Stock market is not the Economy : Unemployment numbers

Few things to note from the table

• During the 2008 financial crisis, unemployment rate went from 4.9% to 5.6% during Jan-June, 2008. S&P500 was at 1278 on June 27, 2009, down 14% from ~1500 peak
• Unemployment rate increased more rapidly during the later half of 2008 to end at 7.2% in December. H2, 2008 saw the fall of Lehman. S&P500 was at 887 on Dec 19, 2008 down 30% from June, 2008 and down 40% from ~1500 peak.
• Unemployment bottomed at 10% in October 2009
• Stock market bottomed at 683 in March, 2009 when the unemployment was at 8.7%

Stock market reflects the rate of change of bad news. 

• Rate of change of unemployment in H1, 2008 = -.15% per month
• Rate of change of unemployment in H2, 2008 = -.23% per month
• Rate of change of unemployment in H1, 2009 = -.28% per month
• Rate of change of unemployment in H2, 2009 = -.06% per month

The rate of change of unemployment numbers clearly show that the rate was highest in H1, 2009 which co-incides with the market bottom. The absolute unemployment percentage kept getting worst in H2, 2009, but the rate of change of bad news kept decreasing. So the market had already started increasing when the economy still kept shedding jobs. The economy hit bottom in terms of unemployment in October 2009 when the S&P500 was around ~1100 which was about 57% above the lows in March 2009 and still 33% below the ~1500 market top.

The stock market is a forward looking vehicle. During a recession, in order to look for the bottom, look for the point where the market starts ignoring the bad news.


Reference

• https://www.ncsl.org/research/labor-and-employment/national-employment-monthly-update.aspx

Book Summary : Antifragility by Nassim Nicolas Taleb

Antifragile by Nassim Nicholas Taleb

Things that can gain from disorder

Between Democles and Hydra

1. Story of the "Sword of Damocles" - with great fortune and power also comes great danger. You cannot rise and rule, without facing continuous danger. Someone will be working towards toppling you. Like the sword, danger will be silent, inexorable and discontinuous. It will fall abruptly after long periods of quiet , perhaps at the very moment, one has gotten used to it and forgotten about its existence. Black swans will be out there to get you as you now have much more to lose, a cost of success.
2. Hydra - a serpent like creature with numerous heads. Each time a head is cut off, two grow back up. Hydra represents antifragility. 
3. apophatic - what cannot be explicitly said or directly be described in our current vocabulary

Overcompensation and Over-reaction everywhere

1. The excess energy released from over-reaction to setbacks is what innovates
2. Sophistication is born out of hunger
3. How to win a horse race : It is said that the best horses lose when they compete with the slower ones, and win against better rivals. Undercompensation from the absence of a stressor, inverse hormesis, absence of challenge, degrades the best of the best.
4. It is a well known trick that if you need to get something urgently done, give the task to the busiest person in office. Most humans manage to squander their free time as free time makes them dysfunctional, lazy and unmotivated. The busier they get, the more active they are at other tasks.
5. Mechanism of overcompensation makes us concentrate better in the modicum of background noise
6. Redundancy is ambiguous because it feels like a waste if nothing unusual happens. But something unusual happens usually. 
7. A system that overcompensates is necessarily in overshooting mode, building extra capacity and strength in anticipation of the worst outcome and in response to information about the possibility of a hazard.
8. Lucretis problem - a fool who believes that the tallest mountain the world will be equal to the tallest one he has observed. Analysts take the worst historical recession, the worst war, the worst historical move in interest rates, or the worst point in unemployment as the exact estimate of the worst future outcome. 
9. Fukushima nuclear reactor which experience catastrophic failure in 2011 during the tsunami was built to withstand the worst past historical earthquake. Alan greenspan during his apology to the congress said "It never happened before". Assuming worst harm is possible. 
10. Books and ideas are antifragile and get a lot of nourishment from attacks
11. Some jobs and professions are fragile to reputational harm, something that in the age of the internet cannot be controlled - these jobs arent worth having. You do want to control your reputation, you wont be able to do it by controlling information flow. Focus on altering your exposure, put yourself in a situation to benefit from antifragility of information. - He demonstrates that the authors profession benefits from the antifragility of information. 
12. With a few exceptions, those who dress outrageously are robust or even antifragile in reputation. Those who dress in suits are fragile to information about them. 

The cat and the washing machine

1. Causal opacity : In complex systems, it is hard to see the arrow from cause to consequence, making much of the conventional method of analysis, in addition to standard logic inapplicable. 

