Too Early to Sell, Too Late to Buy: The Fly Strategy II

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Already an increase of almost 8% for the equity markets in one month. The opportunity for investors to take their profits? Not necessarily. The opportunity for latecomers to buy? Not necessarily either.  

Isn't that a bit excessive? A simple announcement, evoking a probable signing on an unknown date of a pre - deal (between the United States and China) with still uncertain outlines , and already nearly 8% increase in the equity markets.

Yet just a month ago, the Earth shook again: the world's most closely watched confidence indicators had crossed a new critical milestone, anticipating a significant slowdown in economic growth.


Now, investors have two possible options:

  • for those who did not believe in bad omens, is this an opportunity to take their profits? Not necessarily.
    Indeed, if they were able to believe in Santa Claus despite appearances (declining indicators), the new elements (announcement of a deal ) further strengthen their belief. More seriously, if the deal takes shape, then the potential for appreciation in the equity markets is higher.

  • for those who had bet on the end of the world, is there still time to limit the damage and buy back the market? Not necessarily either.
    Indeed, the wasted spending fallacy teaches us that it is too late to change your mind. More seriously, it is not a simple announcement of a possible deal that could provide companies with lasting reassurance. They will need much more to take the risk of initiating significant investments.

In fact no, there is a third type of investor: one who was not in the market, who therefore did not record losses, but suffered a loss of profit.

Should he change his strategy? The fly's strategy teaches us that it may not have anything better to do than to do nothing ...


They have never been impressed by the fall in industrial confidence indicators, by the inversion of interest rate curves, by the debt levels of our States or of consumers, by the deterioration of profit prospects. companies, through communications from the IMF, the OECD, the World Bank, the Fed, the ECB, and above all through Trump's tweets.

For them, the end of the world was not an option, there was only one possible way out of the tensions at the start of the year: the announcement of an upcoming deal between the United States and China, able on its own to sweep away everything else, like those games where bad moves are linked to one that wipes out all the losses and allows you to win everything.

Even so, despite a certain tendency to see life in pink, perhaps they could say to themselves: “  well, I must admit that it was all the same double or even, and that this 8% increase is perhaps a good opportunity to take my profits  ”. Indeed, after all who can really claim that Donald Trump won't twitter a few more aggressive words in a few days?

In fact, it looks like these investors will continue to stay invested for two major reasons:

  • first, the upside potential of the equity markets remains significant from a valuation perspective . This may seem surprising in view of the rise in equities recorded and the rise in interest rates that accompanied it: indeed, these two elements mechanically undermine the appreciation potential of the equity markets; buying a stock at a high price while financing itself at a high rate decreases the hope of registering a capital gain.
    And yet, this potential has been little eroded compared to what it had been able to earn since the start of the year, mainly thanks to the drop in rates. Admittedly, the stock market had nevertheless risen by nearly 20%, but it should in fact have risen much more if a rise in the risk premium required by the investor had not held it back.
    Today, this premium remains at high levels, which leaves it with significant reduction potential, all the more important if a deal is actually signed and results in a rebound in industrial confidence.

  • on the other hand, the behavior of these investors does not seem to obey the canons of rationality. In other words, these investors would have shown certain predispositions to believe in certain myths, that of Santa Claus taking on its full meaning as the end of the year holidays approach.
    Everything has already been said about the reasons for adhering to the belief in Santa Claus :

The authority effect (the word of parents, Donald in our case ) and the cognitive monopoly that results from it, the confirmation bias through the evidence of the existence of Santa Claus, the interest in believing and the temporary forgery of the existence of Santa Claus .

We must then wonder about the reasons that one day lead us to no longer believe in it: the discovery of an external element causing a form of dissonance (no deal ), the multiplication of Santa Claus (of deal announcements ) , or the discovery of the gifts in the closet before Christmas (the deal has already been signed for a long time).


They do not remain indifferent to the sight of a black cat passing under a ladder on a Friday the 13th.

But they still need a lot more to anticipate bad news to come: tangible facts that form a coherent scenario .

In general, their reasoning is based on two types of arguments:

  • the past anticipates the future: if in the past the fall in confidence indicators and the reversals of the yield curve have always been followed by a strong economic slowdown, then the same causes will produce the same effects in the future.

  • the past devours the future: for example, a debt that is too high, an economic cycle that is too mature, investments that are too low, erode the potential for market appreciation for the future.

Even so, despite a certain tendency to see the glass half empty, perhaps they could say to themselves: "  well, I have to admit that I was wrong, and that this 8% increase is perhaps a sign that the deal between the United States and China will be made, and that he anticipates a much higher increase  ”.

Indeed, if the deal is actually signed, why not imagine that it initiates a rebound in industrial confidence indicators to higher levels?

In fact, it seems that these investors will continue to remain sellers for two main reasons:

  • on the one hand, despite the rebound already recorded of nearly 8%, we saw in the first part that the upside potential of the equity markets remains very high. In other words, investors are still showing a certain restraint before rallying the market at its fair price .
    If they don't really believe it, maybe it's because there isn't enough reason to believe it yet? Moreover, it should be remembered that we are talking about a deal that has still not been signed , and which would only be a first step towards other such uncertain deals .
    Finally, even if a dealwas signed, will that be enough to convince companies over the long term that everything will work out? That globalization is not quite buried, and the era of regionalism not quite validated?

  • on the other hand, these investors could be victims of what is called the fallacy of wasted spending  : when the error, the loss, is so great that we refuse to admit it, that we seek to convince oneself that one is right despite the evidence.
    There are different illustrations of this type of situation: the bus which does not arrive but which is expected because it is bound to arrive; the poker player who loses his shirt but who thinks that luck will inevitably change.
    This type of cognitive bias could even be explained by natural selection:

If you embark on a path, you will be expending energy, which will be more than offset by the food that awaits you. But what if there is nothing? The person could retrace his steps and look elsewhere. But then you will have spent a lot on NOTHING. And that is not acceptable in our brain programming.


Finally, there is the one who chose to stay on the sidelines, watching those who decided to believe in Santa Claus profit from the rise in the equity markets, and watch those who decided to believe in bad omens suffer losses. important.

What should they decide to do now?

Maybe they shouldn't change anything at all, in other words maybe they should keep watching the train go by, one way or the other.

This type of strategy is not devoid of meaning: it would be the one the fly uses when it is motionless and a danger threatens… it would then choose to remain motionless, imagining that we do not notice it?

Two remarks: our fly strategy does not work if the fly is moving, which in our case would correspond to the case of the investor who believes in Santa Claus or the investor who refuses the wasted expense.

Finally, we are talking here about the fly strategy II, since a first fly strategy already exists, that described by the futurist historian Yuval Noah Harari:

Small, weak, the fly is incapable of moving even a cup. So, she finds an elephant, enters its ear, and buzzes until enraged, mad with fear and anger, it trashes the shop.

Finally, our three types of investors come to the conclusion that they should not change their behavior, despite the 8% rebound already recorded.

Obviously, only one will be right.

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