Markets are like a see-saw (Predicting bottoms and the Big Bucks method)

Just to start off with a little reflection..

I admit my last market bet went wrong. For the full disastrous speculation you can read it here.  But to surmise, I was overly optimistic thinking that the market will in the short run, shrug off the news about the interest rates hike and run up somemore. I also did not do enough research and was presumptuous about there being no major news being released for the quarter, specifically, i did not foresee Bernake making that horrendous speech.

Anyway, economic results released lately have fallen short of expectation and markets have ironically gone up with expectation that the QE will continue for a longer period. However, i'll wait and see if the recent rise is sustainable. I have my suspicious it won't unless there is a clear move above the strong resistance at 3235.

A few days back i started a conversation with a friend about the market which soon became us discussing what a long time investor is. The conversation quickly revealed that we had a different idea of 'long term', when it came down to:

(1) The investment style - how to exploit the long term

(2) The duration - How long really is long term

My friend basically likes the combination of high dividend, fundamentally sound stocks and averaging down. While i can't disagree that that's a solid plan, this is where our action planned differed.

Friend's long term plan

Believes in buying regularly to smoothen out the market and when it crashes buy slightly more than usual.

My long term plan

Wait for the bottom and buy aggressively with accumulated cash.

My opinion is that while it's true that we can't predict the bottom, we can definitely wait for a period near the bottom.

What then is this bottom? 

The bottom well.. in this context means The bottom. When the corrections are really major. And while you might wonder when this so called 'bottom' might come,  well, you can take a look at this chart i prepared:

7 Major corrections occurred over the last 27 years which translate to an average of 3.85 years. A little long yes, but each upside from the bottom ranges from 30% - 200% +.

Moreover, even if you entered at a false bottom, if you had exercised some wisdom and caution, there's a good chance the false bottom will be below the market average anyway which will deliver you returns greater than the market average. 

Isn't the chart just based on historic figures?

Yes, but you must admit that black swans do happen all the time and will happen in future. No one predicted 911, the extent of the SARS epidemic or the severity of easy credit which led to the housing bubble and subsequently the GFC. It's these black swans that give us the opportunity to make a killing. There are some investors, just a handful, that actually carry it out and make big bucks from opportunities like these.

What is the next black swan that could happen?
Well i don't know. It's precisely why it's a black swan, it could come from anywhere. But in terms of economic play, i guess the main theme right now and for a while more to go would be the playoff between QE and economic growth and perhaps for asian markets, the tightening of the money lending in the chinese economy. You can read more about that here.

If we can't predict the black swan how can we execute a plan?

Well, we can certainly be patient and try to keep a look out for the bottom by staying in tune with the market and at the same time accumulate cash to get ready for it.

If we look at the charts, entering the market at the bottom period, I'd say a month before and after the absolute bottom will put you in a position to reap healthy gains.

Which investment style is actually superior?

Well, it really depends on person to person. While i make smaller bets from time to time my larger investment strategy is tentatively the aforementioned one. (Buying at bottoms). Personally i feel my friend's strategy isn't wrong. His idea of buying now and then to average the lows and the highs will ultimately reap well.. a decent gain. The risk there is that what if for a multitude of reasons he ends up averaging up or averaging at the higher end of the market? This is very possible if you consider that markets can be on a general uptrend of a year what more years. Moreover, the more we 'average', the more we are likely to end up buying and selling which in effect becomes trading.

I also understand that my strategy of making that single huge buy on a 'low' might also go wrong. But understand that from that one big buy we can possibly make bigger bucks than constantly trying to outperform the market (averaging down).

So in the end, decide for yourself if you like to get small returns from small money or big bucks from big money.