I am definitely courting controversy with this one.
We see it all the time – “You can’t time the Market” and “You must stay fully invested” and all this sort of stuff. To an extent I do agree with this but to be honest it is quite a limited extent and I would make the argument that it is far too simplistic and totally ignores stacks of considerations that we need to weigh up in the Real World. No doubt you will have spotted that I bleat on about ‘The Real World’ all the time and it is a big thing with me. I find that so much Financial Writing is academic and theoretical and so obviously not written by people who actually trade and invest in the Markets on a daily basis – if they did, they wouldn’t write this cr*p.
I guess I shouldn’t complain – I get lots of visits to my Website and I have no doubt that part of this comes from the grounding in reality that my scribbles have and if everyone was writing like I do then it would be a lot harder to get people to be willing to read it !! Of course there is also a huge difference between people who write because it is their Job and people who write because they enjoy doing it and because they have the time and the passion for their subject matter.
A Matter of Incentives
Why is this “You can’t time the Market” line trotted out so much? Well, being a bit of an old cynic, I would say it is because it is in the self-interest of the Financial Services Industry to encourage this kind of thinking. It is not difficult to see why and it is on several levels. The most obvious one is that Fund Management Groups and Pension Funds and suchlike tend to get paid via a small Percentage that is charged against the ‘Funds under Management’ (FUM or Assets Under Management – AUM [Not to be confused with FGM – that is quite different]) and anyone with even a fairly limited understanding of maths can figure out that the bigger the FUM an Investment House has, the larger its Revenue and therefore Profits.
This also means that not only is it in the interests of Fund Management Groups to ‘pretend’ that the Markets will keep going up (the truth is that they have no more idea than my Cat does – and I don’t even have a Cat !!), but they also want to avoid Markets falling so they try to encourage Retail Punters (most of whom have limited if any understanding of Assets) to keep on Buying and whenever there is a significant drop in the Markets, you can guarantee that Fund Managers will be saying “Now is the time to be buying” (which is a bit weird because they will also have been telling everyone to Buy just before the Market dropped 15%). I seriously don’t remember ever reading about or hearing a Fund Manager say “This Market is overvalued and has run up too high, it is time to Sell” – ok, back in 1999/2000 there might have been a small number but they were very rare. Admittedly, people like Warren Buffett were saying it was a joke (of course everyone called him an Idiot !1). In 2008/2009 no Fund Managers saw the Credit Crunch coming.
To be fair, there is some sense to this based on Historical outcomes (ooops, ‘Outcome Bias’ kicking in then !!) where since something like 1900 the Markets on average have returned around 5% to 7% a Year depending on what Source you are using. But of course, the problem with this is that it is an Average and there have been many times during that enormous Period when the Markets dropped 50% or more – so people who bought before one of these massive Drops because they believed the Fund Managers, probably weren’t best pleased. Another example of this is the NIKKEI 225 Index for Japan where it hit something like 40,000 decades ago and has got nowhere near that since. No doubt Fund Managers were telling Punters to “Buy, Buy, Buy” right at that Peak.
I am shooting off on a bit of a tangent here but there is another related concept. The other thing Fund Management Groups encourage Retail Punters to do is a wonderful sounding thing called ‘Pound Cost Averaging’ and there is a bit of sense to it. However, who’s interest is it really in for Punters to set up Monthly Direct Debits from their Wages so that every Month the Fund Management Group gets a lovely dollop of Fresh Cash? Such wheezes are fantastic for the Fund Manager because the Direct Debit locks Punters in to them and the inflows of Cash help to keep pushing the Markets up and of course they add to the FUM which means the Fund Manager makes more Revenue and Profit.
For Open-Ended Funds (OEICs and Unit Trusts) there is another bonus for the Fund Managers – if some People want their Money back (they are ‘Redeeming’ some Cash) then rather than being forced to sell Holdings, the Fund Managers can just pay them with the Money coming in from all the Direct Debits (it is not a Ponzi Scheme but I can see where your Brain is going !!)
It’s a bit like the idea of Dividend Reinvestment – another bad idea in my book. OK, for the lazy Punter who can’t be bothered to do much there could be some benefit in a DRIP Scheme but again it is something that helps the Company offering the Scheme more than it helps the Punter. If you have a Company that is doing well and the Share Price is rising, if you re-invest your Dividends then you are buying Shares at continually higher Prices and potentially more over-valued levels; this is clearly not a good idea. OK, you also get the chance event where you might find your DRIP happens when Markets are low but in reality the Big Falls that would really make a difference to your Average Buy Price are actually very rare so it is more often that you are ‘Buying High’. The real reason for DRIP Schemes I suspect is that they can help drive up the Share Price which can help trigger Directors’ bonuses.
I 100% am into the important concept of Re-investing Dividend Payments but my preferred way is to let Dividends from various Companies build up in my Account and when I have a large enough pile, I will be looking at the Stocks I hold (or perhaps even a new Stock) to see if I can use the Cash best by investing more in something I hold already. That way I am buying ‘Low’ hopefully and not buying ‘High’ and not increasing my exposure to a given Stock at the same time which is another drawback of DRIP. It is important to appreciate that your Risk rises as a Stock Price rises. Re-investing Dividends in the way I do really maximises the benefits of Pound Cost Averaging which is a useful mathematical thingamajig.
Right, back on track, where was I? Ah, Fund Managers, and why they want us to stay fully invested, whatever the weather. On an individual level when we come to a Girl or Boy who is a Fund Manager, it is obviously in their interest to ‘Talk their own book’ and to encourage Punters to keep buying whatever the Markets are doing and whatever the Outlook realistically appears to be. This also goes down to an individual Stock level where you will often see articles saying this, that, or the other Fund Manager likes XYZ Stock. The simple fact is they are no different to normal Retail Investors although they are given this aura of being Market Wizards (they are not). Believe me, when the Market drops none of them will have seen it coming – you only need to look at the Woody Woodford debacle to see how even those who are thought to be among the best can still screw it up just like any other Human on the Planet.
