In the previous issue, we broached on the fact that black swan could be one of the uncertainties happening this year. Coincidentally, a black swan appeared on the first week of 2020. On 3rd January 2020, a US drone strike near the Baghdad International Airport, led to the death of an Iranian major general.
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The incident caused a spike for gold and oil, and had the global stock market immersed in the sentiment of panic and fear. In retaliation, Iran fired multiple missiles to the US air base in Iraq the next day. To make things worse, the media kept mentioning ‘World War 3’ a lot in the news. While many were in alarm that greater strikes would take place subsequently, the US President dramatically says, “Iran appears to be standing down…..a very good thing for the world”, which ended the episode much earlier than we thought. Shortly, the focus shifted to the positive development of the trade deals, which prompted the US indexes to climb even higher. At the time of writing, the Dow Jones Industrial (DJI) Index stood at the historical level of 28939.
So, what are the lessons learned from the short and bitter black swan event? Before we discuss this topic, let us see how our portfolio performed till the 15th January 2020:
The portfolio above shows a gain of 321% since November 2015, a 26% increase compared to a month ago. If you have learned technical analysis, you would notice that all companies above are technically uptrend as on 15th January 2020.
In January, we received one cent dividend from NOTION, which is RM600. Our new cash level is now at RM92,921.
So, here are the eight lessons I have learned from the black swan event:
Many tend to predict the outcome of the black swan event. But guess what? We know too little to predict accurately. The ‘prediction’ was nothing more than our imagination. For instance, some predicted that the Iran incident this time would lead to serious war and eventually the collapse of the stock market. In fact, quite the opposite happened.
Therefore, instead of predicting, observe the chart. If you observe the Dow Jones Industrial (DJI) Index since the incident had occurred, you can see the strong uptrend was unshaken. It means the smart money did not flee the stock market.
Bear in mind, the US stock market is too huge to manipulate.
Don’t predict doesn’t mean not doing any research. In fact, to gain basic understanding on similar events in the past does help one to remain calm. Take this Iran incident as an example. Looking at the history, the impact on stocks from geopolitical events has tended to be short-lived.
According to analysts, the S&P 500 has declined 5% on average in 20 major geopolitical events dating back to 1941. However, it recovered those losses in less than 50 days on average.
It means being a contrarian.
Most people have lost money in the stock market, but in order to be the minority and win consistently, you have to act differently. Nevertheless, you cannot do so just for the sake of acting differently. You need to have a basis. For instance, once you know where the smart money is moving to (from chart), and have learned the event through research, you would have the courage to act very differently from the crowd. That separates you from the ordinary.
As Warren Buffet says, “be greedy when everyone is fearful”’. This contrarian’s thought and behaviour comes with the basis of knowledge and understanding.
Despite acting differently sounds cool, it only applies when you are able to.
If your cost is very close to the share price when volatility happens, it is better to protect your profit, or close the position at little lost. On the other hand, if you were sitting on 10% profit or more, you would be psychologically fit to add more position.
In addition, you need to consider your cash level and risk appetite. Once you have managed your risk properly, the profit will take care of itself.
I believe there will be more black swans coming this year. While we cannot predict them, we can always be prepared for their arrival. Let us continue on the second part in the next issue.
Author: Binyuen is the founder of BY Enrich Resources and the author of ‘Life beyond the Comfort Zone’ and ‘Profit from Share Investment’. His books are available in major bookstores in Malaysia, Singapore or online http://www.teybinyuen.com/profitfromshareinvestment