Before I get onto Robert Greene and The Laws of Human Nature, which I wish I had come across years ago, I want to talk about the chart above. The question I ask myself is why would anyone buy ether with a chart that looks the way it does now. It’s like jumping off a cliff. Any indicator you can think of is pointing down, there is no support above much lower levels and the price has clearly broken down from a substantial head and shoulders top. Just to complete the doom and gloom package ether doesn’t have any real fundamentals which is why the price was able to rise so much in the first place. There are no reference points to determine the right price for ether. It is pure supply and demand which is fun in a bull market but terrifying in a bear market.
So why are people buying because somebody is or the price would already be below $500. One reason is because they are not looking at this chart. They are probably thinking something on the lines of – seven months ago ether was $4,864, now it is around $1,000, it must be cheap. This is what I mean by seat of the pants investing. Your decisions are being driven by your emotions not by logic, not you, of course, but whoever is doing this.
All we have to do is substitute what I call a scientific approach based on logic for a seat of the pants approach based on emotion and we are miles ahead of the game versus most investors. In this logical scenario we sold back in January 2022 when all my indicators turned down and equally important, based on my indicators, we stayed out and we are still out; that is what a scientific, logic-based approach means and if you can do it, it is a game changer. For me too because I have taken loads of emotional investing decisions and many of them have cost me dear. I am going to try very hard not to do that any more.
Which brings me to this sensational Google Talk I watched given by Robert Greene, who is a total genius. I am going to oversimplify dramatically but he makes three points that are very relevant to investors.
One, 95pc of our decisions are taken unconsciously. Two, the rational part of our brain was the last bit to develop, underneath it is the emotional bit, which I think he also refers to as the dark side as in hidden, not necessarily evil, and this emotional side is very powerful. So many times when we think we are taking rational decisions they are actually based on emotions. Lastly he notes that humans have very expressive faces and even bodies which enables them to empathise with each other. This was especially important before speech became widespread and meant that individuals could signal to the group for example that a dangerous predator, like a bear, was prowling around and they needed to flee, hide whatever. If you are part of a group emotions can take over and everybody behaves irrationally (unless you really are running from a bear) which is what can create investing bubbles and can also lead to very low prices at the extremes of bear markets.
Put all this together and you start to see why we as investors take so many bad decisions. He even gave the example of Isaac Newton who invested his savings in the South Sea Bubble before it became a bubble and made a fortune. He was a great scientist and a rational man, or so he must have believed, so he cashed in when he had a big profit. But he sold too early and the bubble kept inflating. He began to suffer from what my children call FOMO, Fear of Missing Out. He took the whole £20,000 he had made, a huge sum back in 1720, piled back in and lost the lot. The greatest scientist of the age was reduced to penury.
Greene says that what happened to Newton was that his rational mind was overwhelmed by a primitive emotion and that emotion was greed. Inside Newton lurked a greedy little man whose behaviour he did not understand and who made him take the disastrous decision to re-invest in a market spiralling out of control.
How many times have I done what Newton did? What dreadful greedy little man lurks inside me. Well, now I know he is there and I am going to try very hard not to listen to his wicked promptings. I am going to be a scientific investor and not rely on the seat of my pants. I feel this particularly because the whole Isaac Newton thing has just happened to me. In November 2021 I was doing ridiculously well. I was up 10-fold on my starting stake. On 6 December 2021 when I noticed a dramatic deterioration in the charts I follow I sent out an alert ‘Time to Circle the Wagons’ warning subscribers of what was happening and even suggested that they go entirely liquid to live to fight another day.
I took my own advice and because I was investing through a spread betting account I had a massive profit, not absolutely at the top but seriously wow and totally tax free. And then I started reinvesting like the greedy little b****r that I am. I still ended up with a big profit when the penny finally fully dropped that the bull market was dead but nothing like the profit I had when I first went liquid. It is really hard to deal with emotions like greed, fear, buyer’s remorse, seller’s remorse and many others but if we can learn the potential rewards could be huge.
Just look at that ether chart. Even if there is considerable slippage in our decision making as we wait to make sure that a signal really has been given the resultant decisions would be based on logic and vastly superior to what happens when we let the dark side (our emotions) take over.
It is important that we really understand ourselves and make this transformation from a seat of the pants investor to a scientific investor because we need to prepare. This bear market will end eventually (my provisional date is February 2023) and then there are going to be some huge opportunities. I want all of you and me to be ready to profit to the max from those opportunities.
Effectively what this means is that our decisions are going to be based on my chart signals, not on our emotions. In a way it is very simple which is what investing should be.
Just to recap I have a number of investment strategies.
One is buy and hold. You buy based on 3G share selections, never sell and add more on new buy signals. This is a win in the end strategy. It is totally unsuitable for leveraged investing and is tough to adhere to in a severe bear phase like now but should work if you really stick to it. Ideally you will have spare resources to invest when we start to see 3B buy signals as the next bull market gets under way.
Another is my spread betting, signals based, five-times-leveraged trading strategy. This is what I do which is why I make so much money in rising markets but I realise that it is still too emotion based and my aim is to be totally logical in future and watch out for that greedy little man lurking inside me. I will have more to say about this strategy in future issues because I know it is a good one and I want all my subscribers to do it with some money. No need to bet the ranch. The great thing is that it works even if you only commit a small initial sum of money, which makes it like a game where your job is to make all the right moves like playing a game of chess.
A variant on this is my buy the blue, sell the red strategy. In this strategy we don’t try to maximise our gains from each share but aim to profit from the periods when the shares are rising strongly with support from a rising Coppock indicator. A key attraction of this strategy is that I have yet to find a single example of a rising Coppock indicator and a falling share price. I am wondering whether this may not be the best strategy for a leveraged investor.
A fourth strategy is a refinement of buy and hold. We buy with the intention of holding but if all my indicators turn down for the relevant index, in the case of Quentinvest this is the Nasdaq 100, we are then on red alert. We either immediately sell everything or sell any share which gives a 3S (Coppock, moving averages, trend line break) sell signal.
A variant on this strategy would be that if the Coppock indicator for the Nasdaq 100 was falling we would be on red alert to act on two out of three sell signals for individual shares.
My final strategy is the simplest of all. We base all our dealings on QQQ3 which may be the greatest share of all time because of the way that it amplifies the performance of the Nasdaq 100. Here we can buy and sell on trading signals; we can £-cost average, investing an equal sum each month; we can buy on buy signals; we can buy on days or weeks when the stock market plummets. My theory is that whatever we do with QQQ3 we will win big in the end, which is why I have been buying this ETF since they were over $220 and am currently showing a large percentage loss. I am convinced I am going to win in the end and will buy some more if the price drops below $50 to keep my average price tracking the latest price.
The attraction of QQQ3 is that it is a stunning performer, its performance is based on the Nasdaq 100 so it captures the strength of the US economy and although theoretically it can go to zero (I don’t fully understand the maths of that but apparently it could happen if Wall Street dropped by a third or more in a single day) this in incredibly unlikely, especially given the circuit breakers that have operated on Wall Street since 1987. So a policy of accumulating a holding into buy signals and/ or falling prices should not only win in the end but win big.
My new heroes are Robert Greene for the Laws of Human Nature, Mr Spock for his belief in logic and the King of Siam, as portrayed by Yul Brynner in The King and I, for his belief in the power of science. I am going to be a scientific investor and every time my greedy inner demon prompts me to take some emotional decision I am going to ask myself what these gurus would have done; that’s the plan anyhow.