For more insight into the reality of how Fund Mangers actually select Stocks, go to Wheelie’s Bookshop and get a copy of ‘Liar’s Poker’ by Michael Lewis which is quite an eye-opener.
Nobody said it would be Easy
Without doubt perhaps the most appropriate and valid reason for “You can’t time the Market” is that however talented and experienced you are with the Markets, Buying and Selling at even roughly the ‘right’ time is extremely hard to do. On the one hand you have the Fundamental Economic Backdrop and this is notoriously difficult to predict and of course then we have the various Signals and Indications that the Price Charts themselves can give and neither is that easy to ‘read’ and use well in practice.
It is because of this difficultly that many People fully agree with the idea that Market Timing is impossible and they take an approach of “I don’t want to know” and they shake their head and look away or they stick their head in a bucket. That may be a fantastic coping mechanism (bit of a Ulysses Pact for those who know a bit about Psychology) but for me personally I cannot operate in this way and if I can see impending Doom on the horizon, then I simply cannot ignore it and just pretend everything will be alright whilst whistling a tune and crossing my digits behind my back (or doing my best Ostrich impression).
For example, it has been blindingly obvious that the Brexit Mess could cause a lot of trouble in the Markets this year and I Hedged my Portfolio from the get-go. That has turned out in practice to be a terrible idea as the Markets have charged ever higher but of course there are no guarantees that the Markets will keep going up and this is especially the case as we head into Autumn and the ‘Worst Month of the Year’ which is September (and October can be ‘fun’). I have been ‘Wrong’ all Year but that does not mean that my Decision to Hedge at the start of 2019 was a bad one – in fact, it could still very well turn out to be an extremely good move. Patience.
Of course many will see my failings with the Hedges to be precisely why you cannot time the Market but I would contend that this is merely Outcome Bias and Recency Bias – neither of which mean that Markets will keep on rising and remember, as Markets rise, the Risk of a Drop increases as they get more and more highly valued (or Over-valued in many cases at the moment). I fully admit I have made huge errors. The key one is that my Short Index Positions have turned out to be far too big (although this is partly obscured by the huge hit of 4.4% I took on my Portfolio because Patisserie Valerie CAKE exploded like a Cream Cake in my face earlier in the year) but the other error is in over-riding my Stoplosses – this is a great example of ‘Experts’ being prone to over-riding their own Rules.
OK, ‘Expert’ is a strong word, I really mean someone who has a rough idea about what is going on !!
And in truth I have not necessarily been timing the Market. What I have done with my Hedges is really a Risk Management exercise which I will no doubt come onto a bit more later in this Blog. I could see there was huge potential for trouble in 2019 (in fact, I would say the Fundamental Outlook is much worse now than it was at the start of 2019 now that we have a lot more evidence that the Global Economy apart from the US looks quite troubled) and I took the Decision to Hedge because I did not want to Sell a load of my Stocks or to TopChop any Positions and Hedging has the same effect as Selling Stocks and building up Cash. The catch is that I thought I was Hedging to the extent of about 30% to 40% of my Long Portfolio of Stocks but in reality it has turned out that I am about 90% Hedged !!! (if you go to my ‘Weekly Performance’ page you should see my latest thinking on my Returns, my view of the Outlook and my Strategy).
It is quite silly really to say that you cannot time the Markets. In reality the Best Traders do this all the time and that is how they make their Money. There is no reason why Long-term Investors cannot pinch just a small part of the Trader ‘Toolbox’ and via this follow some very simple timing strategies. To my mind the far bigger danger than trying to time the Market is not really knowing what you are. Most Investors behave like Price Traders and many Price Traders go wrong by behaving like Long-term Investors. It is far more important to figure these distinctions out than to worry about this ‘Stay fully invested’ stuff (at the end of this Blog I will include one about the differences between Investors and Traders).
Keep Costs down
Actually a very good reason for not timing the Markets is to keep Dealing Costs and ‘Costs’ involved in the hassle of Selling Positions and having to Buy them back again as low as possible. It is extremely important and highly overlooked by probably the vast majority of Private Investors/Traders just how much Dealing Costs and Buy/Sell Spreads can impact your Total Return for a given Year. This is part of the reason that I like to Hedge my Portfolio rather than Selling Quality Shares that I want to keep for the long-term only to have to Buy them back again later (and of course with Sods Law you will end up buying them at a higher Price !!). It is cheaper, faster, easier to Hedge.
As a general concept, especially for Investors and less so for Traders, keeping your Dealing Frequency as low as possible is a very good idea. So many People end up over-trading and just running up Costs unnecessarily and of course you can miss out on Dividend Payments as well (it is also important to say that ‘Staying fully invested’ does have the benefit that at least you pick up Dividend Payments – which make a big difference to your Returns when compounded over the years and most Investors/Traders fail to appreciate this). I always say it – the biggest mistake of my Investing ‘Career’ has been to Sell great Stocks too early, even if I did take out a nice Profit at the time – had I held on, I would have made a huge amount more. Chopping in and out all the time makes it far harder to “Run your Winners”.
That’s it for Part 1 and hopefully sets the scene for Part 2 which is probably a bit more ‘meaty’. In the meantime, have a look at the Old Blogs I have shoved in below.
These Blogs cover the whole Investor or Trader? thing:
This next one has a link to Part 1 at the start:
If I have remembered it right, this one has lots about the impact of Costs and Dividends and stuff. Lots of insights into the dangers of over-trading:
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