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Making hay while the sun shines

August 20, 2009
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The old saying about ‘making hay while the sun shines’ applies as much to trading and actively investing in the markets as it does to making hay in the spring time for farmers or other life endeavours, hence the saying. Farmers know that each year in the spring time is the ideal time to make hay and stack it away in haysheds for use in the winter time when pasture growth is slow to non-existent and their stock need additional feed. The seasonal cycles of nature are known and understood even though the conditions for each season are not exactly the same each year.

The farmers have ‘rules’, if you like, for this interaction with the dynamics of nature that are passed on from generation to generation. Their ‘set-up’ is the seeding season and their ‘trigger’ to act is the changing of the season. When the time is right they act. They don’t listen to the stories in the news or ask a broker for a hot tip or give over the decision making processes of haymaking to a fund manager. They use the rules and skills they have acquired as professional managers of their farming business and they act on these. Nor do they leave the pasture growing happily in the paddocks in the ‘hope’ that it will still be there in the winter time. They know that it won’t.

So it is with the markets which also have seasons. Markets are seeded, rise, reach maturity and are harvested. However, there is one major difference – the seasons of the market as not as definitive and timely as the seasons of nature. As managers of our own money we need to have a set of rules which allow us to engage the market with confidence and a feeling of certainty when the conditions indicate we must. We need to get synchronised with the seasons of the market and be able to act decisively when a call to action is triggered and not be concerned with the opinions of others.

This is our opportunity to ‘make hay while the sun shines’. Whilst others are dithering around trying to decide what to do, or listening to the gossip of others, or waiting on the sidelines whilst the market marches ahead, those with a plan of action do not hesitate and engage the market with clarity and decisive action based on the rules of their trading plan and trading system.

And, just as importantly, we need to recognise when the trend season ends. Our job then is to manage the trades and have a full set of rules for harvesting the profitable trades and weeding the losing trades. In this way we avoid the ‘hope’ mentality and get to preserve our capital so we can participate in potential money making opportunities when the conditions are once again conducive to our trading style or methodology.

The way to ensure this occurs is to have technical criteria that are unambiguous. This way you will be able to re-engage the market with confidence. Without knowing when to increase your exposure to the rising market you will be limiting your ability to make hay.

The sun has certainly been shining over the last five months. Have you been making hay?

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Comments

  • Keith Andrews says:

    Hi Gary,

    This is a good article today people are not in contact with their own financial desterney.

    With what ever we do with are money we must mananger with respect.

    The baseic teaching of money mangerment shoud start at school and then carry on from their in to the home.

    We then would have a better start in life and understand the mecenisin of making money.

    Sorry that i got of the tract a bit but we must understand first the mangerment of money.

    Your article is a very valid point understand and manger the trades and have a full set of RULES in place.

    Regards

    Keith Andrews
    termitepest@bigpond.com

  • Dave says:

    Ahhh . . . . it’s a wonderful thing – free associating about making hay; “A time to plant, a time to reap”. (With thanks to Pete Seeger).
    http://www.youtube.com/watch?v=MWg3b15ITS8
    Cheers.

  • Gus Mercurio says:

    Looked at CD, read journals and have spoke to Creig Carraway, a client of yours. Total total cost Gary of the program, date feeds,and any and all ‘extra’ bits needed to get going? Gus Mercurio

  • Max says:

    Hi Gary,

    Many thanks for another interesting post.

    I met a farmer at a party one night and we got chatting a little about farmer handouts from the government because of drought conditions on the land.

    I brought up the subject that you mentioned above in relation to a good farmer in a good season will put aside enough crops to carry them through a bad patch so therefore, was it the bad management of farmers that basically made the government have to come to their rescue.

    He agreed that there was some bad management around in farming as any other industry but overall in most cases for the handouts it was the weather conditions such as, drought, heatwaves and in some areas, floods that continually prevailed, that made it impossible for crop growth. And sometimes this carried on for many years.

    He said a good farmer knew what weather conditions would be good for his farm and also what weather conditions was going to destroy it, which brings me to think about our trading conditions and trading systems.

