Finding meaning in an upside-down market

A rule-based approach to investing and the use of AI to find suitable opportunities is the best way ahead in times of uncertainty and crisis

Finding meaning in an upside-down market

Thursday April 02, 2020,

5 min Read

There have been a few times in history when the air has been thick with fear; both collective and anticipated. Today is one of those times when we’re in a state of cautious action and lockdown all over.

To be honest, the financial services sector is no stranger to upheavals. From the Tulip Mania bubble of 1637 to the 2008 economic crisis, Mr. Market has always had his moods. The decade-long bull run we were in might have been fated to end someday; but what has got us all reeling is the manner in which it has happened. For those of us who have been through the crash in ‘08, some form of PTSD was but normal.


In the last few weeks, we have seen a huge amount of emotion-led investing choices.

With every news headline, stocks across the world have plummeted. At such a time, selling has been the choice for many investors, and even long-term holders are asking if this is the time to get rid of some extra baggage.

To everyone who has asked us this, we have said the same thing - trust the algorithm. If you are new to algorithm-based investing, let me help you understand. One way of building a portfolio is to ask an advisor what’s trending in the market and go by their blind choice. If you choose to do this, you have little to no control over your advisor’s biased opinions. More often than not, you’ll end up adding strategies to your portfolio because they ‘promise’ high returns.

The other way to build a portfolio is to use a rule-based approach, driven by data, which helps you find the right investing strategy at the right time. This is what we at Kristal.AI do. We use a genetic algorithm which helps you select strategies based on current market data, and your personal choices. Our algorithm does not promise ‘high returns’ blindly. Instead, it helps you optimise your portfolio against volatility - the kind that we are seeing now.

But everyone is a loser right now, isn’t it?

Benjamin Graham said, “The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.

If you had prepared a financial plan for yourself before the pandemic hit, there is no reason to throw it all out of the window. The hoarding mentality we have seen with toilet papers and groceries does not need to extend to your cash as well.

I know it sounds like anathema. Emotions tell you to pull out of a trade the moment the red flags go up. But wisdom tells you that it is better to wait. Looking at data going back to 1930,

Bank of America found that if an investor missed the S&P 500′s 10 best days in each decade, total returns would be just 91percent, strikingly below the 14,962 percent return for investors who held steady throughout the ups and downs.


So, is waiting the best policy right now?

If you’re thinking of selling, yes. If you’re thinking of making your portfolio stronger and protected against volatility, now is the best time to use a rule-based approach to investing and use the power of AI to find suitable opportunities.

Author David Kessler - who first talked about the five stages of grief - recently wrote of a sixth step to the process of grieving. Post denial, anger, bargaining, depression and acceptance, we reach the sixth stage of ‘meaning’. For investors, finding this meaning might seem like an impossible task today.

Beyond the questions of do we buy, sell, or hold; it is natural to even wonder if there will ever be an end to this. However, the bottom line is that we will get through this. That is, after all, the natural order of things. But there will be many manic days, panic days, and it-is-going-to-hell days before we get to the other side. Maybe in these times, ‘meaning’ is an unbiased data-based advisory that can help you protect your assets by taking emotion out of investing.

Trusting the algorithm brings resolve and restraint to one’s investing choices; a mantra that we need to defeat this virus as well. It's not about blind faith in a machine, but about reducing the error that comes from human fear and greed in such trying times. Instead of blindly chasing news headlines, use an algorithm to stay focussed on achieving your investing goals.

When we opened up our platform to Indian investors earlier this year, we anticipated challenges. A pandemic was not one of them. But with all that I have seen of the markets in the last 20 years of being a trader/investor, I know there is no better time than today to hunker down and trust the algorithm.

Oh! And don’t forget the sanitizers.