How to make money from this crash - Lessons from 2008

[neil9327]

Total deaths in the US - And probably everywhere - is down because of the coronavirus lockdown... Apparently life kills, so when people are holed up at home they don't die as often...

 

Agreed. A friend of mine is a paramedic, and he says while workload is up due to Covid, work from other non-Covid is down.

[JPerez]

Total deaths in the US - And probably everywhere - is down because of the coronavirus lockdown... Apparently life kills, so when people are holed up at home they don't die as often...

Total deaths in Spain for March were about double the deaths expected during that month.

A lot of the deaths happened in nursing homes.

 

[SharperDingaan]

"I'm not sure I understood your math very well but I'll study the industry more tomorrow."

 

The takeaway is do nothing for 12 months, then make your investment. Let patience work.

We're O/G. Returns are a lot bigger, and sooner.

 

SD

[netnet]

"I'm not sure I understood your math very well but I'll study the industry more tomorrow."

 

The takeaway is do nothing for 12 months, then make your investment. Let patience work.

We're O/G. Returns are a lot bigger, and sooner.

 

SD

 

Hey SD, Munger is quoting you  ;) --WSJ today.

https://www.google.com/amp/s/www.wsj.com/amp/articles/charlie-munger-the-phone-is-not-ringing-off-the-hook-11587132006

 

 

Although I (obviously) feel more threatened personally (read health-wise) with this crisis, financially I feel much better than 2008.  Yes the GNP may really dip and small businesses are going to be mowed down, but the financial system was teetering in '08, which is (currently) not the case now.  As always we are in uncharted territory, but it seems as if the returns in private (VC, small scale PE) and public markets require (even more) patience than one would think. Wait for the fat pitch or as Buffett also said, shoot the fish in a drained barrel.

 

(Minor historical note, returns to capital tend to reduced after pandemics, both large and small.)

[bizaro86]

Total deaths in the US - And probably everywhere - is down because of the coronavirus lockdown... Apparently life kills, so when people are holed up at home they don't die as often...

Total deaths in Spain for March were about double the deaths expected during that month.

A lot of the deaths happened in nursing homes.

 

Deaths of sick old people that happen now are probably really bad for the death care industry though. No expensive funeral services are happening now because of mandatory isolation. And a 90 year old in LTC was probably a good bet for a customer in the near future...

 

 

[wabuffo]

https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/how-to-make-money-from-this-crash-lessons-from-2008/msg401716/#msg401716

 

I would like to discuss how the most money was made from the depths of the last crisis.

 

The lesson from 2003 (after the 2000-02 deflationary bust) and 2009 (after the 2008 GFC) is --  buy the trashiest micro-caps you can and buy a bunch.  Their share prices go up the highest.

 

I'm going to use the Wilshire Equal-Weight 4500 (ie, excludes the top 500 stocks in market cap and thus is the equivalent of throwing darts at all the small-cap names).  Here's some data.

 

2003:

S&P 500 Tot. Return: +28.7%

4500 Equal-Weight:  +97.5%

 

2009:

S&P 500 Tot. Return: +26.5%

4500 Equal-Weight:  +88.0%

 

I had a study from the 2003 market that further stratified the returns.  IIRC, it stratified the 4500 small caps by debt to equity ratio.  No surprise, the bottom decile in terms of debt/equity (ie - highest debt to equity) did the best (well over 150% on average).  In fact, there was almost a perfect negative correlation -- ie low debt equity did less well (vs the overall average of 88%) and each decile of greater debt-to-equity did better.

 

FWIW,

wabuffo

 

Circling back to this question posed during the eye of the storm in late March 2020. 

 

How did my advice of throwing darts at the stock pages of the smallest small caps work out?

 

end of March 2020 - end of January 2021:

S&P 500 Tot. Return: +  45.8%

4500 Equal-Weight:  +118.4%

 

You're welcome. 8)  History not only rhymes, it repeats!

 

wabuffo

[Jurgis]

From what I see, there are no mutual funds or ETFs tracking Wilshire Equal-Weight 4500  :'(

[LC]

Trough to peak, I agree small and micro caps will outperform, but what about peak to trough?

 

The difficulty is knowing where we are in the cycle!

[sleepydragon]

From what I see, there are no mutual funds or ETFs tracking Wilshire Equal-Weight 4500  :'(

 

Not only that, it’s pretty high transaction costs to buy and rebalance 4500 equal weighted and  mostly illiquid stocks

[wabuffo]

The point of my tongue-in-cheek post wasn't to recommend buying an equal-weight fund. 

 

My central point was that once there is a deflationary bust, you:

  - look for signs that the deflation is over (usually gold price stops falling and starts going up again), and then

  - you buy a basket of the trashiest microcaps/small caps. 

