I feel like the article has since stood the test of time, which is why I'm republishing it now under my own blog. The post is about how we introduced the scrum collaboration process to an existing team that consisted of Namics employees and our customer (the product owner).

In fall 2017 we switched a client project from a classic project setting to Scrum. The project has been going for almost 10 years. During this time we’ve been managing both the development of new features as well as maintenance and support. The software that we’ve developed has become an integral component of the client’s infrastructure and we are dealing with many stakeholders, each having different requirements to the software. As the current Scrum master and previous project manager i’d like to share my experience on what impressed me most. Specifically, I’m going to examine the different approaches to answering the client’s question “When can you ship feature X?”.

Answering the question in a classic project setting

In an ongoing classic project the question of “When can you ship feature X” is handled as part of the “Change Request Management”. At first sight the question seems very simple. However, coming up with the answer requires the following tasks:

• Firstly, all parties need to agree on “is the feature actually a new requirement?” This question alone can already be difficult since it requires a clear and common understanding of the original scope.

• Secondly, the project manager needs to organize an estimation of the work needed to build feature X.

• The project manager must have a clear overview over the current release (see picture below) – including A) the remaining resources until delivery, B) the remaining work to do, and C) the remaining time. These figures (especially remaining work to be done) constantly change and it is a challenge to keep them up to date.

• If until delivery, there are more remaining resources available than remaining work, and if these resources are larger than the work required for feature X, then the feature can be included into the release.

• ..if not, the project manager must organize more resources, postpone the delivery date, or move feature X into a later release.

[caption id="attachment_594" align="alignnone" width="872"]

Caption: An overview of a release[/caption]

In practice, when answering this question, a project manager usually goes with his gut feeling – or asks the development team to make a judgement. Nevertheless, my goal was to demonstrate that the answer to this question is not as trivial as expected and it can involve considerable amount of work – especially if the project manager needs to organize more resources and if he constantly needs to keep his overview of the current release up to date.

Finally, answering this question can be stressful. It requires a project manager that can potentially push back and occasionally “say no” to the customer in order to keep a good balance of timely delivery, quality, and costs.

Answering the question in Scrum

Now, let’s examine the question of “When can you ship feature X?” in Scrum. The second principle of the Agile Manifesto reads as follows: “Welcome changing requirements, even late in development. Agile processes harness change for the customer’s competitive advantage.”

As this principle already implies, Scrum provides you with several tools that help you answering the question.

• In contrast to the classic setting, in Scrum there is no need to organize the estimation of the feature. It will get estimated during a sprint planning meeting or (optionally) during a backlog refinement meeting. Having these specific time-slots for asking questions regarding new features usually leads to fewer distractions for developers during the sprint and therefore to more efficient work.

• When the feature is estimated it is the product owner’s decision to prioritize the feature in the product backlog. If he wishes, he can include it in the very next sprint. If so, the delivery date is already clear, because each sprint delivers a increment of working software according to the definition of done.

• If the feature is not prioritized to the top of the product backlog you can still estimate its delivery date. This can be done by calculating the number of sprints it takes to deliver the feature using the average velocity. If it takes 3 sprints for example, and a sprint has a 2 week time-box, then it takes 6 weeks to ship the feature.

If circumstances change and the product owner needs to prioritize other work, the delivery date of feature X can be easily reevaluated. Whereas in a classic setting the project manager could get the blame for the delay, Scrum creates a lot of transparency and a shared responsibility between the product owner and the rest of the team to work towards a timely delivery of the new feature.

Final Thoughts

As a project manager, answering these kinds of questions took a lot of time and caused a lot of headache. Of course, switching to Scrum can have many benefits – however, in my opinion this point alone already made it worthwhile.

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Your Options

Let's first look at your options. Whenever you invest in something, you have the following 3 options:

1. Timing the Market: Wait for the perfect moment. Try to pick the bottom, wait for the crash and stay in cash until this moment has come.

2. Lump-Sum Investing: Invest right now - buy as soon as possible and stay invested.

3. Dollar-Cost Averaging: Move your funds into the asset iteratively bit by bit, over a certain period of time.

So lets look at those 3 options in more detail.

Timing the Market

Timing the market basically means "picking the bottom" and "selling the highs". It describes the intention of waiting for the market to fall (in terms of your local currency), and then, when everyone else has given up, when there's blood in the streets, when the future looks most dismal, when the price can't possibly go any lower, then you invest all your cash, earning massive returns over the following weeks as the asset comes back from the dead. And then years later, when the market is in a bubble, you'll take your profits and sell out and go back into cash.

