Market Timing: Should You Attempt It?

http://www.wolanchuk.com/iimedia.htm

Top 190. Feb 3, 2002 8:44 AM

» Kirk - Article from Individual Investor Magazine

I found this article on Don Wolanchuk's Web Site:

Article from Individual Investor Magazine

Timing is Everything by Stephen Gandel

Out of the Chester Boot Shop in Roseville, Mich., Don Wolanchuk peddles Doc Martens shoes, leather vests, 10-gallon hats—and stock tips. Wolanchuk is the largest Doc Martens dealer in the Detroit area and, by some accounts, one of the greatest market seers ever. Patrons pay either $2.75 a minute, or $8,000 a year, to access his market advice on a 900 number. Calls come in from around the country, and Wolanchuk says someone at George Soros' fund management company phones regularly. Timer Digest, a Greenwich, Conn., newsletter that tracks about 100 investment advisers, clocked Wolanchuk's forecasts over the past eight years at a 20.2% annualized return, beating the Standard & Poor's 500-stock index by an average 3.6 percentage points. So why is Wolanchuk selling shoes instead of skippering a multibillion-dollar hedge fund? That's easy: because he's a market timer, and has the nerve to be out of the closet about it.

Market timing—predicting the stock market's tops and bottoms, and moving quickly from cash to stocks and back again in anticipation of them—is one of the Street's biggest taboos. So how did 94% of 36 market timers tracked by Steve Shellans of MoniResearch beat the S&P 500 during the third-quarter downturn, and why have 33% never had a bad quarter in five years? Is market timing unfairly condemned? Probably. But investors hoping to capitalize on the strategy better beware: It's easier said than done.

The Worst of Times

Only recently, somewhere along the rocket-like trajectory of the greatest bull market ever, did market timing become verboten. ("As a market timer with a 900 number, I'm working against the two worst reputations in this world," Wolanchuk quips.) It was big in the 1970s, during the flat market. And timers such as Elaine Garzarelli, who alerted clients to sell shortly before Black Monday in 1987, made some good calls in the '80s. So why did market timing become such dirty words?

A number of bad calls, including Garzarelli's 1996 bear cry that sullied her reputation, turned big-name market timers into bull market roadkill. The growing dominance of mutual fund investing also set market timers back, because portfolio managers detest mass movements out of their funds, which can exaggerate losses if the fund has to liquidate positions to cash out investors. Timers themselves can come off as a pretty wacky breed, with Wolanchuk a textbook example: "Individual investors don't have a chance," he says. "The boys in the back rooms of Goldman Sachs and other institutions have the market rigged."

But for all that, closet timers abound. "Asset allocation models are clearly market timing," says Edward Yardeni, chief economist at Deutsche Bank Securities. Set by top strategists at brokerages and investment banks, the models tell investors how to divide their dollars among stocks, cash, and bonds. Some analysts change their allocation models quarterly, if not monthly. Greg Smith, chief investment strategist at Prudential Securities, discourages short-term investing, but his asset allocation model seems to recommend it: He modified it 10 times in 1998, twice in October alone. The always ebullient Abby Joseph Cohen of Goldman Sachs may seem like the poster gal for buy and hold, but even she changed her allocation model in October, upping her weighting in stocks to 65% from 60% and lowering the cash position to 5% from 10%.

Many fund managers time the market, too, though most, like Robert M. Gintel of Gintel & Co., recoil when asked about it. "I'm not even sure what the term market timing means," Gintel says. Still, consider his behavior. Early last year, Gintel began selling his holdings. Since then, the cash position of the Gintel fund has grown to $43 million, or 31% of the portfolio. Now Gintel sees a more stable market, so he's buying again. But don't call him, well, one of those guys. "I'm not buying this month because I think the market is going to go up," he protests, "but because I see companies I want to invest in." Robert J. Markman, who manages funds-of-funds portfolios at Markman Capital Management, says timing doesn't offer any long-term payoff. But he recently shifted his portfolio from its traditional stance of 50% in large-cap funds to 95% and cut his international exposure. "Market timing is making a broad call on the market, like when you get out of stocks and into cash," he says. "I'm just managing money." Huh?

Carolyn Mertens, president of the Society of Asset Allocators and Fund Timers, thinks guys like Markman are fooling themselves. "The majority of our members do the same thing as any fund manager," she says. "They're protecting their assets, and that's what market timing is today."