    As we know Gary, the SPA3 and SPA3 hEdge are good systems and your a good trader and as the designer of these systems you would be fully aware of the market conditions (weather) that is needed for sucessful profits.

    With that in mind, I’m also sure you would know of the market conditions (weather) that would have to prevail to destroy a succesful outcome?

    Would it be a 10% decline and then a 10% rise followed by the same again and again for a period of say 2 years, as in a tight channel? If not what would it have to be?

    And I must say that I’m not trying for one minute for you to highlight a weakness in the system but quite the opposite, to highlight the market conditions (weather) that would be needed to destroy us.

    Then in turn we could see the chances of how unlikely these market conditions (weather) prevailing that would have to appear to destroy our bank/farm. Once we see how unlikely this would be, it would certainly give you even more confidence to engage in the market, as you say.

    Many thanks Gary for your updates and emails.

    Kind Regards … Max

  • Gary Stone says:

    Response to Comment by Max:

    “With that in mind, I’m also sure you would know of the market conditions (weather) that would have to prevail to destroy a succesful outcome?”

    Your post and question is a very good one. As investors we need to be very mindful of the possibility of such conditions but not become obsessed with the possibility of the occurrence of such a market that we freeze into inaction and become a permanent spectator. Risk is required to get reward.

    Before potentially identifying such a period I should state that if SPA3 rules are followed wrt reducing exposure and hedging during SPA3 High Risk markets then the probability of being ‘destroyed‘ by a black swan event or period is extremely low (I don’t believe in probabilities of 1 or 0). More risk averse investors can decide to use Risk Profile 1 where their portfolio is reduced to 0% invested (i.e. 100% cash) during High Risk markets.

    I have spent many man months looking for and researching such conditions that could possibly see a medium term strategy slowly get destroyed. Whilst I haven’t yet identified such a period that could destroy an unleveraged SPA3 portfolio, I have found a period that could potentially do more damage than would otherwise be expected from previous research to date if a SPA3 RISK Profile 2 – 5 is used.

    No it’s not 1987 or 1929 – 1932. The SPA3 High Risk market signals were excellent during these periods and SPA3 hEdge performed brilliantly. The period is Feb 1973 to July 1974 in the USA. Even though the S&P500 only fell 30% during this period it is the type of price action that has caught my eye as both long stock trades and index hedge trades were whipsawed. This was not unique to SPA3. Medium term swing traders would also have been affected in the same way.

    What concerns me is similar price action occurring over a similar period with a 50% – 70% fall in the index. I am busy sourcing stock data from that period to construct SPA3 portfolios to determine how they would have behaved and, if worse than the index, what could be done about it without letting a sample of one wag the tail of the entire edge.

    Of course Risk Profile 1 would not have been affected any differently as it would have had the portfolio 100% in cash for all bar 9 weeks of this period.

    We will continue the research journey.
    Gary

  • Max says:

    Hi Gary,

    I totally agree with you, if we want rewards greater than bank interest per year we must put our toes into the water and invest. Yes, that does at the same time expose us to risk, but as you say “Risk is required to get reward”. So on we go!

    Moving through your post I now understand that there is different risk profiles within your system to pick from to suit the different risk personalities of each trader. Before moving on and forgetting to ask, I’ll do it now.

    What risk profile levels is used to give the outcome of +18%(SPA3) and +20% (SPA3 hEdge) returns compounded over the last 8 to 9 years that you advertise?

    And, how would you describe a breakdown of a risk profile 1 trader?

    Ok, back to the market conditions from Feb 73 to July 74 that you have identified as not being favourable to your system and also to the medium term swing traders at the same time.

    I have had a look at this time period that you speak of and I drew a 100-point wide downward channel, capturing most of the price action, which is roughly a 10% channel, give or take a little. There was a small period of time that it broke out above and below the channel in the middle of that timeframe.

