Harbinger of sorrow – divergence in 2016 leads to crash in 2017?

Executive summary: I asked about weird market patterns but got a lesson in humility instead. Stay disciplined, resilient and patient.

“You need to be willing to take (many) small losses to make big gains”

Those words describe the essence of famous investor Mark Spitznagel’s philosophy of investing, that he elaborates on in his book Dao Of Capital.

From Wikipedia: Paul Tudor Jones has said of Spitznagel’s book that “Mark champions the roundabout,”

and “shows how a seemingly difficult immediate loss becomes an advantageous intermediate step for greater future gain, and thus why we must become ‘patient now and strategically impatient later.’”

Spitznagel likens his process to “life’s roundabout road to success”—“the art of taking a circuitous path to an endpoint,” delaying gratification and taking small setbacks now to gain enormous positional advantage later.

The pain of 2016

I’ve been getting quite a few letters and comments regarding my request for personal stories about the financial markets and trading patterns of 2016.

Specifically I asked about big losses and how and why they think those occurred.

I had an idea about traders identifying patterns of divergence between specific stocks, industries, sectors, durations and asset classes. I thought “weird” patterns, only discernible by a crowd, could point to a trend reversal downward in 2017.

I didn’t get any of that.

What I did get was a nontheless interesting psychological snapshot of a motley crowd of investors and their various strategies and tactics to stay level headed no matter what the market did to them. Many stories actually described winning in 2016.

Here are some of the messages I got:

Not worried

I agree with your observation that 2016 has seen more divergence, but I disagree with your assessment that this is some sort of bearish harbinger.

IMO this is a very reasonable response to a rising interest rate environment. In fact, I would be more convinced that this was a “blow off” top if all sectors of the rally rallied together indicating some sort of capitulation or irrational buying.

Sizing is key

The big loss? Not cashed in yet. I have a lot of exposure to interest rates through CEFs (Muni bonds, High Yield bonds, Preferred shares) and REITs and I’m down on paper by a nice 8% this year.

Where I bite my fingers is that I put in my notebook to hedge with TBT at the right time, every day from January onwards. In June the interest rates where at the lowest and my portfolio was in the green by a fair percentage and I completely forgot about it. And it was a perfect and easy trend reversal.

I got distracted by these bloody elections.

I also manage a trading account for fun and profit. I have about 20 positions opened at any time of a small size $ 2,000 to $ 3,500. I have one negative month and so far was able since October 2015 to extract about $ 1,300 every month.

I use momentum (macd or Ichimoku) to enter and Parabolic SAR to exit. My hit rate is around 50% but parabolic SAR takes you out of a bad transaction pretty quickly so losses are small.

However, I had one big loss in September. I was short NXPI, perfect short set up and going down quietly. I go walk the dog, come back and look at my positions; trading halted, the stock is up $ 10. Things like that happen, position sizing is key to keep your shirt.

High savings ratio instead of trading

One year later in August of 2015, I had enough of the permanent portfolio bear market. The portfolio didn’t live up to its promise for me as a Swedish investor. The losses were small so I withdrew all my capital. The small cap funds had been going up for a while so I bet my money on these instead. I regained all my initial capital and got out of the market.

Shortly thereafter in September, I got laid off from my Computer systems development job and I had a lot of free time on my hands. All I ever had read on investing was Harry Brown’s book on the Permanent portfolio. So I knew nothing about investments, trading or risk-management at all.

During my time as unemployed, I decided that I wanted to make a living as a capitalist rather than an employee. So while I was frantically applying for all jobs I could find. I was also for the vast majority of my free time reading books from the famous authors on trading and investing, watching a lot of interviews of finance personalities and amateurs on youtube. Engaged with the communities of bloggers and forums on the internet and learning everything I could get my hands on about trading and investing.

I ran backtracking simulations and experimented with everything one could possibly think of such as swing-trading, day-trading various stocks, trend traded using mutual funds, quantitative investing strategies, index-investing, dividend-stocks investing. I learned about risk-management, how the big guys trade, portfolio theory and pretty much everything else one can think of. Learning and experimenting in a bear market was really stressful.

In Q4 of 2015 I traded mutual funds on a momentum basis.
At the end of 2015 I sold everything for tax-harvesting purposes. Then in January when the market furiosly crashed, I could feel the fear from markets from within myself. I realized this was the perfect timing for a bet on Gold and TLT. So for Q1 of 2016 I was long GLD and TLT.

I vowed to never lose my initial capital I had earnestly toiled for and earned through many hardships as an employee.