So what do the experts say about timing the market? The concept sounds cool but unsurprisingly, it doesn't work.

As this video explains, it is one of the most dangerous things that you can do. First of all, the experts agree that nobody can do it consistenly - whether professionaly or not. In fact, by trying to time the market, you are much more likely to miss out on early gains in the market. Later your emotions will get a hold of you. Unwilling to miss out on any further gains, you'll probably end up buying when things look great and sell when things look terrible. For example, more money went into equity mutual funds in the first quarter of 2000, which was at the height of the Dot-com bubble, than ever before. This turned out to be exactly the wrong time to put money into the market. And then a lot of funds went out of the market in the third quarter of 2008 at the height of the financial crysis, when everyone was saying the world was falling apart, which turned out to be exactly the wrong moment to sell.

"I don’t believe in market timing. I’ve been around this business darn near a half-century, and I know I can’t do it successfully. In fact, I don’t even know anyone who knows anyone who has ever successfully timed the market over the long term." - John Bogle

"There is an overwhelming body of evidence to support the view that believing in the ability of market timers is the equivalent of believing astrologers can predict the future." - Larry Swedroe

Finally, as this article explains, by trying to time the market and increasing the frequency of your trades, you'll end up inducing high cost due to transactions and paying higher taxes. Also, it's important to note that "doom & gloom" headlines are normal. You'll always hear voices proclaiming the end of the bull market the glooming recession. If you listen to those voices, you'll end up selling early and missing out on any future gains.

Lump-Sum Investing vs. Dollar-cost Averaging

Hopefully at this point we have established that waiting for the bottom is a bad idea. You'll have to acknowledge that you cannot time the market and if you try it you'll end up losing money. Also, in Part 1 we already established that cash is a terrible investment, so you better move into other assets. These assets were discussed in Part 2.

That leaves us with the following two options: You either buy right now and stay invested - or you invest your money interatively over a period of time.

Dollar-Cost Averaging

The main benefit of dollar-cost Averaging is reducing risk by avoiding to invest all your funds at a potentially unfavourable moment. In this strategy, you invest portions of your money at certain predefined intervals over a period of time. The main drawdown of this strategy is that, since stock market is biased to rise over time, you'll be likely to miss out on early capital gains and compounding effects. Usually, investors choose to invest their money monthly or quarterly over the period of 1 to 3 years. On longer-term time horizons (more than 3 years) the inflationary forces on cash become more apparent and you're bound to lose wealth.

Dollar-cost averaging works really well for more risk-averse investors that have larger sums of money and that want to avoid investing right before a market drawdown.

The main problem with dollar-cost averaging is discipline. If you don't automate all future transactions and commit to a plan, you run the risk of staying in cash or getting influenced by your emotions, still attempting to pick highs and lows in the market. After all, imagine the market crashed: it takes a lot of conviction to stick to your plan an pour money in a crumbling stock market.

Lump-Sum Investing

In lump-sum Investing you take all the money that you want to invest and put it right into the stock market. Also, every time you get additional funds that you could invest (e.g. a yearly bonus), you invest it right away. The key difference to dollar-cost averaging is that you are not intentionally holding onto the funds for a later time to invest.

The main advantage of lump-sum investing is that you'll profit immediately from capital gains and the magic of compound interest. The main risk of course lies in picking precisely the wrong moment and investing at the peak.

What the studies show

So which one is better - dollar-cost averaging or lump-sum investing? Suprisingly the reseach is clear. A study by Vanguard found that over a 10-year period, lump-sum investing beat dollar-cost averaging about two thirds of the time. In their own words:

We conclude that [..] the prudent action is investing the lump sum immediately to gain exposure to the markets as soon as possible. But if the investor is primarily concerned with minimizing downside risk and potential feelings of regret (resulting from lump-sum investing immediately before a market downturn), then DCA may be of use. - Vanguard Research, 2012

Limitations

The underlying assumption for the above to be valid is that you invest according to the previous blog post in a low-cost, equity-based, well-diversified index fund - and that you stay invested for the long-term. That means, you stay invested - especially during those dark times when all the headlines are dismal and the furture looks grim. However, the above is not valid for short-term speculation and active investing. In active investing you’ll attempt to outperform the market by going long/short certain assets, by using leverage and/or by attempting to time the market. As soon as you deviate from investing in a low-cost, equity-based, well-diversified index fund, the two options recommended by the experts above (lump-sum investing and dollar-cost averaging) are no longer valid. For example when investing in individual stocks additional consideration have to be taken into account - such as company valuation. Over the long run, these assets might behave very differently from the market portfolio and can go to zero. For this reason, one cannot simply keep pouring money into these assets without considering their intrinsic value, market expectations, and possibly even the right moment to buy.

