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The Four Horsemen of the Investment Apocalypse

Bull & Bear PhotoIn his 1994 classic Invest Like the Best author James O’Shaughnessy referred to the typical investment errors as the four horsemen of the apocalypse – fear, greed, hope and ignorance. Of the four, only one (ignorance) is not an emotion.

In his foreword to the 1973 edition of The Intelligent Investor, Warren Buffett wrote that what investors need is a sound framework for making decisions and the ability to keep their emotions from corroding that framework.

Volatility is the single greatest cause of emotion for investors in the stock markets. Yet, volatility is not actually risk unless you need your money back in the short-term.

Regulators, encouraged by the academic community, want to convince us that volatility is risk and they have even forced the professional investment community to rank the risk profile of investment products by reference to their volatility. The following example makes a mockery of the regulators’ stance.

By late 2012, the Irish property market had bottomed following a severe 50% downturn. Using the Regulator’s guidelines, Irish property funds were labelled as high risk at that time given the decline (volatility) in their unit prices. Yet, on many metrics Irish commercial property was offering the best value in decades at the lower prices. Enough said.

Of course, volatility does unnerve many an investor and some simple framework for making decisions can assist greatly in controlling those emotional responses to unfolding news, bad news in particular.

Take the Coppock Indicator, first introduced in the 1950s and which we have written about before. It is a formulaic approach to determining when a bear (declining) market has run its course by measuring when selling in the marketplace has exhausted itself. It’s an unemotional framework.

Since 1950, the Coppock Indicator has given 20 ‘Buy’ signals on the S&P 500 Index with the latest one given on 31st March 2023. And since 1950, the average gain over the following 12 months has been 20 percent with just one losing signal (in 2001). We think the Coppock Indicator represents a sound framework for making ‘Buy’ decisions.

The Coppock Indicator does not give sell signals. But there are other easy-to-follow, price-driven indicators that can assist with sell decisions.

Using such indicators removes subjectivity and, therefore, emotion from the decision-making process.

The canny reader might argue that the ‘Buy & Hold’ investor in the S&P 500 Index has been a better strategy than, say, the Coppock Indicator. And that reader would be right. Buying an asset at decent value and that is growing in value overtime is the simplest and often the most rewarding strategy. But it demands that you have the discipline to ride out the volatility and can determine when that market offers sound value.

For the person who is investing regularly, like someone saving into their pension fund, the job is easier. At times you may be buying poor value but in down markets, if you stay with your savings programme, you will most likely get much better value and it should even out over time.

The lump-sum investor – that investor who can’t add much additional monies to their savings programme – has the trickier time. This investor doesn’t have the flexibility to add monies to their investment programme if markets falter, and so they must be sure that they are obtaining good value at the outset.

For the lump-sum investor, then, using a proven price-driven, technical indicator can add value. Instead of fretting about whether the market offers good value or not, just go with the flow. However, like the Buy & Hold investor, the user of a technical indicator, like the Coppock Indicator, needs the discipline to follow the strategy at all times, and not to pick and choose.

I well recall the buy signal given by the Coppock Indicator on the global equity index on 31st May 2009. Few heeded it, mistakenly believing the apocalyptic views being expressed online and in traditional media of the likely horrendous recession ahead. This website wrote a Featured Article on it at the time (click the link for access).

But the global stock markets had already discounted the bad news, the selling was done and there were only buyers left. The Coppock Indicator picked up on the simple fact that there were now more buyers than sellers. The markets never looked back.

Rory Gillen
Founder, GillenMarkets

26th April 2024