My total gains were never substantial and long-lasting. The winnings was soon consumed by losses in the choppy markets following in Q2 of 2016. Many days went by when I was high on adrenaline. Trying to predict the next move of the market would turn out to be nigh futile. Sometimes I took a lot of profits on one bet just to loose it all in on the next trade. Sometimes I let the trade reverse back on itself and ended up with nothing. In the end, tallying up the totals I was pretty much back to where I started.

Around the time of brexit I recon the the market had turned bullish again and am for the moment fully invested with leverage in the stock market. Still trying to decide if I want a trailing take-profit stop or if I am simply going to be a passive investor. I know the risks of not taking profits while the opportunity is still available. The market can take a large nose-dive to never return for decades like in Japan or the great depression.

In Q3 of 2016, I was finally reemployed yet again. From the fire-hose of money that a at a regular job provides, I will be growing my AUM with a few percentage from my roughly 50% saving-quota. Days when I have a difficult time motivating myself to go to work after the alarm-clock rings in the morning. I chant to myself that I am doing it for the portfolio.

My dream is still to become a full-time capitalist and live off my investments. If I want to do it by passive index-investing or dividend-investing I will need a much larger portfolio then I have now. Earning a living through active trading seems to be almost impossible.

Perma bear turned bullish

I’m one of the newbies you talk about. For the last few years, I have been a permabear (reading too much zero hedge which now I stopped doing because it’s a waste of time) and never invested a single cent in the stock market.

This year I got tired of missing out and opened a small brokerage account. I got my family to invest in a sovereign gold bond with a crappy interest rate, hoping to sell it to the next greater fool before maturity.

Other than that I bought GBP thinking that brexit couldn’t happen due to the rigged political system in the U.K. So that’s been down. It was down from the normal when I bought it and but now it’s down even more. I may hold it till it picks back up.

Cal-Maine foods has been down thanks to it being a solid value but it was down and now it’s back to where I bought it.

I also bought Apple during the dip earlier this year and that has been up 20%. Same for Urban Outfitters, rode the ride up.

I’m now learning more about Options as well.

Also I missed an opportunity in Bitcoin. Missed the ride this year from $470. Now it’s above $900.

Lost it all on leveraged shorts

Bought Sandvik at 65-70, sold above 80. Subsequently shorted with 4x leverage at 90+ and lost it all. Did the same thing in Atlas at the same time.

Lesson: never go short

Bought Rusforest, but that got taken out at just 4% premium.

Bear giving up on market timing

Family Office: Throughout 2015 and 2016 we were convinced that US equities had topped, based on many valuation measures (Schiller PE, market cap/GDP, price/sales) as well as credit market cycle warnings (rising defaults, etc), and we thought that there was also much political risk ahead, which turned out to be correct (Brexit, Trump, etc.).

We had largely moved out of equities and into mainly money market and lots of short-term US treasuries, as well as TIPS. Lots of TIPS. And some risk positions in GLD, and long term US treasuries (risky in the sense that yields are at historic lows)… we thought that deflation pressures would continue (too many are structural like robotics, aging demographics, pressures to service US government debt affordably, etc).

Personally I was convinced this was a great portfolio in case Trump was elected too, because obviously the stock market would tank if he got in… I saw the dips in equities when his poll numbers did better, and also thought this guy is such a loose cannon with protectionist trade policies that of course stocks will tank worldwide if he is elected. We know (so far) how well all that turned out.

The strong dollar has pummeled the gold position, and we missed some very solid gains in equities in the last month. And, inflation expectations seem to be a driver behind increasing long term rates, which has hammered the long term treasury position so far…At least that is what all the analysts seem to be writing, that it is inflation expectations.

Personally, I am starting to think that Trump is such an unpredictable retard on Twitter, and so unpredictable in general, that actually what is happening is that US treasuries are now getting a ‘risk premium’ built into them… especially by foreign holders (who do seem to be dumping them too, but hopefully that is mostly from the strong dollar). A ‘risk premium’ for treasuries would be hard to quantify, but I suspect that it may be occurring and would be a major shift if it were happening. I am still convinced that, with the median US stock at all time highs based on an aggregate of valuation measures, now is a very bad time to be in US equities. So we are sticking with our positions, but it is painful.

I am an avid reader of Hussman like yourself, but I am also starting to appreciate that market timing may really be for fools (as my uncle a retired bond trader always says).