Favorite sources discovered while researching for this post:

• Meb Faber and Andrew Horowitz on the right moment to buy (at position 01:01:30) https://pca.st/xy6ynr74#t=3690

• On the topic of Market Timing:

  • https://investing.wealthfront.com/market-timing/

  • https://www.fool.com/investing/2017/04/02/yet-another-study-shows-that-timing-the-market-doe.aspx

  • https://www.investingadvicewatchdog.com/market-timing.html

  • https://youtu.be/hMjC_TX1Dc0?si=GMVU-XJ3chXxOk23

• On the topic of Lump-Sum Investing vs. Dollar-Cost Averaging:

  • https://www.investopedia.com/terms/d/dollarcostaveraging.asp

  • https://investing.wealthfront.com/video-dollar-cost-averaging/

  • https://www.moneyunder30.com/dollar-cost-averaging-vs-lump-sum-investing

  • https://www.forbes.com/sites/robertberger/2021/02/12/dollar-cost-averaging-vs-lump-sum-investing-how-to-decide/

  • https://investor.vanguard.com/investing/online-trading/invest-lump-sum

Disclaimer:

I am no financial advisor and this is not financial advice. So don’t sue me when your portfolio blows up. Do your own due diligence.

Before making any investment decision, you should seek financial, legal, tax and accounting advice, taking into account your individual financial needs and circumstances and carefully considering the risks associated with such investment decisions.

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If you invested in a very low cost index fund, where you don't put the money in at one time, but average in over 10 years, you'll do better than 90% of people who start investing at the same time. - Warren Buffett

You will not get that advice from anybody because nobody gets paid to give you that advice. You will have all kinds of people that will tell you how much better they can do for you if you just give them a fee or a commission, but they won't do better. - Warren Buffett, 2008 Annual Shareholders Meeting

So you decided that you’re going to invest and you ask yourself “what should I buy?”. In the following I’ll attempt to answer this question. You could skip right to the end of this post to find the answer. However, in the following you will see how I derived it.

Assumption

The underlying assumption for the following to be valid is an investing duration of at least 10 years. Even though the odds will be in your favour with any time horizon, below a period of 10 years the randomness factor is too strong and you might be better off putting your money in a fixed-income instrument, such as a government or corporate bond. However, in the current age of low interest rates this isn’t an option for many investors.

Active vs. Passive

Maybe your friend is bragging about all the 10-baggers in his portfolio and you want to do the same. He promises you quick returns in just a couple of days if you just pick the hottest growth stock, the newest cryptocurrency, the fanciest old timer, the most underrated art piece, or if you put all your money in Gold.

Do you think you can pick individual stocks better than the rest? Do you think you can identify winners and losers? Well, chances are you can’t and neither can your friend - or even a professional fund manager for that matter. In fact, studies show that 95% of active money managers underperform their benchmark. This benchmark is usually a stock index that reflects the overall sector or the national stock market that the fund manager aims to outperform.

Why is it virtually impossible to outperform the market? Well firstly, by definition no more than 50% of fund managers can outperform the average - and the market reflects that average. Secondly, when you throw management fees into the mix (which are higher for active managers), this number decreases significantly. In fact, it decreases so much that over a long enough time frame only 5% are left.

If you’re not yet convinced that you can’t outperform the market, you can go further down the rabbit hole and take a look at cognitive biases. Studies show that we see chart patterns where there are none, that we buy in a boom and sell in a crisis at precisely the worst moments, that the more often you trade the worse you perform, and so on.

Index Funds

Hopefully we have established that over the long run passive beats active investing and that you cannot outperform the market - and neither can your bragging friend with his magic stock picks.

So how can you take advantage of this as an investor? This is where index funds come in. An index fund has one main goal, which is to replicate the performance of a specific index as close as possible. Since this replication can be achieved by following certain predefined rules, index funds have minimal cost (compared to actively managed funds) and therefore they can offer much lower fees. In fact, by lending out their assets, some index funds are able to offer investors zero management fees. The most popular index funds are available as ETFs, which means that they can be traded on an exchange (such as the NYSE, the NADSDAQ, or the SIX stock exchange).

