Wasn't The Tech Crash Obvious?


Wasn't The Tech Crash Obvious?

Surely we all knew this was coming? Surely?

May 26, 2022

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This week's midweek commentary is titled:

'Hindsight will always be the best trader of us all.'

How often in the market do we think, ‘I knew that was going to happen’?

As a trader, I can tell you it’s a daily occurrence in our world; but Trading isn’t just about getting the direction right, but also the timing and that makes it a very difficult job.

If you really know what’s going to happen, AND when it’s going to happen, then money will rain from the sky. The fact is you don’t. It only feels like you did, after the fact.

A good example of this is the recent tech crash. We all KNEW that mega tech companies such as Apple, Microsoft, Amazon and Meta were too high.

The thing we didn’t know, was WHEN they would crash, and how high much they might go in the interim.

Here is an extract from an article we wrote last year saying that the collapse of big tech is/was inevitable.

An extract from an article written by The Portfolio Platform in February 2021.

People feel safe in a crowd, so if you have a stock account but don’t know what to do, just do what the guy next to you is doing.

This sheep-like trading on sites like Reddit, will always create bubbles, or ‘trends’ as they could be referred to until the bubble bursts.

We are living in an age of mobile phone app trading and investing. The generation of young professionals coming through will have known nothing else. The old economists will claim it is breaking their models with regards to p/e ratios, in the same way Roubini has declared cryptocurrencies ‘Shitcoins’, and an asset bubble waiting to burst.

Wall Street may sell out profits and look for value, and that causes the price to drop, but retail buyers will be there to pick up the slack temporarily.

Retail traders only tend to buy big tech names they know, so the weighting of the index is shifting more and more towards them. However, the problem may come further down the line, when flows into passive funds, turns negative.

Passive funds have little discretion whether, and at what price to buy – they must buy if they have inflows. Perversely, passive funds’ demand for a stock generally grows as the price increases because the weighting of the stock in the indices they track increases.

So long as such funds have inflows, they do not sell. They are relatively price insensitive. This hasn’t been a problem so much in the past because we haven’t seen hugely inflated prices like this before created by external sources, in this case, the retail investor.

In theory, as the proportion of assets invested passively increases, it is possible that in the future market efficiency and effectiveness may decline and mispricing of assets become more common. And the amount of money controlled by passive funds has actually doubled since 2011.

Researchers have found that an increase in the proportion of assets managed passively leads to more price movements based on superficial effects rather than deep fundamentals of valuation – in the terminology the prices are ‘noisier’. In turn firms with a higher proportion of their shares held by passive funds are more likely to engage in value destroying takeovers.

The rise of passive investment has been a boon to investors and has undoubtedly driven competition. But it is wise to look ahead and consider where this trend may lead.

The ‘Robin Hood’ crowd buy the stocks they know. Passive investment funds increase holdings in the stocks that go up. If ever there was a case for asset inflation, I think we are seeing it, only the ‘asset’ is actually an index sector – tech.

Cheap money also leads to excessive speculation; this contributed to the 1990’s dotcom bubble, the 2000s housing bubble, and now, a tech bubble – at least a US tech bubble.

If passive investment funds see a negative inflow of capital, the opposite starts to occur, and they need to sell. This would create a massive problem.

Institutional investors are looking for value about this time and some capital will soon shift. The economy could be about to come out of a massive decline in growth, proceeded by a steep incline. Value stocks, and ‘going out’ stocks are surely the place to look for a solid return.

However, for this to happen, I would expect the high value tech stocks to take a dip

Having said that, for it to be a bubble, it must burst and if retail won’t sell, and investment funds won’t sell, then when will it burst? Lots of people foresaw the sub-prime crash, but the ones that got famous were the ones who were lucky with their timing. You can short the market, but if you get your timing wrong, you’re dead in the water and down a fortune.

IF the bubble bursts, the money will move from the many, to the few. Retail portfolios will take a massive hit and all those who have enjoyed the ride up, will suffer from the fall down. We all hope this doesn’t happen and the appetite for long term tech investment will keep their dreams alive, but spreading risk is definitely the key at this juncture. Diversify. A well-diversified portfolio makes for a profitable portfolio.

I’m afraid to say, this all came to pass, the bubble has burst, and the dreams have died.

Year to date share price movement of popular retail investments (Big Tech):

Netflix -68.56
Amazon -37.34
Tesla -45.09
Snap (chat) -69.61%
Meta -45.70
Apple -22.80

We were pretty much spot on and a long way ahead of the curve; and that’s the problem. As we have always said, knowing what will happen is only half the battle, knowing when it’s going to happen is just as important, and that’s the part the investors forget until ‘hindsight’ makes it relevant.