    I follow your thoughts about the type of price action within this period, it did not trend in a direction long enough for your buy and hold, for roughly 8 weeks, system to gather a decent amount of profits except for one decent 8 week run in the middle. A lot of the profits from that run were most likely taken back with the big pullback that followed straight after. Most of the moves up only lasted days or at most 2 weeks, probably triggering buys but then stop-losses being triggered with the pullbacks, eating away at our bank. Also with the channel slowly moving downward as you say, activating the hedging then seeing it return back to the top of the channel more than likely cancelling the hedging at a loss every time.

    I had a hunch it would be something like a 10% channel but gave no thought to the slightly downward channel triggering the hedge in and out to compound things. How long could this last for without going broke? Would we have survived this period of time with these market conditions (weather)?

    You say you have concerns if similar market conditions occur with a 50% – 70% fall over much the same time period. If this did happen over the same time frame and double the % fall as in 1973 –1974, which was 30%, wouldn’t that, make the channel twice as wide. Wouldn’t it be wide enough to be able to pocket some winnings? I understand we would be still in a downward channel triggering the in and out of the hedging strategy but would it be as bad as a tighter channel? Ahhh hang on, you probably mean still a 10% channel but a steeper downward channel. Oh I glad your onto this. J

    I suppose with a medium term system there must be a time period come up sometime to whipsaw us into and out of trades, so what can we do about this? I see your researching more; it will be interesting to see if you can find an answer or a way around this issue.

    Thanks Gary for chasing this up and also your very open and frank reply, I tell you, it is refreshing in today’s world. I have seen and heard that all is out in the open with you and your system and I’d have to say this post does go a long way to prove it.

    And like I said in my earlier post we can now see how unlikely these market conditions do occur and prevail to destroy our bank/farm. But we are aware they can happen and your onto it and also at the same time it’s up to the trader to identify his risk profile correctly and trade accordingly.

    Will check back here for your further thoughts and findings.

    Kind Regards … Max

  • Gary Stone says:

    Response to 2nd Comment by Max:

    “What risk profile levels is used to give the outcome of +18%(SPA3) and +20% (SPA3 hEdge) returns compounded over the last 8 to 9 years that you advertise?”

    The Public Portfolios that have achieved these returns use Risk Profile 2 which is always in the market. During High Risk markets Risk Profile 2 will be a maximum of 50% invested but can get down to as low as 15% invested (the rest is in cash) or even lower for larger portfolios. Risk Profile 2 is the one that we recommend. Risk Profiles 3 – 5 take more risk.

    “And, how would you describe a breakdown of a risk profile 1 trader?”

    Risk Profile 1 users would usually be one of two types of investor:
    1. more conservative with larger portfolios (> $1.0M) that wish to be active in medium-term rising markets and on the sidelines during falling markets to eliminate the possibility of a 50% fall. Their aim is to avoid the large market falls but understand that they may miss out on some opportunity during rising markets that only have shallow, short-term retracements. They would be comfortable with missing out because percentages of larger numbers are far bigger absolute numbers when the market is rising.
    2. investors with smaller portfolios (say, $40K – $80K) that would be affected by brokerage through the frequency of trading. Their aim would be eliminate the possibility of excessive churning during down markets through the minimum brokerage levels increasing drawdown against far smaller position sizes.

    “Ahhh hang on, you probably mean still a 10% channel but a steeper downward channel.”

    Correct. Or even lasting a longer period to achieve the bigger fall. It’s the type of price action that concerns me.

    We won’t have an immiment solution but am working on it.

    Regards
    Gary

  • Max says:

    Hi Gary,

    “The period is Feb 1973 to July 1974 in the USA. Even though the S&P500 only fell 30% during this period it is the type of price action that has caught my eye as both long stock trades and index hedge trades were whipsawed.”

    During this period did the SPA3 still outperform the S&P500 or was it a rare period where it underperform the Index? If worse, how much difference?

    Kind Regards … Max

  • Dianne Price says:

    I was overseas for 9 weeks April to June, but your appearances on TV have spurted me on. 3 weeks ago I commenced a Spa portfolio (doing nicely) and have started an IntellEdgence folio TODAY, so I’ve started to make the hay and hope I have enought for the winter months! Thanks for your encouragement Gary and Karl.

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