Choosing the right Index

Ok, at this point we have established two things. Firstly, passive beats active and as an investor you take advantage of this by buying an index fund. The next step is to pick an index that you want to follow. Unfortunately, there are now more indices than stocks, which illustrates that choosing the right index fund might not be as trivial as you hoped for.

If you want to go down the rabbit hole you can start with this podcast and follow its sources. But for your convenience, here are the main arguments:

• For the long-term, choose an equity index: “The 119 years from 1900 to 2018 were not especially kind to investors in government bonds. Across the 21 countries, the average annualized real return was 0.9%. In the same 119 years equity returns in Europe, Japan, the UK, and the US were all above 4%” (see table 1, page 21). Especially after considering dividends, stocks also outperform Corporate Bonds, Gold and Real Estate.

• Diversify across industries: “Of the US firms listed in 1900, over 80% of their value was in industries that are today small or extinct. In the UK the figure is 65%.” (see page 18)

• Diversify across countries: “There are plenty of instances in which geographic diversification has been a lifesaver, preventing wealth from being wiped out. [...] There are plenty of instances where a given country’s equity market was decimated, and it often takes decades to recover from the losses. [...] This decade, the US has been the best performer so far, but it was one of the weaker performers in the previous decade following the dot-com bust; it was one of the best performers in the 1990s, but before that you have to look back to the 1920s to find a decade in which US equity performance was better than middling. [...] The equally weighted [globally diversified] stock portfolio took material losses at times, but experienced drawdowns that were shorter and shallower, and it tended to recover faster than most individual country equity markets. [...] While we focused on the stock market above, investors can of course suffer material losses being concentrated in other assets as well. One particularly egregious example is German bonds from WWI, which lost 95% of their value relative to cash in the year or so after Germany surrendered. Despite earning more than a 900% excess return since then, investors concentrated in German bonds in this period have never recovered their wealth.” (see source)

So in summary, you should choose an equity index that is well diversified across industries and countries.

Choosing the right ETF

As elaborated above, no matter where you are from, you should probably replicate the returns of an equity index that is well diversified across industries and countries. You can do this by buying an ETF (exchange traded fund) that replicates the index of your choice and that has low fees. Let’s look at the things you have to watch out for when choosing an ETF.

• Does it track your desired index? That is the most important question. After you’ve chosen and index in the previous step, you’ll want to find an ETF that replicates that index and lets you invest in it.

• Avoid leverage. Make sure your ETF is “plain vanilla” and does not use leverage. Leveraged ETFs usually contain words like “Bull 3X” or “Ultra”. They have very high fees due to borrowing and trading derivatives for index replication. Therefore, they are not suited for longer time horizons. Their goal is to track the index on any given day - however, in between days they might behave very differently - usually much worse.

• The next important thing is fees. Luckily you can focus on one number, the TER (total expense ratio). It indicates the percentage that will be deducted from the fund’s assets in order to cover the expenses. When it comes to fees there are huge differences between ETFs. Some charge as much as 2% annually for just tracking the S&P 500, probably the most widely tracked index. For such “passive” ETFs that simply track an index, you should look for a TER below 0.25% annually.

• Avoid Currency Hedging. Some ETFs replicate an index while hedging it in your local currency. The hedge is a bet that your local currency will perform better than the rest. The entire point of global diversification is to reduce risks by reducing dependencies on your geography. By adding a currency hedge you'll do the exact opposite. Additionally, the hedge always costs money (increasing the funds fees) and might as well work against you (if your currency performs worse than foreign currencies).

We are happy to invest in businesses that earn their money in Euros in Germany [...] or earn their money in Sterling in the UK [...] it doesn't bother me to buy businesses around the world unhedged in terms of their currency [...] i think that that will be a net plus to us over time. - Warren Buffett, 2008 Annual Shareholders Meeting

• Liquidity: Now we’re really getting into the details, but some investors might need an ETF that is frequently traded and that they can buy and sell in big volumes. Also, if your ETF only trades a couple of shares a day and has an empty order book, your limit orders might take a long time to get filled.

• Finally, I recommend choosing an ETF that is traded in your local currency in order to avoid currency-conversion cost. For example if you’re located in Switzerland (like me) and have your cash in CHF (Swiss Francs), I recommend buying an ETF that is traded in CHF, rather than USD. This will save you approximately 1% for each conversion.

Putting it all together

There you go. As explained in the paragraphs above, it is prudent to go with an ETF, with low fees, that tracks a globally diversified equity index.