To explain further, let’s put on a hypothetical trade.

Let’s say that we went short the Nasdaq 100 (US big tech) at the time we wrote that article. We were exactly right about what was happening, and what was going to happen, but to understand the complications we have as traders, you need to understand what happens once the trade has been placed.

You can’t experience the true emotions of a hypothetical trade, but just try, and then imagine how many of you would have stayed the course if you had the power to take the trade off.

To reiterate, the trade is to short the 100 biggest tech companies this time last year.

The first thing you would experience is regret. From the 1st ofFebruary, to the 31stDecember, the Nasdaq rallied another 3,538 points, or 27.2%. So, assuming that we leveraged the position by around 2 (meaning 1% = 2% on portfolio), we would have watched our position lose 54.4% by the end of 2021. At about 20%, that regret is accompanied by fear. How far could it go and how much could it lose?

If you are honest with yourselves, how many of you would still be in by the time the trade was down over 50%?

If we had done this, most clients would have been fuming, and many would no doubt want their capital back.

We bet against US tech. That’s madness. Hindsight (in December 2021) tells us it was ‘clearly going to go up’ and we’ve lost their money thinking we knew better than the market.

At that point in time, they would have been right. But this is what we mean when we say timing is just as important than just knowing the direction and that only hindsight knows when the time is right.

For those of you who would have stuck it out you would now be up 81.4% in 2022.

Would it have been a good idea to put on such a position? In hindsight today, yes, but if you’d asked us in December, we would have said, ‘In hindsight, no, in fact it’s been a disaster’. The trade only worked if you accepted the 54% decline in your portfolio. That’s a hard loss to swallow.

Hindsight knows all and at this moment in time, we can look at everything with its benefits.

But if you want to invest in the markets, you need to think forward, not backward because hindsight is only a matter of perspective, and that perspective changes in time.

Lots of people shorted the housing market before the subprime crash, but not many got the timing right and more people lost a fortune trying, than made one succeeding.

Investors are currently saying they knew the market would drop; to be honest we all knew the market would drop at some point. BUT, how many of you would have held the position from February 2021 up until now, to collect on being right?

Not many would think that being too far ahead of the market could lose so much money, but it really can. Part of Man Financial’s collapse in 2011 was due to them betting too early on the outcome of the European sovereign debt crises. They lost $1.6bn but were right, eventually, but by then it was too late.

Retail investors look for fast returns but don’t have the patience to be wrong which is why they don’t make any returns at all. Get in, lose money, get out because the position is down.

Unless you can guess the bottom, or the top of the market, you will always lose money at some point. If you can’t think long term, and you can’t afford to hold your position don’t put the trade on.

Trading and investing requires patience. As Warren Buffett once said: ‘The stock market is a device for transferring money from the impatient, to the patient’.

If you think you’re right, don’t expect to be right instantly. You might have to wait a while for it to be true so be prepared to lose money temporarily, in fact, expect it.

After 22 years of trading, I can tell you that only experience helps you truly understand this. Unless the basis for your opinion fundamentally changes, you could still be right, in time.

Putting on a trade and making money immediately just doesn’t really happen; we wish it did, but it doesn’t.

The skill of our traders at The Portfolio Platform, is their consistent long-term returns. Look ahead, and look to make money when you’re right, ‘whenever that might be’. Our portfolios aren’t designed to make fast money as much as they are designed to grow over time at a better rate than the market. Beating the market every year means we’re better than our benchmark.

So, is now a good time to invest?

We will always be honest with our opinion and one thing we can’t say is whether now is the ‘perfect time’ to invest. What we can say is: IN HINDSIGHT it’s a better time now than it was in January. Markets have dropped, value is returning, and our long-term expectation is that equities will recover.

It is better to put money in when things are down than when they are clearly too high. Fear of missing out and herd investing create bubbles. That bubble has now burst. It might go down more, but we do believe that it will then start to go back up.

It’s impossible to know when the market will get back to previous highs, but if you’re prepared to wait it out, good times and bad, it will get there and there is money to be made.

There are many challenges in front of us, and the world isn’t the same place it was 6 months ago, but things will return to normal, even if it’s a slightly different normal once again, they always do.

Next year there will no doubt be a new ‘disaster’ to worry about, but let’s cross that bridge when we get to it. We have crossed every single one in the past, and we will continue to do so in the future.

For now, we see long term opportunity: despite inflation, despite rising interest rates, European markets are good value.

To discuss building a TPP portfolio with a structure that aims to outperform the market on a multiple of 2-4 X per annum, contact us here.

Schedule a call with our team to discuss your options.You can do so here.

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