. You have to look at the big picture over 15, 20, 25 years, or even longer. As long as possible. That's what investing is all about: being patient and focusing on what investing really is: managing your assets well for the long term.
What do you see when you look at the very long-term charts? You see that for many companies, and also for indices, the cumulative dividend payout has been crucial. Even the most profitable companies in the world were not always so profitable, and in any case experienced periods of sharp price declines on the stock market, or periods of 10 or 15 years in which the stock price did not grow. But if these companies were good dividend payers and the dividends were reinvested, a very different picture emerges in the longer term.
For example, what is the benefit to an investor of a company that is currently still loss-making, has high expectations, is rising sharply in price, but does not pay dividends? An investor who is truly in it for the long term may think: this is an excellent return this year, I will hold on to this investment.
The crux of the matter is that, in this way, excellent returns can continue to be achieved year after year. But a profit-taking protocol for shares is really very difficult. It is possible to devise something that is reasonable and, in any case, verifiable, so that emotions are eliminated. But that model always means that no profits are taken at the peak. Because it is simply not possible to know when a peak will occur. And when 2008 and 2009 roll around, or March 2020, it is quite possible that the price gains accumulated over years will have evaporated completely and turned into losses. And if there had been no dividends in those years of price gains, there would be no return on the investment.
What I want to emphasize here is not that profits should be taken at the right time. This is always very difficult, because investors will often see that profits have been taken, while the investment continues to rise after the profits have been taken, leaving you to regret your decision. This can lead to profits being taken on equity investments that have performed well, while investments that are losing money are held on to. Of course, 'profit = profit', but it is better to have a long-term approach that ensures, for example, that an investment can remain in the portfolio for a lifetime, so to speak, because there is simply never a long-term sell signal.
These kinds of dilemmas—should I take profits, should I take losses—are mitigated by investing in companies that consider their shareholders and therefore pay good dividends. As far as I am concerned, there are few exceptions: you could say that a company like Alphabet (Google) has proven that dividend payments were not that important, and the same can be said of Amazon, and perhaps also of Tesla, provided this investment was discovered in time.
But these companies are the exception to the rule. In general, investors who do not invest in companies that pay dividends are forced to adopt an active strategy. Those who adhere to strict trading rules can undoubtedly be successful, but the boost provided by dividends, however small per year, proves to be an important factor in the long term.
THE ROLE OF ADYEN IN 2023
For the AEX, which we focus on, Adyen's share price performance was particularly unprecedented. The Payment Service Provider (yes, only the English term is used) had grown significantly in price and value, and when it was announced in August that expectations had to be adjusted downward, an unprecedented decline in Adyen's share price followed. Apparently, no one had seen this coming, and even insiders had not sold, otherwise you would see something like this in the share price performance when the figures are close.
ADYEN'S LEAPS AND BOUNCES IN 2023
Adyen fell by 44% in the week of August 18 and by 40% on Thursday, August 17 alone. This is unprecedented and unheard of in the history of the AEX, with a company that carries such significant weight in the AEX.
Declines on the stock market are, of course, nothing unusual, even large declines, but the algorithm we use for trading did not have such a negative calculation for that particular trading period. Because the algorithm has been tested on data dating back to the creation of the AEX index 40 years ago, we were dealing with 'new statistics'. With our system, it was only partially possible to respond to such an unforeseen decline in the AEX. The 'real answer' only became possible after the 'new statistics' had been tested and incorporated into the system. This took a few weeks of observation and testing.
Probability calculations play a major role on the stock market; it is never about the current situation, but about the future. This does not necessarily require a prediction, because predicting is impossible, but it does require the best possible probability calculation, and the risk protocol must remain manageable.
Good investors must be trained in "smelling opportunity." When is it acceptable to take a specific risk, and when is it not?
A sharp decline is always an opportunity; perhaps an opportunity to buy cheaper, or conversely an opportunity for downward speculation, because the decline is not without reason and may be the start of much more.
To determine what the real long-term opportunity is, we at RVM Systems have developed an algorithm. This should help us answer the question of whether this is the beginning of much more (i.e., further decline in value), or whether it is actually a wonderful opportunity for growth, which could now turn out to be much more profitable because prices are lower.
In August, our algorithm indicated that the latter would be the case, i.e., upward opportunities that would increase as the index continued to fall.
This is extremely valuable, and we are naturally very pleased with this methodology.
DEALING WITH RISK
Based on the 'new statistics', we were able to determine in August that this specific decline in Adyen and the AEX actually offered a significant upward opportunity, but that was hindsight at the time. After all, the rapid decline had already caused damage to the positions. Some patience was therefore required, because there is always a risk protocol in place, which ensures that all kinds of conditions must be met before the existing upward opportunity can be realized.
In the fall, everything came together: Adyen skyrocketed, dragging the AEX index up with it once again. At RVM Systems, we were able to capitalize on this, because we had already anticipated it (as you just read) and had set an upward price target from the outset.
This all went well, with a relatively cautious long position doing the job. Nevertheless, we are still looking behind the scenes to see how we could have responded earlier to the possibility of higher prices, while still complying with the risk protocol.
At RVM Systems, we always want to innovate, but only if we are absolutely certain that it is an interesting innovation.
As we currently operate, we only take an "opportunity" when all signals are green, and that is usually only the case when the potential profit (i.e., the distance to the algorithmically calculated price target) has already decreased somewhat.
But that aside, we have a specific innovation in mind that is not particularly risky. Regardless, the recovery of the RVM systems in the fall was excellent, the target price calculation proved to be correct, and the AEX delivered on that.
So, it was a great way to end 2023 for us, and we are eagerly looking forward to 2024!
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Most investors who ever decided to follow have never left.
Sincerely,
On behalf of Van Megen Systematic Trading,
Ruud van Megen