Monday, May 22, 2017

The math of crisis investing

I want to find out what is the possible rise in my portfolio after investing during crisis, and in so doing, I can find out the optimum amount of cash to keep. The problem with cash is that while it's very useful during crisis, there's a cost to it. It's the drag on your portfolio return, that is, your cash is rotting in the bank doing nothing. On the other hand, investing throughout the ups and downs will mean that your portfolio volatility will be swinging in extremes too. Not for the faint hearted.

I start off by looking at Straits time index in the past. These are the major crisis that happened and what the STI returns look like after while. The first dates indicated the lowest point in STI while the second date refers to the apex of the bull run that occurs after market recovers. The % refers to the percentage increase i.e. 220% means if you invest 100k, your portfolio will increase by 220k.

1998 Sept to 2000 Jan - 800 to 2580 - 220%
2003 Apr to 2007 July - 1220 to 3900 - 220%
2009 Mar to 2015 Apr - 1450 to 3550 - 145%

The last current bull run might be still 'running'. As you can see, all these are from hindsight. It's not clear until after the fact had happened. Since I can't predict the future, well, the past history is all that I have.

Assuming that we can only capture 70% of the bull run from trough to peak, we are talking about 220% x 70% = 150% gain or a 250% increase in portfolio. Let's use that figure to guesstimate our returns from crisis investing.

If we keep 100% cash and invest during crisis, we can realistically expect to get about 150% increment. That means we're looking at 225% increase in our portfolio. If we keep 80% cash, and invest during crisis, we can realistically expect to get about 200% increase in our portfolio. If we keep 60%, we can expect to get a 175% increase in our portfolio. If we keep 40%, it'll be 150% increase in portfolio.

Here's a few thoughts:

1. If you think the returns are too low, you can leverage. But it comes with its own set of problems.

2. If you're hoping to become a millionaire after the crisis, you have to be realistic. Ask yourself how much you have in your portfolio now and how much cash you are keeping and how long are you waiting for that big crisis to happen. We haven't even talked about whether you have the balls to go in while others are busy rushing to get out.

3. Since STI tracks only blue chips, which are safer, we can technically do a few rounds of the crisis investing. When STI is at the trough, we get into blue chips first. Once the blue chips recovered and STI goes up, people will take notice of the rising market and get in, so we get out of the blue chips and enter the mid/small caps before they do. When the blue chips had finished rising, the next rotation will be the mid/small caps, so technically we 'compound' our cash faster. Instead of going in and out during crisis, we recycle our capital and do it within each cycle itself. Easier said than done, of course, but that's the plan. The execution depends on your skill.

4. For me, I aim to get around 40% to 80% cash during crisis. That should realistically get me a minimum of 150 to 200% increase in my portfolio growth organically. Haven't include recycling of capital or injection of new capital or dividends.

5. We only get 2 rounds of solid crisis and I've wasted one already. I can't waste it anymore. Save hard, work hard on my craft and execute it. I don't want to be caught in a crisis without the cash to utilise, or the psychology to take advantage of it. If executed properly, this can save me a few years of my life.

Updated (22nd May 2017)

Thanks to theintelligentinvestor from Investingnote community from spotting my calculation error in the percentage. At first, I still thought that crisis investing is still alright. Now, with the changes in the error, an organic portfolio growth of 150 to 200% is crazy and I know it's do-able!


yeh said...

So how we know how Low the level can hit while during crisis ?

Anonymous said...

Dunno leh.... If mkt drops -30%, put in 33% of warchest? If drop further to -50% then deploy another 33% warchest. If drop > -70% then use the remaining 33% warchest. Remaining 1% take to temple to pray & go buy beer to drink.

As J.M. Keynes said "Markets can stay irrational longer than you can stay solvent." But he still able to win the equivalent of a few million dollars in today's money through stock trading.

la papillion said...

Hi yeh,

That needs a certain level of technical analysis or FA to guess. Can't tell for sure.

Anonymous said...

5:45am lorr ... you don't know meh??

Singapore Man of Leisure said...


Its very doable.

On paper.

You have left out the psychological part.

The mental strength to squeese the trigger and the psychological dexterity to "let go" and take some profits off the table.

