Sir Isaac Newton's (1642-1726) formidable contributions to physics (classical mechanics, universal gravitation, optics) and mathematics (infinitesimal calculus) are well known. A little less known is that he was a devout Christian (albeit with some traces of Arianism), a scholar of religion and biblical studies, and at the same time passionate about alchemy and esotericism. It was alchemy, moreover, that familiarized him with the possibility of a force that also acts at a great distance, gravitation. Hence the accusation, to which he was the object, of introducing occult forces into science.
Even less known is that Newton was for thirty years in charge of the English mint, which had great successes in the fight against counterfeiting of coins (a crime then punished by hanging, drowning and quartering) and which made a decisive contribution to the transition from gold-to-gold bimetallism monometallic silver (gold standard).
Little known is also that he had no romantic relationship and never married, that he was born rich, lived wealthy and died poor because in the last years of his life he lost everything on the stock market (more than three million pounds at current value). Newton bought a fair amount of shares in the South Seas Company in January 1720.
The company had been founded nine years earlier on a project by the writer Daniel Defoe, the author of Robinson Crusoe (the eclecticism of the intellectuals of those times was fascinating). In competition with the Bank of England, the Company took over the outstanding public debt in exchange for treasury shares with a 6 per cent dividend, paid indirectly by the Treasury. It was a form of voluntary consolidation of the public debt, greatly increased due to the continuous wars and in fact not repayable in the original manner. As a sweetmeat, the Company was granted a monopoly by the Crown to transport and sell slaves in South America, a business that was politically correct at the time.
The sugar was much appreciated by the market. The stock was also aided by the company's constant buyouts and leveraged buyouts by compliant shareholders. Newton managed to sell the shares for 300 pounds that he had bought a month earlier at 150. A brilliant operation, then, but the satisfaction was short-lived because the shares continued to rise. Newton, surrounded by friends who hadn't sold and who were getting richer and richer, then decided to go back and, this time, in a particularly aggressive way. He therefore repurchased it at 680 pounds in May and initially did not regret it, because the Company continued to rise, reaching 1050 pounds at the beginning of August.
At that point, while news arrived from France of the collapse of the Compagnie du Mississippi set up with a similar scheme by John Law, however, the decline began, at first slow and irregular and then precipitous. Newton began selling in October at £300 but liquidated the bulk of the position in November at £100, thus losing almost everything. I can calculate the movement of the stars, he is said to have said, but not the madness of men.
Those who have made some mess from December to today can therefore console themselves. Even great geniuses like Newton, who was non-affective in his private life, are subject to the basic impulses of greed and fear, they don't study the securities they buy as they should, and they manage stop losses very badly. So let's try to imagine some strategies for those who screwed up and also for those who didn't.
The premise from which we start is that this is the first of a series of volatile years, with fast and conspicuous rotations and with divergent monetary policies, with a moderately restrictive America and an expansive rest of the world. We rule out as unlikely, at least in the short term, recessions and market crashes, but also accelerations in growth and an immediate recovery from the 2009-2014 bull market.
To those who sold on the lows of February 11th, we suggest not to re-enter the market immediately, if not in small quantities, even if between now and March 10th it is not probable that the stock markets will start to fall again. Expectations on Draghi, in fact, although not as high as they were in December, will slow down the initiatives of the shorts. It is above all a psychological suggestion and therefore to be evaluated on a case-by-case basis. The idea is that returning immediately to the market after a misstep with the aim of making up for it at all costs often leads to other mistakes, which could in turn lead to a definitive exit and at the price of further losses.
Better then, in these cases, to stand still for a round (or participate with a few calls) and wait for a new decline to let the emotions cool down and to return to the same levels at which you exited or even lower (if the case will be ) in order to maintain a sense of consistency in what one does. We know that these are considerations that can horrify both efficient market theory enthusiasts and behavioral finance enthusiasts (wanting to buy below the level at which one sold is a form of anchoring to something arbitrary).
However, rationality in human beings must be reconciled with the belly and with the integrity of the ego, otherwise we won't go anywhere. Will there be opportunities to come back on interesting levels? The June 23 referendum in the UK could be an opportunity. Brexit might not be as catastrophic as they say, but it would certainly open a long phase of complicated negotiations and give strength to all European nationalisms. If the polls do not give more than clear indications, the stock exchanges will try to incorporate a risk premium in the weeks leading up to the referendum.
If the Brexit obstacle is then overcome in the best possible way, the Fed will take advantage of it in the following months to raise rates again. If this obstacle is also absorbed, we will have US elections in November that could see candidates that are difficult to measure. Both Sanders and Trump, in any case, would be dealing with a Congress not very different from the current one and would not have carte blanche. Uncertainty, however, would still demand a price from the markets, at least in the first phase. Downturns could finally originate again from oil and China, although their virulence would still be mitigated by the lack of surprise effect.
Anyone who has neither sold nor bought in these two months and has simply held the positions they held is certainly better off today than two weeks ago and is therefore able to make less emotional choices. However, it is probable that he wonders whether it is appropriate to sell something already at these levels to save himself new suffering in the event of new descents. As we said, we think the next two to three weeks could take the market higher. From
that point up it will be good to consider some easing, gradually more aggressive as we approach the levels of the beginning of the year. It is not a question here of overturning an obviously bullish strategy, but of modulating it on the length of the cycle. The more mature a cycle is, the less structurally aggressive one needs to be, even in moments of apparent good health of the economy and profits.
Those who bought on the lows of February can instead consider transforming a part of the position into a call. If then the market, as we think, will go up again, the position can be closed almost entirely and a part of the profits can be invested in puts. Those who bought on the lows were evidently light and it is not a bad thing that they return to it if a selling opportunity presents itself so as to be able to repeat the exploit at the next low.
It is the strategy of some hedge funds which already in 2015 had decided to remain structurally very liquid in order to be able to collect better on a decline. Those who had instead sold in December and did not buy back on the February lows are probably in time to buy some calls. When the markets go down as they have gone down in recent weeks, one always gets the impression, during the downturn, that they will never go back up again. In reality, the bear market we have been in since the spring of 2015 does not have all the virulence that is sometimes attributed to it.
Raw materials themselves, the source of so much suffering in recent months, may not be far from a stabilization phase. The Fed, for its part, may not even be in all the rush to raise rates that it officially manifests. More than a continuous deterioration, we see a limping phase in which not only the decreases, but also the increases will have full right of citizenship.