So here are some ETFs that fulfill these criteria:

Closing thoughts & limitations

To close off this blog post, let's take a quick look at its limitations:

• Firstly, this blog post could well be perceived as a rant against active investing. For the average investor active investing and speculation should only be done as part of your “fun” budget (see my previous post on “How much should I invest?”). However, I do acknowledge that there are certain investors that consistently manage to outperform the market. If you belong to those elite 5% it is rational for you to pursue your own strategy. For the rest of us, we should probably stick to the approach and principles explained above.

• In recent years the concept of “Risk Parity” has been popularized by Ray Dalio and his hedge fund Bridgewater. It describes a different portfolio mix that aims to balance the volatility of different asset classes. Interestingly, the portfolio only consists of 30% stocks and still managed to outperform the S&P 500 over extended periods of time - especially during market drawdowns. However, the portfolio actually performed badly during the Covid crisis when certain correlations between asset classes broke down.

• Some experts (including Meb Faber who’s podcast provided the basis for this blog post) mention the benefit of adding a value tilt to your portfolio (also see this podcast). Rather than choosing a market-cap weighted diversification between countries&stocks, you might prefer the equal-weight approach. The main critique for market-cap weighting is that it over-weights large/expensive stocks and it under-weights small/cheap stocks. However, in recent years this hypothesis has not held true and market-cap has been outperforming equal-weight.

• Finally, there have been warnings about “too much indexing”. Even John Bogle, the founder of Vanguard which popularized passive index funds, acknowledged that a market with 100% passive investors is not desirable. In this podcast, Michael Green examines the “passive risks to the market” and the unintended effects that this trend brings along - among other things it includes increased volatility.

So there you go. Unless you're Warren Buffett, this is what you should buy. The big remaining question is “When should I buy?”, which will be covered in the next blog post.

Favorite sources discovered while researching for this post:

• 1997 Annual Berkshire Shareholder Meeting: Warren Buffett on active money managers

• 2017 Annual Berkshire Shareholder Meeting: Warren Buffett on "Jack" Bogle and the Index Fund

• Meb Faber. Episode #201: The Case For Global Investing

• Credit Suisse. The 2019 Global lnvestment Returns Yearbook: 119 years of financial history and analysis.

• Bridgewater. Geographic Diversification Can Be a Lifesaver, Yet Most Portfolios Are Highly Geographically Concentrated

• Low-cost index trackers that will save you money

• Why I Picked The Vanguard All-World ETF As My Global Tracker

Disclaimer:

I am no financial advisor and this is not financial advice. So don't sue me when your portfolio blows up. Do your own due diligence.

Before making any investment decision, you should seek financial, legal, tax and accounting advice, taking into account your individual financial needs and circumstances and carefully considering the risks associated with such investment decisions.

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What is the goal of this blog series?

Over the last couple of years friends and family repeatedly approached me with the question of how to invest. It usually sounds like this:

• “I inherited 100k from my parents. Do you have any advice on what to do with it?”

• “I’ve been working for 5 years and I saved some money. The stock market has been going up like crazy. Should I invest ..and if so, how does it work?”

• “I saved some money and I think I should do something with this money rather than having it lay around on my bank savings account. There’s practically no interest on the bank and then there’s the risk of inflation. So do you think I should invest this money?”

• “I saved some money and I want to invest. But I also have plans of buying a house or founding a business in 2 years. What should I do?

The goal of this blog series is to answer these questions.

Is Investing Complicated?

Studies show that over a 15 year time frame you can outperform 95% of active money managers with the simplest of all strategies. In the words of John Bogle: “Investing is not nearly as difficult as it looks. Successful investing involves doing a few things right and avoiding serious mistakes.”

So, what are these few things that you have to get right? And which mistakes should you avoid? This is exactly what this blog series is about.

You don’t want to invest?

What if you don’t want to invest? As you certainly know there are risks involved in investing and your portfolio can experience sizeable drawdowns. What if you want to stay in cash?

The tough news is, cash is also an investment, and it even is the worst one. This has even been true if you come from a country with a relatively strong currency, such as the US Dollar or the Swiss Franc. Studies show that due to inflation the real return of cash is -0.8% every year. In fact, since 1913 the dollar lost over 96% of its purchasing power.

This doesn’t mean you should own zero cash. You should probably follow Warren Buffett’s example: “We always keep enough cash around so I feel very comfortable and don’t worry about sleeping at night. But it’s not because I like cash as an investment. Cash is a bad investment over time.”