Until this year I was a bit of a market timer in my investment outlook. Hussman writes great stuff but his funds have not done well over the years … one of these days he will be a genius again but until then I think he is just calling it too early, over and over. My fear is that I just did the same thing, and the animal spirits under Trump will drive equity markets even higher and higher over the next several years, despite the crazy valuations. And that bond yields really are at an inflection point upwards. And central bankers may buy even more equities than they currently are to keep it all propped up too. If so then our positions now are just plain bad.

Micro caps: all-in, despite lesson of 2008

I was down by 20%, but finished at +40%

I bought heavily in the nanotech battery company Insplorion, inspired by Druckenmiller (go all in if you believe).

I experienced the financial crisis but I’m nevertheless all-in in micro caps and don’t care for macro. The only thing I use for risk management is the 12 months moving average on OMX

2016 was normal and easy

As a technical analyst myself, I can say that the patterns and usual trends work pretty much the same this year, didn’t find any real problem reading the markets so far (except that trump rally, which is fundamental event and not pattern related).

I wish I could give you a story about my terrible trade, but the only ones i can give you are the trades I didn’t take and should have, this is because I was in gold juniors… which did very well.

Lost on shorts

My worst trade was the Italian referendum. I guessed right and spread betted the italy 40 index and was 100k up. However i had so many individual sub bets that i needed many partial closures and by the time i closed i had virtually lost most of the profit.

The problem was that my ego could not accept this so i shorted again waiting for a profit but it did not happened. Even so i held onto the position until a large loss accrued.

Did not follow his own plan

2016 could have been wonderful sticking to the mechanics. I made two major errors:

1. March – Aug there was no volatility out there and market kept up going up. I did not sell enough premium against my bearish core positions hoping volatility was just around the corner.
Remember: stick to the mechanics.

2. Nov: I had the clear plan to be basically from bearish into cash when the election is done (and Clinton makes the race) and to keep my shorts a couple of days with Trump elected which did not work out at all.
Remember: stick to your plan incl. your exit plan.

Lost on hope stock and short position

Bought short index ETFs (XACT BEAR) too early and didn’t realize how expensive they would be over time if the market traded sideways or up. It was the wrong tool considering my long term investment horizon.

Instead of sticking to my strategy of buying quality companies I bought a small insurance company, Vardia, without a real track record

Both investments lost more than 50% each. Even if the total loss amounts to approximately 10% of my portfolio, the psychological hurt is much worse.

Now I’m eager to learn about investing for real, or maybe learn that I shouldn’t do it at all.

Short but happy, despite losses

Like you, my short positions killed me in 2016.

My individual stock picks did well. I never would have predicted the post US election rally. I never had time to cover my put options on Wednesday after election Tuesday.

I am happy though that I can still pay for a nice bottle of wine tonight after a day of skiing at the Montage in Deer Valley. Makes my losses on my 2016 short positions a little less painful….

Listened too much to others

Bought oil at 31 with a horizon of at least a year, but sold after listening to MacroVoices – my worst decision in 2016!

Bought XACT BEAR after reading your blog but eventually sold out at a 15% loss

After that I’ve focused on higher quality, lower risk stocks like Investor and Industrivärden. They are up by 5% since then

Unfortunately I bought Fingerprint the day before the cmd and profit warning. I lost 15% on that trade (which luckily wasn’t that big, but I learned a lesson)

All in all I lost a few per cent in 2016 while everybody else seem to have made 10+%. I only have 35% of my savings invested on the stock market.

Given up on bearish view due to PPT

I lost 10% on XACT BEAR x2 leverage

I thought Brexit would amount to a black swan but I wasn’t aware of the Plunge Protection Team, eller ”Working Group on Financial Markets”. Since 1988 the PPT works to prevent market crashes like the one in 1987.

No matter what happens in terms of terror attacks, elections, macro statistics etc., the PPT makes sure the market rises. Buy the dip is thus likely to prevail in 2017, even if, e.g., Marine Le Pen becomes the President of France

Learned day trading isn’t for him

128 trades, 70% wins.

85% of the 40 loss making transactions were short positions

In 5% of the loss-makers I didn’t stick to my stop loss levels

I’ll stop trading and go back to investing. Trading isn’t for everyone

I’m ashamed, but at least I made one good deal that saved the year; I made over 100% in Bitcoin and got out before the mini crash at the end of the year.

