An Update on Bill’s New Trade of the Decade
The idea behind Bill’s Trade of the Decade is to find a simple macro trade that you can stick with for 10 years.
His first Trade of the Decade, which he wrote about at the start of the 21st century, was: “Buy gold. Sell US stocks.”
That worked out pretty well.
The price of gold rose from a close of $287.80 on December 31, 1999, to a close of $1,096.20 on December 31, 2009 – a 281% gain for the decade.
The S&P 500 closed at 1,469.25 on December 31, 1999. And it closed at 1,115.10 on December 31, 2009 – for a 24.1% LOSS for the decade.
Bill’s new Trade of the Decade is to buy Japanese small-cap stocks and sell Japanese government bonds.
Like his previous trade, it’s based on something called “mean regression.”
As we’ve written before, mean regression is one of the most powerful forces in finance.
Whenever luck plays a role in outcomes, it’s a simple statistical fact that an extreme value, such as the price of stock, tends to be followed by a value closer to the average.
That’s the regression effect. And it explains why tall parents tend to have tall children, but not as tall (on average) as themselves… why a company’s disastrous years tend to be followed by more profitable ones… and why bull and bear markets don’t last forever.
What you need for a successful Trade of the Decade is something that has been beaten up for years to pair with something that has had a stellar performance. You buy the beaten-up asset, and you sell the stellar performer.
Gold and US stocks were the obvious choice at the start of the new millennium. US stocks were at bubble peaks. And gold was deeply unloved.
At the start of the current decade, strong candidates for mean regression were Japanese stocks, which had gotten beaten up for the previous 20 years, and Japanese government bonds, which had been in a bull market for just about as long.
How is Bill’s new Trade of the Decade doing as we approach the halfway mark?
From its close on December 31, 2009, of $39.99 a share, the iShares MSCI Japan Small-Cap Index Fund ETF (NSYE:SCJ) is up 30.6%.
The other side of the new Trade of the Decade is harder to track because, until recently, there hasn’t been an easy way for a US investor to sell short Japanese government bonds.
But if you had bought the PowerShares DB Inverse Japanese Government Bond Futures ETN (NYSE:JGBS) – which tracks a short position on 10-year Japanese government bonds – when it launched in November 2011, you’d be down 8% as of today.
But with the Bank of Japan intent on devaluing the yen… and with Japan’s big retirement funds dumping Japanese government bonds… there’s still plenty of time for this leg of the trade to show a profit.
P.S. Don’t forget to check out the special presentation Will put together. It contains important information about how the political elites have rigged the market in their favor… and how you tap into a very different set of investment opportunities. Go here for full details.