With Global X FTSE Greece 20 ETF $GREK down nearly 16% at the time of writing, two thoughts pop into my mind.
First, an old quote from Baron Rothschild: “The time to buy is when there’s blood in the streets.”
Then, I remember that time I bought Washington Mutual.
Just a quick reminder of what happened to Washington Mutual:
Back in 2007 I had built a stock picking model based on fundamental factors that I had found to be statistically significant identifiers of forward performance. The problem is that the model was based on the concept of “how much are you paying for the fundamentals today” versus “what were investors willing to pay historically for these fundamentals?” As WaMu’s stock crashed, it looked like a screaming buy.
The problem was, the story had changed. The fundamentals of 3 months ago were no longer the fundamentals of today. And so without any sort of revision or forward estimate, my value measures were badly, badly wrong.
Lesson learned: buying the dip works until it really, really doesn’t and you end up catching a falling knife.
This WaMu lesson was one of the things that got me interested in trend-following (particularly at the sector level) as a risk mitigating technique.
Which is a little more legible when log-scaled…
…and tells us that despite a significant sell-off – and potentially even a capitulation – the market is still negatively trending. That isn’t to say that this isn’t a significant buying opportunity, but there may be more downside to come. And even if there isn’t, this chart highlights that while a trend following technique may lag at exact bottoms, it can help us avoid significant risk environments and still capture the majority of market growth.