Do You Have an Investment Strategy for Uncertain Times Ahead?

Distressed young manager man holds her head with hand. Modern office man at working place, depression and crisis concept

The black swan is a Western Australian icon.

You’ll see it on the state flag and the local coat of arms. Perth’s beautiful Swan River also takes its name from the majestic bird.

The black swan also has a link to the AFL. During the 1920s and 30s, the South Melbourne Football Club was home to many players from WA. This could lead to only one nickname — the Swans.

For centuries, the black swan was thought not to exist. The prevailing old world wisdom was that all swans were white. The term ‘black swan’ was a popular reference to the impossible.

But this all changed in 1697.

You see, Dutch explorer Willem de Vlamingh saw one of WA’s famous birds — he was the first European to do so. From then on, a ‘black swan’ had a new meaning. It was now a term for the unexpected.

The expression ‘black swan’ is still in use today. It was popularised in a 2001 book by former trader Nassim Taleb — Fooled by Randomness.

Taleb describes a black swan event as a big surprise with a major effect. Essentially, just about no one sees it coming. Recent examples include September 11, and the global financial crisis.

So is Brexit a black swan?

Well, it was a surprise — the bookies and pollsters got it wrong. It also had a sizable impact. The British pound fell to a multi-decade low, and world stocks took a hit.

But I wouldn’t call Brexit a black swan. It wasn’t a completely ‘left field’ outcome. Everyone knew an exit vote was possible. Brexit is perhaps more of a grey swan.

I’m not going to say much about Brexit today. There are others who can discuss the complexities better than me. But I will say this: I don’t think Brexit will spark a global meltdown.

Of course, I don’t know this for sure. Brexit could turn into something much bigger. That’s why it’s so important to have a plan. You need to know what to do if it’s ‘business as usual’ — and if it’s not.

My strategy for uncertain times is a trading system. I don’t have to second guess what the market will do next. I just stick with my system and follow the rules.

The future is in the past

Let me describe Quant Trader’s strategy in a couple of lines:

You buy what’s going up, and avoid — or short — what’s going down. You then cut your losses, let profits run, and use a trailing stop.

I use a few extra techniques to improve performance. But that’s essentially how it works.

People often ask my opinion on the markets. They want to talk about the dollar, interest rates, government policy, and events like Brexit.

Sure, I’ll have an opinion. But I tell them it’s more important to follow the market. It doesn’t matter what you or I think; it’s how we react to market movements that counts.

The truth is this: You don’t need to predict the future to make money. Rather, it’s about having a strategy that can shift the odds in your favour, while managing risk.

You would have seen Quant Trader’s back-testing at some point. It stretches back over two decades, to 1993. The system has seen many ‘surprises’ come and go.

But is the past a guide to the future?

There’s one way to find out — let’s see how Quant Trader is performing in real-time.

Have a look at this chart…

Source: BigCharts
[Click to enlarge]

You’re looking at a graph of the All Ordinaries. The start date is 17 November 2014 — the day Quant Trader began live signals. It covers the period up to the Brexit announcement.

These are tough conditions. The market is down close to 4% over the period. It’s also lost nearly 700 points since last year’s high. I’m sure many private and professional traders are struggling.

What’s more, only half the months are positive. This is well below the historical average of around two-thirds. The only decent periods were in early stages of both 2015 and 2016.

It’s fair to say this has been a highly uncertain period.

Now have a look at this chart.

[Click to enlarge]

This is Quant Trader’s hypothetical performance over the same period. It assumes placing $1,000 on every long trade, and there’s no allowance for dividends or costs.

I’m only going to talk about long trades today. Shorts currently have a small positive effect on the portfolio. But I’ll save a discussion on these for another day.

The two charts have little obvious resemblance — the All Ordinaries is trendless, while Quant Trader’s hypothetical profits are generally rising.

But look closely. You’ll notice the charts have something in common — they tend to rise and fall on the same day. The difference is the size of those moves.

You see, Quant Trader often does better when the market rises, and not as bad when it falls. This makes a big difference over the 20-month period.

An edge on uncertainty

So why is Quant Trader outperforming?

Well, it’s simple.

Quant Trader’s portfolio has a strong stock bias. The system buys into strength, and exits stocks that falter. This can give it a big advantage over the index.

Let me show you what I mean.

[Click to enlarge]

This graph says a lot. It matches Quant Trader’s performance (the blue line) against All Ordinaries. The strategy of running profits and cutting losses is doing well — even in uncertain times.

Now let me tell you how I calculate this data. This is a bit technical. But I want you to understand what you’re looking at.

The first step is to calculate the daily return. I do this by subtracting the current day’s total equity from the previous total. I then divide this by the total capital outlay from the previous day.

Step two is to calculate a cumulative return. This is done by multiplying all the daily returns together. The end figure is the total hypothetical return to date.

I do the same for the All Ordinaries. This then allows me to compare the two.

A good strategy can make a big difference. Sure, there’ll be losing months. But look at what can happen when you buy strong stocks and avoid weak ones.

Quant Trader’s live signals are stacking up with the back-testing. This reinforces my view that a strong trading plan is the best defence for uncertain times.

Until next week,

Jason McIntosh,
Editor, Quant Trader

Editor’s note: Quant Trader has identified a number of new trades with big upside potential. There’s a good chance you haven’t heard of many of these stocks. You see, the ASX has over 2,000 listings. That’s more than any human can analyse.

But here’s the thing. Quant Trader doesn’t have limitations like us. Each day the market is open, Quant Trader scans practically every ASX stock for opportunities. And there are a lot of them!

Why not let Quant Trader start working for you? The results could amaze you.

Learn more about a free trial to Quant Trader by clicking here.

PS: Quant Trader sources all graphs and images unless otherwise noted.

Jason McIntosh

Jason McIntosh

Jason is a professional quantitative analyst. Before he graduated in 1991 he joined Bankers Trust — a Wall Street investment bank — to be a trader. After Bankers Trust was taken over in 1999, Jason, already financially independent, co-founded a stock market advisory and funds management business called Fat Prophets. At 37 he sold his part of that business and retired. These days, he’s a private trader and system developer. In 2014 he launched the wildly successful trading service: Quant Trader.

Leave a Reply

Be the First to Comment!

Notify of

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to