Market timing and fund managers...
I just have to chime in on market timing and TA for a bit. First, it is well worthwhile to read "Pring on Market Momentum" (the thin book, not the 1000 pager) as a companion volume to "A Random Walk Down Wall Street". When Pring uses lines like "Some people use a 28 day moving average since it corresponds to the length of the menstrual cycle", I can only conclude that this is voodoo, not anything I want to risk my money on. I mean really, now, this is a pretty mystical connection <G>.
The seductive thing about TA is that you can fit any graph of the past prices of a stock to some formula that would have "predicted" the proper buy/sell points to maximize profits. Clearly, the problem is to choose the "right" formula for going forward. Oops, that's where understanding the nature of the company/sector you are in comes into play as well as the psychology of investors.... Sounds suspicious to me. Conversely, you can take almost any formula and find some stock whose historical price works well with the formula over some interval. It seems that one or both of these techniques are used by most TA enthusiasts.
In my more cynical moments, I wonder if the whole TA thing is simply a scam by the brokerages to encourage more trades. No matter whether TA works or doesn't, it encourages more trades and thus makes more money for the brokerages. Who provides those "free tools" anyway?
Pring makes a very interesting point. Something to the effect that "The more complex the formula, the less most people know about what it actually measures". I'm paraphrasing here since I loaned the book out and haven't gotten it back. I'd encourage anyone who practices TA to get the actual math that generates the pretty graphs, understand what each variable is doing and correlate that to the "real world". What is it actually supposed to measure? Until you do that, you are letting someone else play with your money, not taking responsibility for your own decisions. This is really the equivalent of Due Diligence when buying a stock. It makes no sense to me to accept the math underneath the TA blindly yet scoff at a "hot tip" from an anonymous poster on a message board. In both cases, you are accepting someone else's decision without doing your homework. Don't tell me that "TA measures investor psychology". Tell me what it is about the particular formula you are using that measures this. I don't need a mathematical formula to determine that "more people are buying than selling". I can tell that from the price chart. I can also tell you precisely what the price chart is measuring. I'd venture to guess that a vanishingly small number of people who speak knowledgeably about TA can do the same about their charts.
Now, before the die-hard TA enthusiasts out there jump all over me, let me say that if it actually works for you, do more of it!! If you have found a method that works for you, great. Let me know what it is and I'll send you 10% of the profits. However, I will scoff at any statement that starts out "I could have...". I've tried to say that too many times myself to do anything other than laugh. Just give me ONE MONTH of FUTURE prices for any stock and I'll retire. That's essentially what is said by any sentence that starts out "I could have...".
About outperforming fund managers.
I've long thought that fund managers labor under constraints that the individual doesn't. Specifically, they have too much money to handle and are measured over a very short time frame. We can all (except possibly some of the retired set) take all our money out of wherever it is now and put it somewhere else and nobody notices. In particular, we wouldn't have effected the stocks we sold/bought at all. GG practice concentrates money in a few companies. A fund manager can't do this with a gazillion dollars without changing the valuation of the companies being invested in, particularly when they are entering the tornado (i.e. around our 10B market cap criterion). They are also often constrained in how much of a company they can own. Additionally, they have to answer the question "how did you do this quarter?". Thus they make bad decisions and have to scramble to cover. Witness the "window dressing" done late last year (and its consequences this last couple of months).
The "risk adjusted" jargon that is prevalent just doesn't count for many of us. We're not investing in enough companies to make any statistical arguments. Statistics don't count in this case anyway. I'm not interested in the average rate of return of the market except as it lets me know whether I'm wasting my time and could buy an index fund and spend more time in my garden. I'm very interested in whether the companies I'm invested in are making or losing me money. I spend considerable time trying, in fact, to make the statistics used by studies irrelevant. That's what the GG is all about in my view. "Risk adjusted" is a statistical measure with built-in assumptions. Another way of saying this is the the DD we try to do here is intended to alter the risk in the "risk adjusted" equation (this has been pointed out many times before, but it bears repeating).
Look, if I borrow $10,000 and lose it all the worst consequence for me is that I'd have to extend the mortgage on the house for an additional 8 months or so, paying it off when I'm 48 instead of 47. Big deal. I'd be "broker and wiser", but on a scale of 1 to 10, with 10 being having my house bombed or being on the wrong end of an "ethnic cleansing", that consequence rates way below 1. I understand that 10K is of larger consequence for many, but still not a biggie on the above scale. The risk in the above for me isn't sufficient to miss the opportunity. Interesting side note; People are generally more upset by a small loss than missing a huge opportunity.
My final rant: "Ethnic cleansing" is a vile term. Would someone please explain to me why it's perfectly acceptable to say "ethnic cleansing" on public radio but slang terms for making love are prohibited? See the movie "Lenny" and his comparison of stag film to a bang-bang shoot-em-up flick. Something like... "Most potentially violent scene in the stag film is the guy picks up a pillow. He may smother her with it, right? Instead he slides it gently under her butt." Kill is also a four-letter word, and rarely done by mutual consent. Yet SI won't censor me for typing kill, kill!, kill!!! KILL!!! "And we was both jumpin' up and down yellin' KILL, KILL, KILL! And the sergeant come in, pinned a medal on me and said 'you're our boy'. I wasn't too happy about that". (from the song 'Alice's Restaurant' by Arlo Guthrie where he's reporting to the draft board, for the under-35 set).
There, I feel better. What's the equivalent term for motor mouth as it pertains to typing?
OK, it's time to do what I went on-line for in the first place....
Erick@MotorMouthAtTheKeyboard.com |
