I’m sure you noticed that last week saw a sudden return to volatility in markets. As discussed in our 2018 Investment Outlook, this kind of correction was long overdue. The one thing we didn’t know for sure was when it would happen.
Which leads us to a major lesson in investing, taught this week by 50 Cent. (well not that 50 Cent…)
Nomura apologizes to investors burned in bet against “fear index”
The mysterious trader nicknamed ’50 Cent’ made $200 million last week as the market blew up
The articles above show two sides to the same trade. After a long period of almost no volatility in the stock market, Nomura managed to convince investors that the status-quo would continue. The chart above, plotting the inverse of the VIX volatility index, essentially shows what happened to those investors last week.
Meanwhile, the trader nicknamed “50 Cent” spent the last 12 months being expensively wrong on his bet on a (let’s face it, inevitable) return to volatility. Wrong that is, until he was right and made a profit of some $200 million.
The lesson here, of course, is that when things are good (stocks hitting all-time highs and volatility low), it’s easy to get caught up in the fervor and keep buying. It’s much harder to realise that things can’t go on this way forever, but not know exactly when they will come to an end. You will note that “50 Cent” did not make this bet a month ago. He started acquiring large amounts of call options over a year ago. He didn’t know when he would be right, he just knew he would be.
Now this is a financial planning blog not a trading blog, but the lesson is still valuable. Those Nomura clients aren’t professional traders, they are regular people. It’s likely that many of them did not realise how much risk they were taking. However, if stocks are at all time highs, you probably shouldn’t be betting the farm that they will keep going higher. If another asset class has underperformed for the last few years, that doesn’t mean you should write it off forever.
It takes a mixture of common sense and courage to go against the crowd, especially if it means you might be wrong for a while.
Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.