In contrast to cash, if you do investing the right way, it allows you to grow your money over time thanks to the magic of compound returns. Chances are that you have heard a story of an old lady living a average life, but still leaving a huge fortune after her death? What these stories usually have in common is an early investment in an asset that compounded returns and grew over time.

How much should I invest?

Ok, at this point, hopefully we have established 2 things: Firstly, Investing is supposed to be super easy and secondly, whether you like or not, you have to do it. You are doing it already. Even if 100% of your wealth is on the bank, cash is also an investment, and it is the worst one of all.

Having established these two points, we can move to the first step of the process and the main topic of this blogpost: How much should you invest?

Well, I have no idea. So I asked a friend who does this for a living. Here’s what he told me:

Let’s unpack this. You have to read this pyramid from the bottom up.

Firstly, you probably have cash savings. Unless you are paid in Bitcoin or something like that, you have income and expenses in cash. Whatever is left at the end of the day/week/month is your cash saving. Just like Warren Buffet said in the quote above, you’ll want to have a bit of a cushion here in order to sleep at night.

On the second level are tax-incentivized investments. Chances are that you live in a country that has a tax-incentivized retirement plan (e.g. “401k” in the US or “3-Säulen” in Switzerland). Contributions to this plan are usually tax-deferred and sometimes matched by your employer. Distributions are taxed in the year they are taken. Why do countries offer an incentivized retirement plan? Well, because if they don’t, they might have to take care of you when you’re old – and that sucks.

Finally, we get to the third level and to the question “how much should I invest to compound returns or to buy a house?”. The answer is “Whatever is left from the two levels below”.

Going further up the pyramid, people often use the remaining cash or the proceeds from their investments to build a company and have fun. In this context “fun” also refers to buying a yacht or speculation (i.e. buying individual stocks and cryptocurrencies).

Conclusion

So there you have it. This is how much you should invest. Naturally, the actual number varies from person to person and depends on your individual circumstances. However, I like the framework above, because it provides an overview and sets the priorities. So you probably shouldn’t invest if you’re unable to save money, are in debt, or if you haven’t maxed out your tax-incentivized retirement plan. Additionally, when you think about investing, you might want to consider any plans to buy a house, build a company or have fun.

Favorite sources discovered while researching for this post:

• 7 Easy Ways To Start Investing With Little Money

• Why Investing Is Simple But Not Easy

• Warren Buffett's Super-Simple Retirement Advice

• How To Invest Money: The Smart Way To Make Your Money Grow

Disclaimer:

I am no financial advisor and this is not financial advice. So don't sue me when your portfolio blows up. Do your own due diligence.

Before making any investment decision, you should seek financial, legal, tax and accounting advice, taking into account your individual financial needs and circumstances and carefully considering the risks associated with such investment decisions.

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Samuel Benner

Samuel Benner was a prosperous farmer who was wiped out financially by the 1873 panic. When he tried to discern the causes of fluctuations in markets, he came across a large degree of cyclicality. The Benner Cycle is based on a major 54 year cycle. Market tops form in a recurring cylce of 16, 18 and 20 - leading to an average of 18 years. Benner also identified a 27 year cycle in pig iron prices with lows every 11, 9, 7 years and peaks in the order 8, 9, 10 years.

Benner eventually published the following chart in 1875 (!).

The table predicted panics (or highs respectively) for 1911, 1927, 1945, 1965, 1981, 1999, and 2019. Except for 1981, these were all good years to sell stocks. An overlay with the Shiller Price Earnings Ratio illustrates this fact. (Please note that the the two charts have slightly different time scales. The lines actually represent the years of the Benner cycle, even though they appear to be slightly off)

William Delbert Gann

The following table is infamous among traders. In 1909, William Delbert Gann reportedly constructed this legendary Financial Timetable providing a road map for the direction of US stock prices for the entire 20th century.

The table was calculated using the North Node lunar time cycle of 18.61 years (similar to Benner's 18 years). To mimic the lunar declination cycle Gann simply alternated a sequence of +19, +18, +19, +18 etc.-years across the top to get an average length of 18.6-years. However, he noted that an adjustment would finally be due for Dec 25th, 1989.

The H row predicts "very high stock prices". The S&P 500 dividend yield is a valuation metric for the stock market and when we examine the years in row H on the dividend yield we see that these years accurately predicted market tops (notably 1929, 1946, and 1966):

Note that the next row J predicts "Major Panic-CRASH! 4-years of falling prices". Once again when we put these numbers on the S&P 500 dividend yield Gann's predictions proved to be right:

After these 4 years we reach the A row with "Extreme low stock prices". Putting the years of row A into S&P 500 dividend yield gives us the following picture:

The C row does not produce such clean and obvious patterns. It simply stands for "Panic". When we examine these years on the S&P 500 dividend yield we appear to get alternating highs and lows in alternating secular up- and down-trends.