  - hold for about 10-12 months.

 

It worked in 2003 (after the 2000-2002 bust), it worked in 2009 (after the GFC) and it seems to have worked again in 2020.

 

You don't even have to really do any due diligence because you want diversification via a basket.  In fact, trying to pick them using fundamentals is actually a bad idea.  If you look at the results of that study that I posted in this thread that did a post-mortem of 2003:

 

  - companies with no earnings/loss making companies (+117%) did better than companies with positive earnings (+44%).

  - companies rated F (poor) for financial health did better (+110%) than companies rated (A) (+55%).

 

It's counterintuitive and hard to actually do in the middle of stocks falling 20-40%, but that's what the data says...  so back in late March when the question was asked "how to make the MOST money from the depths of this crisis in March",  this was my recommendation.  Did I follow it myself?  Uhhh - I'll plead the fifth.

 

wabuffo

[compoundinglife]

Circling back to this question posed during the eye of the storm in late March 2020. 

 

How did my advice of throwing darts at the stock pages of the smallest small caps work out?

 

end of March 2020 - end of January 2021:

S&P 500 Tot. Return: +  45.8%

4500 Equal-Weight:  +118.4%

 

You're welcome. 8)  History not only rhymes, it repeats!

 

wabuffo

 

Thanks. I did not do exactly that but close.

 

Did some tax loss harvesting around this time and shifted a chunk of funds from SCHB and VTI to the small cap equivalents because of your comments.

 

At first glance I did not do as well as with market cap weighted as I would have with equal weight. But the result is better vs staying in total market. I also took a small position in RMT which is up 126% since March. It might be time to rebalance back into total market index funds and do this again next time around.

[compoundinglife]

Here is chart SCHB (total), SCHA (small) and IWC (micro) from the lows to now.

[Simba]

The point of my tongue-in-cheek post wasn't to recommend buying an equal-weight fund. 

 

My central point was that once there is a deflationary bust, you:

  - look for signs that the deflation is over (usually gold price stops falling and starts going up again), and then

  - you buy a basket of the trashiest microcaps/small caps. 

  - hold for about 10-12 months.

 

It worked in 2003 (after the 2000-2002 bust), it worked in 2009 (after the GFC) and it seems to have worked again in 2020.

 

You don't even have to really do any due diligence because you want diversification via a basket.  In fact, trying to pick them using fundamentals is actually a bad idea.  If you look at the results of that study that I posted in this thread that did a post-mortem of 2003:

 

  - companies with no earnings/loss making companies (+117%) did better than companies with positive earnings (+44%).

  - companies rated F (poor) for financial health did better (+110%) than companies rated (A) (+55%).

 

It's counterintuitive and hard to actually do in the middle of stocks falling 20-40%, but that's what the data says...  so back in late March when the question was asked "how to make the MOST money from the depths of this crisis in March",  this was my recommendation.  Did I follow it myself?  Uhhh - I'll plead the fifth.

 

wabuffo

 

I disagree. And is also why I didn't buy small caps in March of 2020.

 

In March of 2020, there was a lot of possibilities of how the virus could of panned out, and how governments (And Central Banks) around the world would react.

 

In 2009, it was clear small caps were going to recover as it a was a financial crisis.

 

2020 was a biological crisis.. if you had a 5-year timeframe in March 2020 sure you could of risked it, but there was a chance the markets would go down another 10-30% from the March lows (considering the market was crashing -10% everyday we were probably only 2-3 days away from this scenario, anyways)

 

[compoundinglife]

The point of my tongue-in-cheek post wasn't to recommend buying an equal-weight fund. 

 

My central point was that once there is a deflationary bust, you:

  - look for signs that the deflation is over (usually gold price stops falling and starts going up again), and then

  - you buy a basket of the trashiest microcaps/small caps. 

  - hold for about 10-12 months.

 

It worked in 2003 (after the 2000-2002 bust), it worked in 2009 (after the GFC) and it seems to have worked again in 2020.

 

You don't even have to really do any due diligence because you want diversification via a basket.  In fact, trying to pick them using fundamentals is actually a bad idea.  If you look at the results of that study that I posted in this thread that did a post-mortem of 2003:

 

  - companies with no earnings/loss making companies (+117%) did better than companies with positive earnings (+44%).

  - companies rated F (poor) for financial health did better (+110%) than companies rated (A) (+55%).

 

It's counterintuitive and hard to actually do in the middle of stocks falling 20-40%, but that's what the data says...  so back in late March when the question was asked "how to make the MOST money from the depths of this crisis in March",  this was my recommendation.  Did I follow it myself?  Uhhh - I'll plead the fifth.

