Learning from long experience

Business Times - 13 Jun 2009

SHOW ME THE MONEY

In the market since 1966, Trader Vic shares his expert views about market moves over the past several decades

By TEH HOOI LING, SENIOR CORRESPONDENT

IN this Internet age, youthful energy is valued much more than experience. But in many fields - and particularly fund management - I think there is no substitute for experience and the opportunity to learn human and market nature over a long period of time. That's the reason I regard most young hotshot fund managers with some scepticism, unless they have shown themselves to be really old souls.

This week I met a trader who has been in the market since 1966. And what he says makes a lot of sense. Victor Sperandeo started working on Wall Street at the tender age of 20. Asked why he chose trading as a career, he said he has always been a numbers man. When he was young he used to play cards with other teenagers in back alleys. 'We played poker once or twice a week, and I made a living - a small one - doing that. I won by studying the odds, they are easy to measure and think about. So I decided to build my career around statistics.'

When he was looking for work in The New York Times Classifieds in 1965, the three highest-paying jobs were physicist, biochemist and a trader. He opted to be a trader. And he's still at it more than 40 years later.

Mr Sperandeo - nicknamed 'Trader Vic' by Barron's in an article in 1987 - was in Singapore this week to launch the Trader Vic Index (TVI) in partnership with the Royal Bank of Scotland. The TVI is a rules-based, long/short index that comprises a diversified basket of 24 futures contracts spread across three asset classes: physical commodities, global currencies and US interest rates.

Market wisdom

Mr Sperandeo thinks there are so many things going on around the world that sound fundamental analysis is out of the question, especially in commodities. 'You can't know everything that's happening,' he says. 'All you can do is follow the trend with some reason. And sell it when it turns.

'It's very difficult to make money if you are a fundamental investor in commodities. You don't go anywhere if you don't trade commodities - they always come down.'

For example, corn was trading at US$0.80 a bushel in January 1930. Now it's at US$4.41. In almost 80 years, its compounded annual return has been only 2.1 per cent.

Here's another reason why fundamental analysis doesn't help predict commodity prices. Say an analyst has studied demand and supply of soya bean for three months and comes to the conclusion that there is going to be oversupply. He shorts soya-bean contracts. But soon after he does this, the tides in some oceans shift. As a result, the supply of, say, anchovies, which are used as feed by farmers in Japan, falls sharply. So the farmers turned to soya bean as alternative feed.

Consequently, demand for soya bean shoots up. 'Nobody knows why the tides shift,' says Mr Sperandeo. 'They just do. So this guy is sitting on his short position, and has no idea why he is losing money despite his three months of research telling him the price of soya bean should come down.'

Moving averages

Different commodities have their own price cycles. So traders who want to identify a trend should look at different moving averages. Too short (a moving average period used), you get whipsawed. Too long, you can't make money, says Trader Vic.

For example, precious metals are very volatile. People trade gold using a lot of leverage. That causes violent price movements in the short term. The moving average one should use for precious metals is 12 months, says Mr Sperandeo.

For crude oil, he uses the six-month moving average. For grain, he looks at the four-month moving average to coincide with planting seasons. And for Treasury notes he uses the 10-month moving average. 'Once the government starts to tighten or loosen the monetary environment, they don't change course so soon,' he says.

Also, different moving averages are used for different currencies. They range from four to 12 months. For stock markets, 200-day moving averages are used. And all moving averages are exponentially weighted, which means more recent data has a bigger influence on the calculated average. A price that rises above an upward sloping moving average line is on an upward trend, and one that falls below is on a down trend.

Trader Vic sees a lot of similarities between the current equity market and that in 1938. Between March 1937 and March 1938, the Dow Jones Industrial Index fell about 50 per cent. The legacy of the Great Depression, war fear and Wall Street scandals contributed to the crash. That period of decline was remarkably similar to the stock-market crash in the fall of 2008, says Trader Vic. Back in the 1930s the market bottomed around April 1938, then staged a 60 per cent rally in about three months. It consolidated for another three months before a spurt towards the end of the year sent the index up a further 15 per cent.

In 1939, there was a correction in January, followed by a rebound. Then in the second half of March, there was a steep descent that took the index down 20 per cent in a month.

Mr Sperandeo thinks the path of stock markets today will resemble that of 1937-1939. 'We are going through a consolidation phase now, and heading towards the good news of GDP not contracting as drastically as the last quarter of 2008, so there's likely to be a rally towards the end of this year,' he says. But by next year, if no new stimulus package is introduced, the rally is unlikely to sustain and stock markets will plunge. Still, prices won't revisit the lows of the previous 18 months.

Although a year-end rally is expected, Trader Vic says he won't buy equities now. 'Rallies are like humans. Only 5 per cent of rallies go up 40 per cent without a correction. Getting into the market now is like buying an 80-year-old man. Yes, he can live to 85. But if you buy a 21-year-old, you have better insurance.' Trader Vic will buy the Hong Kong and Singapore markets if there is a 10 per cent correction.

In the current environment, he reckons gold is the best investment in the next one to three years. 'I don't know any scenario that can make it go down,' he says. 'It's going in one direction that's consistent in the long run.' He is also a big bull on other commodities.

There are known and unknown risks for stocks, he says. For example, Israel may attack Iran at any time. The current Israeli Prime Minister, Benjamin Netanyahu, is very aggressive. 'So what I do is, I long crude oil contracts every Friday and close the trades on Monday. The last time Israel attacked Iran was on a Saturday. If they ever attack, crude oil will double overnight.'

Then there are Pakistan and North Korea. 'Markets don't discount wars. There's no self-interest for fund managers to sell in anticipation of a war,' says Mr Sperandeo. 'If they did, and the war didn't happen, they would underperform their peers. But if they didn't, and the war erupted, everyone's portfolio would be hit. He would be no worse off.'

By following trends, the TVI has chalked up some pretty impressive returns in close to 20 years. Between July 1990 and May 2009, the annualised return was 13 per cent, with a maximum annual decline of 10.6 per cent. This compared with MSCI World equities index's 5.1 per cent annual return and its maximum drawdown of -54 per cent. On a rolling 12-month basis, the TVI made money 98.1 per cent of the time.

The world after the current crisis will be one in which companies make less money and enjoy slower growth because of de-leveraging. In this kind of environment, the smart thing to do is 'not to be an investor but be a trader, as the US will not repeat its stock-market performance of the mid-1990s for some time', says Mr Sperandeo.