The F row also predicts years of "Panic". When we put these years in the Shiller Price Earnings ratio we see that these years predicted lows in the stock market but also the turning of interest rates in 1981 and the bust of the 2000 Dot-com bubble.

Of course, Gann's table can be extended into the future. The following Excel table accounts for the mentioned necessary adjustment (by adding one year to the cycle - see yellow mark) and extends Gann's table until the year 2100. (I found another version that adds 2 years instead of one but I can't find a reason why they would do that)

Just like the Benner cycle, the extended Gann table predicts high stock prices and a following panic in 2018 and 2019.

Final Thoughts

In an attempt to explain Benner's accurate predictions Businessinsider writes "It makes some degree of intuitive sense that a farmer would recognize longer term cycles. Their entire year is based on the annual sowing/growing/reaping cycle; The 11 year solar cycle would certainly impact their crop yields, revenue, etc. So looking at how the variants of crop yield and prices impacts the overall economy and markets makes lots of sense."

In the end, the cause for these accurate predictions and for cycles in financial markets might be multifaceted. It might include influences from the climate (which affect commodity prices), the generational cycle, the short-term business cycle (with economic expansions and recessions), and the longer-term debt cycle. No matter the cause, the cycles actually do appear in the data, which gives us the opportunity to learn from them and to anticipate the future.

Sources:

• The Benner Cycle

• W.D. Gann's Financial Time Table | Extended and Adjusted

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“History is seasonal, and winter is coming.” (Neil Howe)

Some questions have been haunting me in recent years:

• How come that we are seeing more and more populist leaders getting elected into power?

• Why is the call for order (or even for fascism) getting louder? (e.g. calls from the French National Front, the Dutch Party for Freedom, the Alternative for Germany, the Freedom Party of Austria, and the UK Independence Party)

• Why are we seeing these nationalist movements and why did Britain vote to leave the EU?

• How will southern Europe get out of the mess that they find themselves in - with record rates of youth unemployment? ..do they have to abandon the Euro? ..what currency will follow?

I recently found some answers to these questions when I stumbled upon this podcast with Neil Howe. 

Neil and William Strauss created the generational theory and wrote the books Generations (1992) and The Fourth Turning (1997). Former U.S Vice President Al Gore called Generations the most stimulating book on American history he'd ever read and he even sent a copy to each member of Congress.

Originally, Neil Howe and William Strauss discovered the theory when they asked themselves why the baby boomers were so different than the World War II generation that raised them. When they looked back in time, they found that there have always been generational clashes throughout American history. They analysed generations all the way back to the 15th century and they found that these generational clashes tended to occur in a certain sequence. In other words, different generations don’t arise at random. Certain kinds of generations always tend to arise after another in a certain long-term cycle - and that is about the length of a long human life.

One cycle consists of four generational turnings. They found that the fourth turning is the period of crisis. This is a period of destruction, often involving war, when society tears down institutions and everything that is dysfunctional. The authors say the previous Fourth Turning in the United States began with the Wall Street Crash of 1929 (starting the "great Depression") and climaxed with the end of World War II. According to Howe's and Strauss' theory we currently find ourselves in the fourth turning of the current cycle (called "Millennial Saeculum"). The following table gives an overview of the four generational turnings and when they happened in the last 500 years:

Each of the four turnings has a distinct mood that recurs every saeculum. Strauss and Howe describe these turnings as the "seasons of history". At one extreme is the Awakening, which is analogous to summer, and at the other extreme is the Crisis, which is analogous to winter. The turnings in between are transitional seasons, similar to autumn and spring. At the heart of Strauss & Howe's ideas is a basic alternation between these different types of eras. Both of these are defining eras in which people observe that historic events are radically altering their social environment. During Crises "great peril provokes a societal consensus, an ethic of personal sacrifice, and strong institutional order". During Awakenings "an ethic of individualism emerges, and the institutional order is attacked by new social ideals and spiritual agendas". People suddenly tire of social discipline and want to recapture a sense of "self-awareness", "spirituality" and "personal authenticity". Awakenings are periods marked by cultural or religious renewal, when society focuses on changing the inner world of values and private behaviour. The last Awakening was the "Consciousness Revolution" of the 1960s and 1970s. The generation in young adulthood were the "Baby Boomers" and their contemporaries in Germany, the '68-ers', the Achtundsechigers. This was a group of counter-cultural rebels and they are currently in power.