What kills me makes others stronger

1. Antifragility for one is fragility for someone else. Fail for others to succeed, one day you might get a thank you note.
2. The fragility of every startup is necessary for the economy to be antifragile, and thats what makes entrepreneurship work : fragility of the individual entrepreneurs and their necessarily high failure rate. 
3. Individual stocks may be fragile and that is what makes index funds antifragile
4. There is tension between nature and individual units. Organisms need to die for nature to be antifragile - nature is opportunistic, ruthless and selfish and takes advantage of stressors, randomness, uncertainty and disorder. 
5. Systems subject to randomness - and unpredictability build a mechanism beyond the robust to opportunistically reinvent themselves each generation, with a continuous change of population and species. 
6. Evolution benefits from randomness in two ways : randomness in mutations and randomness in the environment - both act in similar ways to change the traits of next generations
7. Nature is antifragile upto a point - if a calamity kills life on earth, completely, the fittest will not survive. 
8. Someone who has made several errors, though not the same error twice, is more reliable than someone who has not made any
9. For the economy to be antifragile and to undergo evolution, every single individual business must necessarily be fragile. 
10. Economy as a collective wants them to not survive, rather to take a lot of imprudent risks themselves and be blinded by the odds. Their respective industries improve from failure to failure. The want local overconfidence and not global overconfidence. Their failure should not impact others. 
11. Government bailout is a form of transferring fragility from the collective to the unfit.
12. Nietzsche's "what doesnt kill me makes me stronger" -> "what did not kill me did not make me stronger, but spared me because I am stronger than others; but it killed others and now the average population is stronger because the weak are gone" -> this is transfer of antifragility from the individual to the system
13. Nature wants the aggregate to survive, not every species
14. Every species wants the organisms to be fragile so that evolutionary selection can take place
15. Heroism and the respect it commands, is a form of compensation by society for those who take risks for others. 

Modernity and the denial of antifragility 

Other recommended books by the same author

1. Skin in the game
2. The Black Swan

Psychology of Investing through a recession

Psychology plays a big role into how investors see through a bear market. Even the most staunch buy and hold investors can get wiped out during the harshest recessions. These are investors who have help regular 10-20% market downs and bought the dip into a bull market.

Asset allocation and the ability to stick to it is off course very important. Often times investors coin asset allocations during bull markets and heavily "overestimate" the amount of real risk they can tolerate. Overestimation is a harsh word here. Bull markets are characterized by good times, growing earnings, growing incomes, new cars, new houses, etc. Hence, recency bias can trick an investors brain and the investor tend to forget what bad times look like. The probability of bad things happening tend to be low. Also generally investors see peak asset prices towards the end of a bull market, fuelling higher confidence, retirement dreams, etc.  Once a recession emerges, several risk factors become more probable. Often times they are correlated and become more likely to happen. An investor generally keeps 6 months expenditure as emergency funds. Let me underline some risk factors that can blow up the emergency funds during a recession

• job loss
• health insurance loss
• stock market decline and scare of contagion into bond/real estate prices
• mental and physical health issues
• immigration uncertainties
• lack of diversification of assets
• emergency fund being too small
• regret of not having sold and FIREd
• house price underwater
• over-investment in company stock
• high amount of leverage in rentals
• head-fake or bull-trap

All these things piled together leads to "flight to safety" mentality which leads investors to sell at lower prices. When all these dark clouds appear together, even the biggest "buy and hold" investors can fold. Also this has played out time and again from 1942, 1972, 2008, 2020

I have compile a list of real life readings for investors from previous recessions/bear markets

1. Devil take the hindmost : a history of financial speculation
2. A tale of health crisis, layoffs, 2 recessions and how a couple FIREd in their 40s
3. FATFire Facebook thread on recession stories
4. Have courage : we have been here before - describes the bleak outlook of capital markets in the midst of world war II 
5. Making sense of a stock market that doesn't make sense

Guggenheim

1. Market whiplash perspective during 2020 recession
2. Note published after the S&P500 experienced worst weekly loss after 2008

Sabre Capital

1. Bear Market Notes

Boggleheads threads from past recessions

1. [Oct 9, 2008] Sheepdog's "To sell or not to sell" is a must read for all new investors or new retirees. It talks about how Sheepdog made the decision at the depths of the financial crisis. This is the point in 2008 when the market was 40% off the peak. Point to note was that the market fell 20% from here further to reach the bottom. Also the market rose 10% from the day after he sold
2. [Dec 29, 2008] Maximum tolerable loss thread on boggleheads
3. [Sep 7, 2008] Plan B - achieve your required minimum wealth in loss. This thread is important because the recession comes after a prolonged bull market. Hence, investors often feel that they are close to their retirement goals, life goals, etc. The should tie their portfolio and asset allocation to those goals. If an investors current asset allocation, guarantees them to not need to work full time, they may consider taking some chips off the table by the time the market still allows them to. Otherwise, the bear market may wipe out that dream leading to regret and despair. 
4. [Sep 16, 2007] Mortgage your retirement - long 3x ETFs threads that surface at the peak of the bull market
5. [Mar 3, 2009] REIT disappearance thread on boggleheads
6. [28 Jan, 2009] Real estate expert stay away from malls

Best books for Investing and Financial Independence - FIRE

The FIRE(Financial Independence and Retire Early) movement has really picked up in the last decade.

Here are the best books to prepare for FIRE

1. The richest man in Babylon
2. The simple path to wealth
3. The Intelligent Investor
4. The Little Book on Common Sense Investing
5. Rich Dad Poor Dad
6. A random walk down wall street
7. One up on wall street
8. Devil take the hindmost - a history of financial speculation