Specialist
We recently ran an article on Sean, the unluckiest investor in the world. We saw how whenever he had some money to invest, he got his timing all wrong. What you didn’t know what that Sean has a twin brother Luke. And unlike his brother, good luck seemed to just follow him around.
Luke also work for the same employer and was given the same amount of money to invest as Sean. But Luke has a 6th sense when it comes to investing.
Black Monday 1987
When Luke was given €100,000 from his employer, he decided to wait before investing it. Although he studied the markets, there were no real signs that markets were gong to crash but they did, so Luke waited. It was while people were enjoying their Christmas break in December 1987 when Luke decided to invest his €100,000 in the MSCI World Index.
Russian Default 1998
In 1998, there was a lot of turmoil in Russia. Rates in short term Russian bonds were hiked to 150% in June to stem the flight of capital. A $22.6 billion financial packaged was agreed by the IMF and World Bank to stabilize the Russian market and swap out those short bonds into long term Eurobonds. With all this chaos going on, Luke decided to get out and in August 1998, he transferred €408,188 to cash, just as his boss gave him another €100,000 to invest.
He didn’t leave it sitting in cash for long though and got back into the market in October 1998, deeming that despite nationwide strikes, a poor harvest and the government appealing for humanitarian aid, including food, the worst had past.
Dot Com Bubble (2000) and September 11 (2001)
And he was right. World oil prices increased rapidly and the value of internet companies took off as people were going online. CGT rates were reduced in the US, making investing all the more attractive for investors. Internet stocks were the stocks to own with shares in Qualcomm rising 2,619% in 1999.
In February 2000, the US Fed announced a plan to aggressively increase interest rates, which would impact negatively on internet companies that weren’t really generating any income. In March, Japan entered a recession and Yahoo and EBay ended merger talks. There were also reports that these internet companies were running out of cash.
While many people were spooked and cashed out as the Nasdaq fell 25% in a week in April, Luke hung in there, happy to ring every last penny out of this bull market. He moved to cash in September 2000 where his pot of money had grown to €2,718,019.
Internet stocks fell 75% in value. Then there was major accounting scandals with Enron and WorldCom as well as the September 2001 attacks. All the while, Luke sat it out and his pile of cash wasn’t impacted at all. In March 2003, Luke saw the green shoots of recovery. It wasn’t the large companies that were doing well, it was companies with doubtful financial positions and ones in the bracket just above that. With an additional €100,000 from his employer, Luke decided to go back into the market.
Credit Crunch 2007
Over the next few years, we saw tremendous growth in the stock market. Credit was cheap, people were buying homes and consumer spending was going through the roof, funded by credit for many.
By June 2007, Luke had doubled his money. His boss had given him another €100,000 but he held onto it. He then read an article by a guy called Michael Burry. He was an investor who said that the lending practices of US banks were going to cause trouble. They were lending to low income buyers with attractive, low interest introductory rates. He reckoned that when these introductory rates expired and the high rates came into effect, people would default. Luke figured that this made sense so he moved to cash, moving €5,764,904.
Uncertainty in the market started soon after. Lending between banks tightened as banks didn’t know who had liquidity issues or not. Who owned a piece of these Credit Default Swaps? Most people didn’t know what the cause was and things would recover. Volatility returned and we saw the stock prices go up before falling again. Luke kept his money in cash. Then, in September 2008, Lehman Brothers went bust. The MSCI World Index fell by -23% in the following month.
Lending stopped. Banks needed liquidity to maintain solvency. Business’s couldn’t grow without credit. Consumers stopped spending and kept their cash. The housing market stopped, with building sites closing overnight. There were job losses and house foreclosures. The world was plunged into a global recession.
Governments and Central Banks saw that they had to do something. If the banking system failed, our way of doing business would fail. They pumped trillions into the banking system, guaranteeing deposits to prevents runs on banks and bail outs.
On 6 March 2009, The Dow Jones hit its lowest level ever, a drop of -54% from its peak just over 17 months before. Luke saw this as a time to get back into the market. A few weeks later, Quarter 1 results were out which saw a massive decline in GDP across the world. Luke stayed invested.
Covid 19 2020
What we saw then was the greatest bull run ever in the history of the stock market. Internet companies took off with their innovation and ability to generate massive amounts of cash. Consumer spending resumed as jobs came back. Over the next 11 years, Luke saw his money grow to a staggering €29,809,465. Not knowing how successful Luke had been, his boss gave him a final €100,000 before retirement. Again, Luke didn’t invest.
He had been reading about this disease in China, Covid 19. It seemed like a pretty big deal over there but western governments weren’t showing much interest. Afterall, it wasn’t the first time there had been such an outbreak in Asia. It was usually contained in the region and they got on with it. But as the months went on, it seemed to be getting bigger, so on 13 February 2020, Luke took his money out and put it in cash.
What happened next is that the world economy effectively closed. People were told not to come into work. Those who could work from home did so. But with schools also closed, many juggled between home schooling and trying to work. Those in the service industry found themselves unable to work at all.
With the last recession still fresh in people’s minds, governments and Central banks acted swiftly to avoid a repeat and started pumping trillions into the economies. Those who couldn’t work were given an increased payment so they could continue to pay their bills.
Not everyone was spooked. Lots of investors also remembered how quickly stocks rebounded last time and the gains to be made. Lead by the big tech stocks, markets didn’t take long to recover. And Luke saw a last opportunity to go into the market, so just a month after he took his money out, he went back into the market on 23 March 2020.
Who would have known that while unemployment figures went into double digits and businesses remained closed, the stock market would rally? When Luke retired on 17 August 2020, his pot of money had grown to €40,916,627, a return of 37% in just 5 months
Can you do what Luke did?
With just 9 trades in his life, Luke turned €500,000 into €40.9 million. He is not a trader as a profession, he does not spend hours and hours each day pouring over economic reports and looking for signs that there might be something to worry about or that after a few fall dawns (also known as the dead cat bounce) that this time the recovery will be real.
Other times is was just sheer luck that he wasn’t invested. No one can know about a massive fraud going on in companies like Enron or Worldcom and who could have predicted the events of September 11?
If you are a regular investor, it can be tempting to try to time the market but it is incredibly difficult to do, especially over the long term as you have to call the tme to get out and then when to get back in. You should trust in the long term growth of the stock market and realise that sometimes you will be lucky with your timing, other times less so. But that’s all it is, luck.
by Steve Barret of Bluewater Financial Planning