According to the authors the present fourth turning began in 2008 and should end sometime around 2030. That’s the period - at least in the previous cycle after World War II - that Bretton Woods, the IMF and the UN and many more institutions were being created. Also the European Union has it's roots from this area and the generation that built it were the children of World War II. In the podcast Howe remarks that now, we see increasingly the emergence of two younger generations in Europe, who are proud of their own nationality and their own national institutions. They are showing flags again and singing anthems. After 2009, with the sovereign debt crisis, a lot of people were talking about the demise of Europe over sovereign debt - until Mario Draghi said he would do anything and prevented that from happening. According to Howe the real problem was not sovereign debt but rather political. People did not want to be locked into a system, which impoverished them and which prevented them from making their own decisions to improve their economies. Howe sees in the Euro a parallel with the gold standard, which locked people in. In the case of Britain, it almost locked them into permanent depression until they finally got out of it. The Euro is playing a similar role for Southern Europe today. During the crisis, all problems begin to merge into one huge problem. In the previous cycle the great recession, the rise of fascism and currency wars became part of a huge problem. This is what happens in every fourth turning: all these little problems come together into a giant problem, which eventually gets completely solved. Howe emphasises that fourth turnings are not necessarily dangerous or bad things, they are good and necessary. It's when societies solve big problems that otherwise in another era would have seemed insoluble. Fourth turnings are times when institutions which are deemed unworkable completely disappear, and institutions which are deemed workable are suddenly fortified.

Stephen Bannon, Trump's recently resigned chief strategic advisor, is a vocal advocat of these books and has been heavily influenced by them. Bannon had played a central role in helping Trump win the White House, shaping the billionaire businessman’s populist message in a way that resonated with millions of Americans unhappy with the progress of the economic recovery. Bannon believes that, for the new world order to rise, there must be a massive reckoning. He encourages breaking down political and economic alliances and turning away from traditional American principles to cause chaos. In that way, Bannon seems to be trying to bring about the Fourth Turning. Bannon has never been secretive about his desire to use Trump to bring about his vision of America. He told Vanity Fair last summer that Trump was a "blunt instrument for us ... I don’t know whether he really gets it or not."

In the podcast and in his book, Neil Howe mentions the following symptoms of a fourth turning:

• Unsatisfied people, unhappy with dysfunctional institutions and systems (e.g. the Euro, the American presidential election producing two inadequate candidates)

• A perceived crisis that endangers (e.g. North Korea, Islam and jihad, terrorism, China, immigration in Europe).

• An underground willingness to define who we are as a community and stand up for something in the face of encroaching danger.

• A desire for a new sense of community and solidarity (Howe has done a lot of polls on the millennials, which confirm this new desire)

• Nationalist movements (e.g. French National Front, the Dutch Party for Freedom, Alternative for Germany, the Freedom Party of Austria, the UK Independence Party, the Narendra Modi government in India)

• A willingness to change and a call for authoritatian leaders (e.g. calls for for Shinzō Abe in Japan, Rodrigo Duterte in the Philippines, radical leaders in the EU, Bernie Sanders and Trump in the US, Narendra Modi in India)

"History doesn't repeat itself, but it does rhyme" (Mark Twain)

If the fourth turning is happening then the really big crisis has yet to arrive. In their book, Howe and Strauss offer some financial advice (among others) for dealing with this turning of generations:

• "The bottom line is: you'll need to know where your money is."

• "Diversify enough to make sure that no one severe outcome would destroy your asset base: inflation, deflation, market crash, bank panic, even the default of the national debt."

• "hedge your portfolio: acquire assets in foreign markets, where the secular rhythms don't coincide with America."

• "Try to enter the crisis with a reliable cash flow, diversified savings, and some liquid assets"

Sources:

• Neil Howe Interview on CNBC

• Macro Voices Podcast: Neil Howe: The really big crisis has yet to arrive!

• The Art of Manliness Podcast: Podcast #236: What the Generational Cycle Theory Can Tell Us About Our Present Age

• Wikipedia: Strauss–Howe generational theory

• Amazon: The Fourth Turning: An American Prophecy - What the Cycles of History Tell Us About America's Next Rendezvous with Destiny

• Business Insider: Steve Bannon's obsession with a dark theory of history should be worrisome

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