How to make money from this crash - Lessons from 2008

[LearningMachine]

29 minutes ago, wabuffo said:

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%

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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.

Thanks @wabuffo for starting this discussion. 

Now, if capital gains are ~50%, and you wanted to avoid paying taxes, and just wanted to sit on what you bought, are you ok with holding 4500 Equal-Weight forever, or would you rather hold S&P 500 Tot. Return forever? 

[wabuffo]

LM - I can't really answer your tax question - especially when it's a speculation on what tax policy may or may not be. 

But I did want to pivot to an earlier upthread critique of my "method".  That criticism was that you can't time the move to trashy $hitcos because one doesn't know the timing of the "all-clear" signal.   In my commentary, I kept referring over-and-over to a deflationary scenario but never really explained exactly what I meant.   So I'm going to add this dimension to this commentary now.

Over the last twenty years or so - there have been three major "deflationary" events.   The definition of these involves a shortage of the govt's money (ie, Treasuries).   There have been three:  1999-2002, 2008-2009, 2020 (March).

Each of these may have had different causes - but they were all defined by the market rushing to the US dollar and US dollar assets like Treasuries and that demand exceeding supply.   In my opinion the single-best real-time indicator of a deflationary liquidity squeeze is the real-time price of gold.   When there's a crisis, I watch the price of gold closely.  If even gold is falling relative to the US dollar and US dollar assets - a deflationary squeeze is on.   Now that is different from a speculative run-up in gold that then breaks (like 2012 -  or even late 2020, early 2021) when there is clearly no underlying liquidity issues from the US Treasury's fiscal response and thus gold is just falling from a speculative run-up.  So you need both conditions: a) an underlying lack of USDs due to inadequate fiscal liquidity, and b) gold reacting to that.

Ok - so here's the three charts for each of these events.  I've circled in red the deflationary squeeze and in green the relief from the deflationary squeeze (when the price of gold goes back to its pre-squeeze price.   The other thing that's interesting is the increasing speed of the US fiscal response.  In 1999-2002, the US Federal govt ran a surplus and the economy ground down for three years until the drop of tax revenues flipped the US Federal govt's surplus back into a more "normal" deficit.   In 2008, the govt reacted faster but still much slower than the blinding speed of the March 2020 response.   Anyhoo - the green circle represents the "all-clear" signal to run into microcap $hitcos.

1999-2002:

2008-2009:

2020 (March):

There you go - fundamental analysis you'll see nowhere else. I feel like I have finally fully answered ukvalue investment's original question from the depths of last year's pandemic market meltdown.  You are now armed with knowledge and ready for the next banking panic/deflationary crisis, LOL.

wabuffo

Edited June 1, 2021 by wabuffo