 

wabuffo

 

I disagree. And is also why I didn't buy small caps in March of 2020.

 

In March of 2020, there was a lot of possibilities of how the virus could of panned out, and how governments (And Central Banks) around the world would react.

 

In 2009, it was clear small caps were going to recover as it a was a financial crisis.

 

2020 was a biological crisis.. if you had a 5-year timeframe in March 2020 sure you could of risked it, but there was a chance the markets would go down another 10-30% from the March lows (considering the market was crashing -10% everyday we were probably only 2-3 days away from this scenario, anyways)

 

 

edit: I think what you are saying is one needs to do this at the bottom based on historical results. That is a valid point . Actually I misinterpreted your statement. I see what you are saying. But don't agree that the type of crisis matters as much as picking the bottom. In March 2020 same as 08/09, the bottom was knowable only in hindsight.

 

I do agree if you do it too early or too late it seems like it will hurt returns vs the market. The graph I posted was obviously cherry picked.

 

I think an interesting data point would be, at periods where the market is down 30% and small and micros are down 30+X, where maybe X=10, what were the returns over the next 6 and 12 months.

 

 

 

 

 

 

[Cigarbutt]

i agree with the concept of investing at the bottom (and, at some point then, the worst and mostly injured as a basket, the better) but i wonder if a solid framework has been provided to define what is a bottom and not much has been said about the very strong and adverse correlation to smaller and trashier stocks when general market directions are down (falling knife type of thing).

 

The significant differential performance has occurred since around October and i'm not sure there are fundamental reasons to explain that (although there are plenty of 'technical' possibilities..)

 

Also, if market timing is the thing, it seems like waiting for an average human gestation period and then to plow back everything in the most shorted stocks seems to do the trick.

 

On a more fundamental level, i wonder if future investors looking back to 2020 may not remember this episode like 1987: a truly memorable period but one which, with perspective, looked more and more like a blip in the chart and which did not really influence where things were heading, eventually.

[wabuffo]

The significant differential performance has occurred since around October

 

Mar 30 - Oct 31, 2020:

S&P 500 total return                    +27.8%

Wilshire Equal-Wgt 4500              +46.5%

 

I guess it depends what you mean by significant differential...

 

wabuffo

[Cigarbutt]

The significant differential performance has occurred since around October

Mar 30 - Oct 31, 2020:

S&P 500 total return                    +27.8%

Wilshire Equal-Wgt 4500              +46.5%

I guess it depends what you mean by significant differential...

wabuffo

Ha Ha!

Your idea is a good one and you are commended to have posted the idea when you did.

i've been doing this for 20 years now and i'm still trying (for sub-indices and specific targets) to define what a 'bottom' is and the ideal timing indicator for a change of fate has remained elusive.

A nice thing about this thread is that it can be re-visited in the future. :)

[clutch]

Wilshire 4500 did outperform s&p500 since last March but perhaps not because of the premise wabuffo lays out.

 

If you look at the top 10 holdings of VXF (the closest thing to invest in W4500), they are:

1 Square Inc.

2 Uber Technologies Inc.

3 Zoom Video Communications Inc.

4 Snap Inc.

5 NXP Semiconductors NV

6 Blackstone Group Inc.

7 Twilio Inc.

8 DocuSign Inc.

9 Lululemon Athletica Inc.

10 Workday Inc.

 

A lot of top names are actually big name tech comapnies that have not made into S&P500.

 

Or am I mistaken?

[wabuffo]

Or am I mistaken?

 

Equal weight.  Each stock is 1/4500th of the market value of the index at the start of every month (actually more like 1/6000 - I think there are more than 4500 stocks in that index) and then rebalanced the next month.  Its a theoretical construct that would be plagued with crazy liquidity and frictional costs.

 

The point is trying to track the results of the average stock where even the tiniest microcap is weighted the same as any other stock.  Its a theoretical concept but it is the equivalent of throwing darts at the stock pages at the end of March 2020.

 

wabuffo

[rkbabang]

Since there is no ETF or fund, how many random stocks would you have to buy to approximate the results?  500? 2500?  It doesn't seem like a reasonable strategy.

 

Also if you need to correctly identify the bottom with maximum pessimism in effect, then you could make more using options on larger stocks.  The trick in any case is being sure about the bottom.

[wabuffo]

how many random stocks would you have to buy to approximate the results?  500? 2500?  It doesn't seem like a reasonable strategy.

 

I think there are academic studies about diversification that demonstrate that you can achieve 90% of the results of a population of stocks with just 12-18 stocks - especially since here we are talking about a median return equaling the average return.  You get to 95% of the population result with 25-30 stocks, etc.

