3. When is the right time to start my investment following the model? Case study

People keep wondering WHEN is the best time to start applying the Hari Seldon Trader’s model (HST). Now, in 2019, we have lived through one of the longest and more profitable bull markets of market history, started about ten years ago.

Many traders are fearing a coming recession, and recessions usually bring massive bear markets, with indexes losing 40% of their value or more. So, this might be the wrong time to enter the markets ,if you apply a “Buy&Hold” model (B&H from now).

Let us see a real example:

In January 2007 the stock markets (Nasdaq represented here) were at all time highs, having recovered all the losses of 2001-2002 crash. From October 2002 to January 2007 the index went from 1114 points to 2434 (+117%).

During this period, the HST model performed a wonderful + 215%

Was this a good time to enter, after a so long run? Or was a bear market approaching (now we know it was not so far) and that was a good time to leave the markets and go to cash? Nobody knew for sure.

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A year later, in January 2008, Nasdaq was at 2652, another 9% up.

Going cash out in Jan-2007 was a mistake, and a missed gain; one year later that investor should have regret this choise. Investors following The HST model on the other hand, now reached +260% since the lows of October 2002.
Maybe the investor who went to cash in Jan-2007 is now tempted go back in. But you see the white stripes on the right part: the HST model is not bullish anymore..

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Another year later, in Jan 2009, the Nasdaq was down to 1577.

A huge drop, but after all, Nasdaq was still +42% since 2002, but -41% compared to Jan 2008.
The HST model performed much better: it was + 206% since 2002, and near the same level as it was in January 2007 (-14%)

Conclusions:

During the late period of that long bull market started in October 2002, everybody was wondering if/when it was going to end.

During all those years 2004, 2005, 2006, 2007, 2008, you could read tons of predictors prophesying that the bull market was done, and a bear market was approaching. Eventually, somebody was right, but how many times so many people were totally wrong? Is there anybody who can predict the exact top of bull markets with no luck involved? Can you trust them for the future? Then do it.

Our position is to stick to our HST model, anytime.

It was not predicting every exact top of the market, but it gave during year 2008 an acceptable drawdown of -14.2%, pushing investors to cash for most of the time (see the white parts), and saving from massive losses.

Moral of the story:

Question 1: when is the right time to start my investment following the model?

Answer: Anytime:

If you are lucky, the bull market will last for more months or years, and your account will be greener and greener than having been cash.
If you have entered at the very top, be prepared to suffer some drawdowns, but eventually the model should work and push you to cash, preparing for the next opportunities.

Question 2: what is the magnitude of the drawdowns I might experience applying the model?

Answer: The HST model can be applied in several variants, with bigger/smaller yields and bigger/smaller possible drawdowns. We shall present them in next weeks.