Try doing so when 50% of your students dropped out due to one of their parents being retrenched...

I was lucky during 2009 that the company I worked in and my day job were both doing splendidly well despite the crisis...

If we are mentally and physically stronger than the next hunter, we may profit from his "crisis".

That's cold. I know.

la papillion said...


Left that out because the title is 'Math of crisis investing' HAHA! I think I've mentioned a lot of times about the psychological part of investing during crisis like this post "Wishing for rain to come" (

Actually part of the mental strength comes from doing that what we think we know is actually feasible. At least for me. I need to satisfy both my right and left brains, otherwise no matter how strong mentally, I'll have a nagging feeling that somehow I might be delusional. The math of how it can be done will ground me, and the grounding gives me the mental strength to do it.

Anyway, every year I experience 50% of students dropping out because they graduate. Probably more, maybe 60 to 70%, so every year I'll have to start from scratch again. It's damn good training about letting go man.

Singapore Man of Leisure said...



Ya hor? Eggs on my face :)

Again its a good example of we perceive what we want to perceive. I definitely have a right brain bias ;)

That's a very good training for investing! Losing half your income and have to constantly start from scratch every year.

The problem with a non-sales day time job is the complacency of a constant and regular income with little or no volatility.

People tend extrapolate it with investing and they'll be in for a rude shock!

Investing is not the same as saving.

Those of us living with high income volatility have no problem appreciating that we can drown while crossing a river with average water depth of 1 metre ;)

Spur said...

Many younger people (those younger than 35) only have 2008/2009 as reference point for market crash & recession. The danger is that this particular event was a "fake" recession for Singapore due to the massive QE by Fed, PBOC, BOJ, BOE and ECB. Markets started multi-year uptrend after just 6 months from Sep 2008. And job losses were rather mild. Singapore had it very very good during 2008/2009.

A "normal" recession without artificial pump priming will take 1 year or more for stocks just to stop dropping. The bigger problem will be the much bigger job losses (like what we encountered during AFC and bust).

Your 70% students leaving is not customer loss, but rather business turnover because your product has a relatively fixed short life. :)

Imagine you can only get 1/3 or 1/2 of your usual annual replacement. And it lasts for 2-3 years. Use that as stress-testing for surviving the next big market crash & recession.

With that as starting point, then work out whether & how you can implement crisis investing. E.g. you may find that instead of 100% warchest utilization, you can only afford 50% to maintain safety & sanity for family.

la papillion said...

Hi Spur,

You're right. Makes a lot of sense too. Actually given my temperament, I doubt I'll ever use 100% of my warchest. I just can't do it mentally. And i'll just hve to live with that, I guess. As it is, I'm saving up my mortgage payment, which forms a big part of my monthly expenses, in the form of OA. In case shit happens, at least the payment part can be worked on. I should have enough work for the other variable expenses.

As I've mentioned to other people, there must be stability in at least some areas of your life before one can take risk. Otherwise, most pple will capitulate at the wrong moment.

la papillion said...

Hi temperament,

Wah...if fiat money goes bust, really don't know what to say. The world as we know it will cease to exist.

Spur said...

Hi LP,

Yup, critical to have foundation secured & basic stability first. I had horrendous drawdowns and swings during 2008/2009 but survived & eventually thrived becoz (1) home fully paid-up, (2) no kids, and (3) I can survive on very very low maintenance. :)

Hi Temperament,

So far the main central banks used monetary policies (QE is unconventional monetary policy). The big govts haven't really used big scale fiscal policies yet, becoz (1) many of the big countries already have big debts, (2) govt spending can be very unproductive & self-defeating, and (3) can be very inflationary. The Donald is trying to use this approach...

Actually S'pore is an example of a zero-interest-rate environment for a long time, since 1998 AFC. That's why govt's main tool for stimulating economy is fiscal policy i.e. govt spending. We are very dependent on all sorts or rebates & subsidies --- income tax rebate, corporate tax rebate, PIC, innovation fund, special employment credit, GST rebate, utility rebate, conservancy rebate, CHAS, Pioneer package, Workfare. And the big guns --- infrastructure spending, MRT, highways, tunnels, bridges, govt buildings, university buildings, polytechnic buildings, ports, airports, HDB, govt land sales, etc.