Investment manias and financial bubbles have likely existed for as long as humans have been involved in financial markets. In this research piece we take a look at some of the more famous market bubbles in history and the extreme volatility and drawdowns they experienced. We then examine a simple trendfollowing approach investors could use to manage their risk. Across twelve market bubbles we find that a trendfollowing system would have improved return while reducing volatility. Most importantly, it would have reduced drawdowns significantly leading to the most important rule in all of investing – surviving to invest another day.
“I can calculate the motion of heavenly bodies but not the madness of people.”
To answer the question posed in the title of this article…..he wouldnt of got his arse kicked so badly if he had been a trendfollower. The quote above is from from Sir Isaac Newton after his fateful second foray into the South Sea Bubble of 1720. (The South Sea Bubble was the 1700s equivalent to our modern day technology crash/GFC). It cost him some ₤20,000, which is a staggering sum, when you consider that the Nelson flagship HMS Victory cost around ₤68,000 to build.