Theory into Practice

For such a simple concept, market timing is amazingly difficult to pull off. "The fact that most people have failed at it doesn't mean it can't be done. It just means that most people don't know how," says Kenneth S. Ray, president of Æxpert Advisers. Don Wolanchuk says the first step is realizing that bottom lines and balance sheets are worthless. "Individuals are trained to believe that the market moves on all that fundamental stuff, but that's a smoke screen," he says.

Many market timers lean toward technical indicators, such as advance/decline lines, which track the number of stocks going up versus the number of losers, but Wolanchuk prefers the esoteric. It takes a sophisticated understanding of mathematics to follow his favorite tools. For instance, Wolanchuk believes the market is ruled by Fibonacci sequences—number patterns that seem to determine the architecture of all nature's bounty, from the number of petals on a sunflower to the shape and size of a shell—and he is a follower of Elliot Wave Theory, which says the market moves in a predictable, five-wave sequences: three waves moving in the direction of a trend, alternating with two counterwaves. Through the course of any day, he will look at reams of data from oscillator patterns, which measure the strength of the market, to put/call ratios, which gauge the direction options investors are betting the market will go. But even Wolanchuk, one of the cockier timers around, agrees: picking market tops and bottoms is more art than science.

What's Good for the Goose...

Then again, so is picking the Next Great Growth Stock. So should we all start timing the market? "If you are a conservative investor, modest market timing makes sense," says Warren Boroson, editor of the newsletter Mutual Fund Digest. "And the older you are, the more you should tilt toward having money in a market-timing fund." Two he likes are Vanguard Asset Allocation, which was up 16.1% this year through October and has returned an average of 21.4%

annually over the past three years, and Merriman Asset Allocation, which uses four timing indicators to spread risk. Merriman, however, hasn't performed well—it has returned an average of only 10.8% annually for the past three years (compared to an S&P 500 return of 25.4%).

Michael O'Higgins, who invented the Dow Dogs strategy, is one of the few portfolio managers who does recommend that individuals time the market, though he strongly warns, "People do too much of it." In his new book, Beating the Dow with Bonds (HarperBusiness), O'Higgins suggests investors make a timing call once a year, deciding whether to invest in stocks or bonds, based on the earnings yield of stocks. If the earnings yield of the Dow Jones industrial average and the S&P 500 is less than the interest investors would get on 30-year Treasuries, then O'Higgins opts for bonds. Of course, that strategy would have taken you out of stocks in the early 1980s, missing that decade's bull market. Currently, O'Higgins owns zero coupon bonds, and his newly formed O'Higgins fund was up 24% through the first three quarters of 1998.

What makes Wolanchuk's 10-year performance so incredible? Market timers, he says, tend to overplay their bearish hands. "I learned early on that to be king of the market timers, you just had to be bullish as hell," he says. And it has worked (at least in the abstract: Wolanchuk's performance is based on his market calls; he has never managed a fund). Based on his telephone service, at the end of last year, Timer Digest ranked him the best market timer for 1997. He also won the award for best timer for the past eight-year, five-year, three-year, and two-year periods.

Wolanchuk doesn't see the market turning down again soon. "I think the Dow can hit 16,000 in the next couple of months," he says. It's that type of prediction that can make even loyal Wolanchuk followers shake their heads. But consider this: in 1989, when the Dow was near 2700, Wolanchuk predicted the 1990s would end over 10,000. Earlier this year it flirted with 9400, and there's still 12 months to go.

-- posted by Kirk

Top 191. Feb 3, 2002 10:07 AM

» soonertimer - Re: Article from Individual Investor Magazine

In response to message posted by Kirk:

Sure looks to me that this article was written at the beginning of 1999! His strategy to be "bullish as hell", may not have produced many glowing articles over the last couple of years. :-)

-- posted by soonertimer

Top 192. Feb 3, 2002 12:42 PM

» mdorsey - Another month of good results for timers.

After two years and 1 month the move to cash or bonds in Jan 2000 is still looking great. I am personally ahead of where I would have been by 40% if I had just held my stock funds for that period. Some will say timing can't be done. Well maybe so but, time will tell.

-- posted by mdorsey

Top 193. Feb 9, 2002 2:10 PM

» Kirk - Terry Savage says "Don't Time the Market"

Good article by the 2/9/02 host of ABC's "Moneytalk"
http://www.suntimes.com/output/savage/cs...

