Summer Rally? July 5, 2002.
Sy Harding
I’m going to guess, based on anecdotal evidence, that 90% of investors still believe in buy and hold investing, and that ‘market-timing’ has no validity.
This even though the market, on a buy and hold basis has now plunged all the way back to its level of 1997. So for buy and hold investors, cash would
have been a much better investment over the last five years than participating in the biggest bull market in history.
How can investors repeatedly be fooled about buy and hold investing, and have such a false impression of market-timing? It must be due to the
brain-washing work of Wall Street, and not any research into the actual history of the two strategies by investors.
Wall Street obviously doesn’t want investors to be engaged in market-timing.
Mutual funds don’t want investors periodically switching out of their funds to avoid a decline in the market, because when they come back they might
come back to a different fund. So they spend millions ‘educating’ investors to simply buy and hold, that “market-timing doesn’t work”. It’s obviously a
case of do as I say and not as I do, since statistics show that on average, mutual funds have a portfolio turnover rate of roughly 90% per year. That is, they
hold the stocks in their portfolios an average of less than 12 months.
Brokerage firms don’t want investors to recognize market-timing as a viable strategy. They use investor assets to make loans to margin buyers, loan
investors’ stock out to short-sellers for a fee, and are paid fees based on the amount of assets under management to manage wrap-accounts for investors
(whether the accounts are making or losing money).
Corporations sure don’t want you trading out of their stocks just because you think they’ve become overvalued, perhaps driving the price down. After all,
they use the value of their stock as collateral for loans, and as currency when acquiring other companies. But their advice to investors to simply buy and
hold is another case of do as I say and not as I do. Company insiders sell their stock at rally highs and buy back at correction lows with such consistent
success that reports of insider buying and selling (the legal kind) are used by market professionals as another tool in their analysis of which stocks they
should buy or sell themselves.
The media plays an even more important role in convincing investors to buy and hold, since it is the conduit through which Wall Street reaches most
investors, by sending out spokespersons for interviews, and providing the experts to answer the questions of newspaper and TV reporters. Meanwhile,
columnists are generally writers, not market analysts, and so rely on their Wall Street 'contacts' to provide them with column 'ideas', or to provide 'the truth'
when they run across something positive on market-timing and want to get the 'facts'.
There are basically only three approaches to the stock market. One is buy and hold investing, buying ‘good’ stocks and hoping they will always be good
stocks. The current bear market has again taught history’s lesson about that fantasy. Another approach is to simply not participate in the market at all. Yet
over time the stock market, investing in corporate America , has always been the best investment by far, better than real estate, bonds, gold, collectibles, etc.
The third approach is market-timing, participating in the gains, but then using some strategy to avoid giving back too much of the gains, or even making
more by investing for the downside.
Unfortunately most of those who fall for the buy and hold theory wind up instead following all three strategies, and even more unfortunate, adopt each with
the worst of timing. They start out following the highly touted buy and hold strategy in a bull market when it works well. In fact, it seems so easy and sure
fire they swear they will hold forever. And so they hold through most of the next bear market. But after losing their easy bull-market profits, they become
market-timers - but sell out after the damage is done. Then, made increasingly disgusted by rallies that fail, they adopt the worst approach to the market,
that of swearing off “the damned market” for good.
Yet those following most any of the 'market-timing' strategies have few such long-term problems. Sure it isn’t as easy as simply buying and holding, and
mistakes will be made, by selling too early in rallies, or buying too soon or too late at the next correction bottom. But market-timing calls for cutting losses
quickly, while letting winning trades run, so will usually have to deal with only short-term losses amidst the gains. Much easier to deal with than giving
back 5 years of profits.
It’s beginning to look like investors who held tough all through the current bear market in spite of horrendous losses, are now reaching that other extreme
of “swearing off the damned market for good”. Once again this week, money flowed out of mutual funds, a process that began five or six weeks ago.
Meanwhile, market-timers, even those only taking advantage of a simple ‘seasonal-timing’ strategy, are considerably ahead again. Seasonal timing called
for entering the market in October and exiting in April, and so caught most of the big September through December rally. It then called for being in cash
since April, a period in which the S&P 500 has lost 15%, and the NASDAQ 26%, in the April-July market plunge.
As you know, my market-timing work based on technical analysis, called for a market decline to a low by the end of June, which would be followed by a
significant summer rally (but not the end of the bear market).
For those who haven’t yet sworn off the market for good, that remains my expectation. |
