The Average Investor's Blog

A software developer view on the markets

The Weekly Update

Posted by The Average Investor on May 14, 2011

Another red week across the board and after being battered badly for about three weeks now, the Emerging Markets index gave a sell signal at the close on Friday. This trade should have been opened on March 3, 2011 and would have resulted in a 0.89% loss, a loss as the previous two trades in this ETF.

Asset Symbol Position Date In Gain
US REIT VNQ Long 2010-07-23 21.21%
S&P 500 ^GSPC Long 2010-09-30 17.22%
Nasdaq 100 ^NDX Long 2011-03-25 2.71%

To me looking at past performance is an invaluable exercise helping you prepare psychological for the real thing. For instance, if you have started trading EEM using 20 week MA in March 2010 (the first buy signal for the year), currently you would be sitting at about 3.15% losses, which doesn’t seem much, but how easy is to swallow and be persistent after sitting on a loss for more than a year? What if the loss was 20%? 40%? Definitely a reality check.

The markets can teach one a lot. I am not alone in this opinion – Nassim Taleb shares similar thoughts in his exceptional book The Black Swan.

The most important lesson that I have learned from studying the markets is that it is very hard, if not impossible, to beat just inflation, forget about excessive returns. Here I am discussing pure trading gains, excluding fees charged (by a well-known money manager for instance) and taxes. Take a look at the inflation adjusted returns of the S&P 500 since 2000. Amazing isn’t it – 30% off the peak in 2000 (30% on the way down is equivalent to about 42% on the way up) and that’s after the central banks and politicians were congratulating themselves twice for saving the world, first after 2002 and recently for the second time!

Looking at this charts another sinister thought creeps up in my mind – probably this is the explanation why republicans (or conservatives in general) have been adamant against raising taxes – people who have money (not debt) have been taxed at an exceptional rate already since 2000 simply by the operational logistics of central banks! They might be right (until now I have been seriously disgruntled by their reluctance to raise taxes), certainly some food for thought here …

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