Conclusion of her article:

Don't try to beat the market: "It should actually be a relief to learn that one of the most important laws of investing is that nobody can outsmart the market," says Glassman. Instead of "outsmarting" the market, he advises you to "partake"--just be invested in good stocks.

Time is money: "Time is the single most important factor in investing--more important than the stocks or bonds you pick or your cleverness in buying or selling at just the right moment," says Glassman, advising parents to start teaching and investing for their children while they are young.

Good advice!

-- posted by Kirk

Top 194. Feb 14, 2002 7:57 AM

» Kirk - Top 10 Timers are Bearish

As I post
DJIA = 10,034(just pushed through)
Nasty = 1877
SPX = 1124

To:David Stern who wrote (962)
From: da_cheif (don wolanchuk)
Thursday, Feb 14, 2002 7:32 AM
View Replies (2) | Respond to of 984

well....more fuel for the bull....for the first time ever Timer Digests top ten timers are all bearish....in the past 20 years that has never happened...9 out of ten happened in may 87 just before a blast off....but they only stayed bearish for a few days......this report coming after 2000 pts up is unprecedented and extraordinarily bulllish....

Wolanchuk used to be followed by Timer Digest and he'd win most every time so they stopped following him saying he "issued too many trading signals" even though the record says he issued fewer than typical. Wolanchuk is currently VERY, VERY bullish so lets see if he again beats the top 10 timers!

-- posted by Kirk

Top 195. Feb 14, 2002 12:39 PM

» way2go - tyc-- insiders timing??

http://biz.yahoo.com/t/t/tyc.html how can you tell if they are covering shorts or really buying??

-- posted by way2go

Top 196. Feb 17, 2002 6:02 AM

» SteveT - How to Avoid Temptations That Threaten Your Success

http://www.russell.com/us/Education_Cent...
I found this article on the Frank Russell web site.

Back to Basics
Part III: How to Avoid Temptations That Threaten Your Success
By Len Brennan
Managing Director ? Individual Investor Services
Frank Russell Company
May 23, 2001

Editor's Note: The recent bear market has given investors an opportunity to revisit basic ideas for successful investing and why they work in both up and down markets. This is the final article in a three-part "Back to Basics" series.

Temptations Can Pull You Off Track
Many investors follow a sensible process and sound principles in building their portfolios, only to then succumb to temptations that pull them off track. There are four categories these temptations fall into:

* Performance hype
* Timing
* Manager selection
* Market momentum

Let's evaluate how each can lure you away from your long-term plan, while also emphasizing how you can avoid them.

Put Performance Hype in Perspective
You've probably seen headlines in personal finance magazines that promise Our Ten Best Fund Picks for the New Year! Invariably, those "best funds" are selected through hindsight, such as last year's performance record.

These headlines do sell magazines, because so many investors want the prestige of owning a "five-star fund." Yet, authoritative studies have documented that selecting funds on past performance gives you only a random chance of success at best. In many cases, last year's best performing funds lag next year's averages, as styles that have been hot start to cool.

Avoid the Temptation
Unless you understand specifically how superior performance was generated, take it with a grain of salt. When you take the time to investigate, you will often find that a fund performed well because its specific style or economic sector was in favor, or maybe its portfolio manager was plain lucky. If you must pay attention to past performance, evaluate how the fund has performed over the past two or three economic cycles. Strong performance in both up and down markets can confirm that a manager maintained discipline and outperformed other managers of similar style ("peers"), even when that style wasn't doing so well. Focus not only on long-term performance versus benchmarks and peers but also long-term consistency.

Time Is On Your Side, But Timing Is Not
The temptation to "time the market" also can be influenced by the financial news that you hear. A gloomy report on the evening news can create enough anxiety to cause investors to pull money out of the market. If the market then goes higher, they may be reluctant to admit a mistake and miss a whole bull market. At Russell, we don't have a short-term view on which way markets are going, and we don't advocate tactical (short-term) market timing. Over many years of analysis, we have not seen timing work well for most professional investors, let alone individuals. We believe the opportunity always exists to begin a sensible investment program that is well diversified, with a long-term horizon.

Avoid the Temptation
How should you process daily bits of financial information? I recommend listening to financial news and trying to assimilate it into a context of how markets will move over time. Then, discuss with your spouse or financial advisor these "macro trends," not the day-to-day news and rumors. Even if events cause stocks to move up or down short-term, there are broad underlying currents flowing through markets which can be more powerful than the "surface news." Over longer periods of time, for example, stocks have always tended to trend upward with economic growth and corporate profits. This trend can be especially powerful for investors who have time on their side to achieve financial goals.

