Friday, December 6, 2013


So I've been thinking. I've been thinking a lot.

On my gambling CFD front, I'm horrible. I just make too many mistakes. Sure, it's fun and all, but when I think that I've actually just lost a ton of real money, kinds of kicks me in the balls.

Because of all these tuition fees that I'm coughing up into the system, I think I can safely say that I have been learning a lot though. I just haven't been practicing it, which I should.

I trade too much, trade unfamiliar pairs, listen to questionable advice, rarely ever book profits and I always try to go against the flow.

Personally, I think that deep down I'm a contrarian guy, rather than a momentum guy. So, I've been thinking how I can use this trait to help me with my long term investing.

Using the moving averages signals, if the signals are already showing buy, do I put more into the position? If the signals are saying cash, do I remove everything from those positions?

Well, I was thinking about, and I don't feel comfortable adding lots of extra capital into already overdue buy signals. If the buy signals were generated a while ago, that means I'm a while faster to taking the bets off the table.

So, I've decided to do something a lot more contrarian, which is to invest using drawdowns.

Historically, if drawdowns are 40%, if my fund drops more than 40%, I'll be looking at any moment to hop on and pile in the money there. Basically, asset classes have difference performances and volatility and a lot of other things. There are different. However, they each have a unique characteristic, which is how much are their drawdowns.

I have written about drawdown investing before, a few months ago, and I did show some charts for some asset classes. I think it was in my investment building write-up. Anyway, how does drawdowns help you invest?

Well, take for example, the US Aggregate bonds. It's a standard bond index used by US investors, and based on historical drawdowns, it has never been drawndown more than 3.8%, until this year. This year's drawdown pushed it to the limits and almost doubled that drawdown percent to 6.8%. Currently, the index is still 5.8% down. What are the odds that over the next 15 years the drawdown in this bond index will exceed 6.8% again? Personally, I think never.

How about gold miners? Their last mega drawdown like this lasted for over 2 years from 1996 to 1998, and the drawdown was 72.58%. The current drawdown starts from 2011 and it's 64.94% now. Can it go down lower? Yes, I think so, but not appreciably much lower.

So, here's the table where I got my information from. It took me quite a while to run around and collect the information.

Along with the weekly updates of moving averages, I think I will I will also be including this drawdown comparison table.

The reason why I find this compelling is that I can start on a long position and accumulate it with the safety in mind that there is a cap to the amount of drawdown that I can possible have now.

Look at UOB Gold & Gen. It's current drawdown is 89% of it's biggest historical drawdown. If I decide to invest into the fund now, I have quite a high margin of safety knowing that beyond a drawdown of 11%, this fund has never ever loss that much before. Who's to say that the biggest drawdown is the cap to how low a fund can go? However, knowing that the fund, if it follows history, will not really plunge more than that.

Given this information, I feel a lot more convinced not to add into positions that have buy signals, unless they were fairly recent. I also will have more conviction to not be itchy and add to those momentum asset classes, and instead be closely monitoring the unloved asset classes, waiting for a nice price level to enter which really minimizes downside risks.

That being said, I've my eyes particularly keen on gold miners. I'm hoping to hear more news about taper talk and what not, and then EM and US bonds will start looking like a fantastic place to add in additional capital.

Argh, with all these ideas floating around, I do think that they can add alpha instead of just having a buy-and-hold strategy. Now what I have to do is to stop thinking so much about other strategies, and instead figure out how my asset allocation is going to work!

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