Too ambitious sizing: blew up account

My first year in the casino started great. I managed to time the bottom in silver/gold with mining stocks, almost exclusively thanks to dumb luck (just finished a book on the history of gold), which netted my portfolio a 100% return on paper. Needless to say, I didn’t seize any of the profit – you’ve got to love hubris and inexperience. I just closed the portfolio today with ~40% gain, still not bad (including other small losses on bearish ETF’s like short HY and small gains on some companies)

My real losses came through futures and CFD’s. I made a 100% return in a few days (2-3…..), when I started daytrading the S&P with a bearish bias.

Of course, I got struck by the god complex and upped my already insane position-sizing. Unsurprisingly I managed to blow up the entire account in the course of the next week or two. Way to go.

Lesson learned? Far from it. In order to enter the Danish daytrading course/contest, I opened and credited a new account.

This time around my sizing was more sane and I diversified a bit. I could’ve closed my new short on S&P with a decent profit on several occasions like Brexit, but while I saw doom & gloom, the algos bought the fucking dip and got on with it fairly quickly – so I missed the window(s).

I held on to the trade all the way until the Donald euphoria (I expected a sell-off) shot us to new all-time highs and I got stopped out, yet again. I lost almost 50% of my account’s capital on this previously profitable trade.

I gained a little bit on Tesla, Crude Oil and EUR/GBP shorts, but this was offset by stop-losses on both gold and silver longs, where I once again positioned myself too aggressively, which caused me put the stop-losses too close.

Judging by the repetition of my mistakes I might be clinically insane.

Bought 1 dip too many and gambled the rest in depression

I had 200 ksek in cash and 40 ksek in shares. I bought Africa Oil years ago and just left them there

I bought Saniona, bought more when it fell after breaking off its collaboration with Pfizer as well as wanted to raise more capital. By then I was literally all-in, all my capital in one share.

And then it turned and suddenly I was 45% in the money and sold all. I made a few more profitable trades in Saniona and other companies and suddenly had 380 ksek.

An injury made me depressed and reckless. I bought shares in Xintela, bought more and more as it fell. Lost in other shares as well where I futilely just tried to make my losses from Xintela back – not a good strategy. Tried some daytrading too, with no luck.

What little I had left I lost on sports betting, thinking I might get rich – and if I lost it all I couldn’t feel any worse than I already did.

Mark again

Mark Spitznagel has said this about the key to investment success:

The most valuable things you’ll need to learn to be good at investing are patience, resilience, and self-discipline. You aren’t just going to learn these in school. My best financial advice: practice yoga

The trick (a few of them) is to make small predictable losses, by sizing correctly, using sensible stop-losses (read how Mark was trained to always take one-point losses in the bond pit as a young man), and not getting emotional.


As you were, nothing to see here. Circulate… Make sure you get to stay invested for the long run. The following three rules are a good starting point.

  1. Patience: Wait for good opportunities; as long as it takes to find opportunities as identified by your system
  2. Resilience: have a system that won’t blow you up under any circumstances; whether you use stop-loss rules, anti-leverage rules, diversification rules…
  3. Self-discipline: Follow your rules of patience and resilience. Don’t let your SL-levels glide. Specifically, don’t let others or your emotions interfere with your strategy.

As for the markets of 2016 and 2017 respectively, I’m quite agnostic. And this exercise certainly didn’t add any relevant information regarding the asset markets.

Most of my investments are in private companies anyway. My listed instruments are mostly considered hedges against my other assets which are all long the economy (or gold and housing).

Regarding listed companies, I focus on hated micro caps with little or no revenue or profit, hoping for breakthroughs, takeovers, turnarounds, spin-offs and other exciting stuff.

Investment reading recommendations

For the fundamental value investor: Howard Marks, Seth Klarmann, Tim Richards, Edwin Lefèvre  

For the aspiring VC/angel investor: Peter Thiel CS 183

For the big picture macro guy: Peter Schiff, James Rickards

Other good investment reads: link

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  1. Very good article, inspiring and a reminder of how difficult it is to make money on investments. This will help not beeing to greedy. Also a reminder of importance of diversification. Thanks for a nice blogg and podd.

  2. Those stories were PAINFUL. Everyone should stop right now and read Reminiscences. The lessons are — never look for stock tips and never blow your stops.

    I also read some of the bearish blogs out there as a guilty pleasure. If you read this stuff, you need to ignore all the gloom/doom predictions, and the conspiracies about gov manipulation constantly either saving the day or about to destroy our bank accounts. This kind of victim mentality is very bad for your confidence.

    It is painfully easy to know which side of the market to be on. We just have to accept the tape and stop predicting. Remember the story in Reminiscences about old Mr. Partridge. When everyone is stressing out about their trades, he just says “well, it’s a bull market”. Don’t over think.

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