Manager Selection Has Grown More Challenging
Investors also go off track when they engage in the game of constantly assessing and changing portfolio managers. For example, suppose you stay true to your asset allocation by putting 30% into large-cap growth stocks, but you constantly change large-cap growth managers. This can be detrimental for three reasons: 1) It doesn't give your manager a chance to perform over a full cycle; 2) It can trigger tax consequences that erode returns; and 3) Any mistakes you make in selecting managers can damage your confidence and long-term commitment.

At Russell, we recognize that there are now more mutual funds in the world than stocks listed on exchanges, and most investors have as much difficulty selecting managers as individual stocks. Evaluating managers isn't getting easier for the individual investor, either.

Avoid the Temptation
We employ 60 analysts and spend $20 million a year researching managers and analyzing their styles and performance. We believe that individual investors who depend on active management should leverage the "manager due diligence" resources of an analytical firm like Russell. In a Russell fund, you pay a management fee comparable to the fee in a regular mutual fund. But you receive multiple managers plus Russell's comprehensive services for researching, monitoring and changing them if appropriate. We believe this is an intelligent approach for investors who: 1) want to stay well diversified in an asset allocation discipline; and 2) believe money managers can apply their insight and information to outperform market benchmarks For investors who are content to mirror the market averages, we believe participating in index funds can be a way to avoid the temptation of second-guessing manager selections.

Market Momentum Can Change Your Risk Level
The fourth and final temptation is perhaps the most subtle, because it doesn't require action on your part. At times, the market's momentum can be powerful enough to pull your asset allocation out of alignment. An example occurred in 1998 and 1999, when the spectacular run-up in large-cap growth stocks caused many portfolios to balloon with these stocks. It's important to evaluate momentum-driven changes in your risk exposure, and whether you are comfortable with them. For example, suppose you settled on an asset allocation of 60% stocks and 40% bonds, and then the stock market made a powerful move upward, so that the mix shifted to 80-20%. Ask yourself if you are as comfortable with the risk represented by 80%-20% as you were with 60%-40%.

Avoid the Temptation
By choosing an "automatic rebalancing" feature, you can anticipate and prevent momentum-driven changes in risk exposure. If your portfolio moves out of alignment by perhaps 5% in an asset class, the program automatically adjusts the mix to the original percentages.

Conceptually, you should recognize the need for a "constant level of risk" represented by a specific mix of asset classes. This can be difficult, because it's natural to want to ride a bull market all the way to the peak with the hottest stocks. But that's a little like trying to climb Mt. Everest in a snowstorm. You don't know where the peak is, and the higher you climb the farther you can tumble back down. If you don't take advantage of automatic rebalancing, it's a good idea to review your portfolio mix quarterly ? especially when the market has made a significant move.

The Value of Patience + Perspective
All four temptations have one thing in common: They can undermine the process of identifying your important financial goals and building a portfolio designed to meet them over time. The solutions described for coping with temptations also have one thing in common: They help you avoid the powerful seduction of short-term news, trends, performance and momentum. Don't be distracted by news headlines or advertising hype. Look inward and be honest with yourself. Give your investment program a fair chance to succeed by being patient and putting all the "little things" in long-term perspective.

-- posted by SteveT

http://cbs.marketwatch.com/news/story.as...

Top 197. Feb 27, 2002 10:38 AM

» SPYDR22000 - FODDER FOR THE DEBATE

I have personally developed many successful mrkt.
timing schemes where back testing is the only
criteria 8)

-- posted by SPYDR22000

Top 198. Feb 27, 2002 3:34 PM

» KLR - Re: FODDER FOR THE DEBATE

In response to message posted by SPYDR22000:

Hey Spydr,

I read that article too. Basically it says buy above the 100DMA and sell below. This is what back-tested results look like....

"...We back-tested this system using the Nasdaq Index ($COMPQ: news, chart, profile). Without timing, the index had an annualized return of 11.8 percent in the 30 years from 1972 through 2001. Along the way, its largest decline was 76 percent.

When timed with the 100-day moving average, the index's return rose to 18.9 percent, and its largest decline was 38 percent.

To put that in perspective, an initial investment of $10,000 in 1972 would have grown to $283,958 without timing or to $1.8 million using this simple timing system. Timing multiplied the return by 6.3 while cutting the risk in half.

I wonder how such a "system" works in shorter time frames?

-- posted by KLR