 

Its not that unrealistic to me that a strategy of picking 20 stocks at random from the stock pages on March 31st would've gotten you close to a 100% rate of return - similar to the 4500 equal-weight index.

 

On another board, we run an annual stock picking contest.  The spouse of one of our members, picks a "control" portfolio pretty much at random.  She wins a few years and always smokes most of the field other years, FWIW.

 

Moving on to cigarbutt's excellent question about how does one pinpoint the timing for deploying this "buy crapstocks" strategy,  I have a working theory on that. The macro environment has to be one of large deflationary monetary conditions (not recessionary - though that sometimes becomes the result of the deflationary conditions).  The clues are a surge in the demand for US dollars and a drumbeat of not enough good collateral (i.e., US Treasuries).  The gold price should also be falling (gold goes up and down all the time - but a falling gold price in the middle of the crisis signals deflation).

 

I can count three times these conditions have happened in my 20 years of investing - a) 2000-2002, b) 2008, and c) 2020.  In each case, the dollar surged, gold fell vs the USD and there was talk of not "not enough US Treasuries to go around".  The difference between the three is the response of the Fed and US Treasury in each case.  We went from a laissez-faire, small footprint in 2000-2002 (because of the surplus, there was actually a fear that there would be no more Treasury debt for collateral lending)  to a slightly faster, slightly bigger response in 2008 to a "fire the bazookas at the first sign of trouble" in 2020.

 

When these conditions turn around, the crap stocks go up the most because they feel the heaviest burden from monetary deflation as their large liabilities relative to their profit/equity rise the most in real terms under a deflationary compression.

 

That's why when this topic sprung up in March, it felt like this strategy would get a good test run.

 

wabuffo

[Xerxes]

When a crash happens, it is always (I think) a liquidity shortage event. So that is why all stocks and even gold go down and US Dollar goes up (followed by Japanese Yen due to the carry, Swiss Frank (the haven)). Even Bitcoin will go down, specially now that it has been institutionalized (meaning there is leverage at play). A cross-asset correlation of well diversified portfolio goes straight to 1.

 

I think one's best bet is to be provider of liquidity in a market crash, but on the way down, i don't there is something that will soar in value (short of a put option that is extremely well times or one of those insurance type black swan product that we only talk about it when bad things happen).

[DW]

 

 

On another board, we run an annual stock picking contest.  The spouse of one of our members, picks a "control" portfolio pretty much at random.  She wins a few years and always smokes most of the field other years, FWIW.

 

 

wabuffo

 

 

May I ask what that other board is? I would certainly understand if you were not interested in sharing that for one reason or another.

 

 

[Kreaken]

I would like to discuss how the most money was made from the depths of the last crisis.

 

The lesson from 2003 (after the 2000-02 deflationary bust) and 2009 (after the 2008 GFC) is --  buy the trashiest micro-caps you can and buy a bunch.  Their share prices go up the highest.

 

I'm going to use the Wilshire Equal-Weight 4500[...]

 

I realize this is an old thread and more focused on the sudden dip post-covid we saw last year, but still an interesting thought experiment for the more bearish scenarios we could find ourselves in as investors in the future. In case this is deemed worthy of reviving for discussion, I wonder how we can really compare the last two crashes to a hypothetical crash/reversion to the mean for the US market, and identifying the best practices for finding high performance assets post-crash.

 

To borrow what I gleaned from Hussman's data-heavy writings, the decile distribution of the current "bubble" (In terms of Mktcap/GDP) is more evenly distributed across the market as opposed to it being more focused as I understand it being in the prior crash(es).

 

Im a relatively new entrant into the world of investing and so am happy to return to lurking and learning from this insightful community, but thought I would probe on this topic a bit considering all of the uncertainty on the macro level I am seeing.

[wabuffo]

I would like to discuss how the most money was made from the depths of the last crisis.

The lesson from 2003 (after the 2000-02 deflationary bust) and 2009 (after the 2008 GFC) is --  buy the trashiest micro-caps you can and buy a bunch.  Their share prices go up the highest.

I'm going to use the Wilshire Equal-Weight 4500 (ie, excludes the top 500 stocks in market cap and thus is the equivalent of throwing darts at all the small-cap names).  Here's some data.

2003:

S&P 500 Tot. Return: +28.7%

4500 Equal-Weight:  +97.5%

2009:

S&P 500 Tot. Return: +26.5%

4500 Equal-Weight:  +88.0%

---------------------------------------------------------

We can now update this thru the end of May 2021 (from the end of March 2020 - around the time this question was posed):

2020:

S&P 500 Tot. Return:  + 65.8%

4500 Equal-Weight:    +150.01%

The S&P had a great comeback - but once again, the trashiest micro-caps outperformed by two-and-a-quarter times the S&P 500 total return index.