Market Timing: Should You Attempt It?

» KLR - Where's Bob Brinker's Record???

Well, after 20 years of watching Mark Hulbert's monitoring of investment letterland, I agree with the facts -- but I disagree with the conclusion.

As I said in my book, "The Wall Street Gurus," the message of Mark's data can be summarized as the two Hulbert Laws of Investing:

1. It's E-X-T-R-EMLY hard to beat the market over time. (Corollary: if anyone says he consistently makes spectacular profits, don't believe him.)

2. It may be hard. But it can be done. (Corollary: We -- well, actually Mark -- knows who's done it.)

It's quite true that only a very few investment letters beat the stock market. And that's at least as true for institutional investors as well.

Mark's data shows that 12 letters (out of 67 tracked) beat the market over the past 10 years and only 8 (out or 42) over the past 15 years.

Just five have beaten the market over the 22 years since Mark began monitoring the industry. They are:

The Prudent Speculator

No Load Fund X

The Value Line Investment Survey

Dow Theory Letters

Elliott Wave Financial Forecast

To be sure, the first three newsletters on this list owe at least part of their market-beating performance to stock (or fund) selection. But the last two made it onto the list solely on the basis of their superior market timing.

So some timers do, in fact, beat the market.

Not by much, of course. Mark's data shows that as a practical matter, annualized gains of 15 to 20 percent are the best you can expect in the stock market over the long term -- maybe twice the market's underlying growth trend, which you could get with a nice restful buy-and-hold.

You do get exceptions. The Prudent Speculator has appreciated at an annualized 18.7 percent since mid-1980.

But, again, they don't outlie by much. Remember, Warren Buffett's annualized appreciation at Berkshire Hathaway is only -- make that "only" - 23 percent.

This sounds elementary. But polls show that investors have extraordinarily exaggerated ideas of what return they can expect. It causes them to be too impatient and sometimes, alas, to say rude things to money managers.

Investors shouldn't be impatient. As everyone knows, but few really understand, compound interest is a wonderful thing. That 18.7 percent annualized gain would have meant that $100 invested in mid-1980 would now be worth $4,344.

Hulbert's First Law is the answer to a nasty question that cynics often ask about investment letters: If they know how to beat the market, why are they selling the secret in a letter for a lousy few hundred bucks? Answer: even an excellent 15 to 20 percent return won't feed an editor who has little capital to begin with. In effect, by selling you the advice, he's sharing the return on your capital.

Of course, this ceiling on long-run stock market returns just emphasizes how much more important the asset allocation decision is -- whether to hold stocks, bonds, cash or gold (see my June 6 column). But that's another story.

-- posted by KLR

» Kirk - The Seers and Their Wares

http://www.suite101.com/discussion.cfm/i...

Author: MarketVVizard
Date: July 14, 2002 4:41 PM
Subject: Roger's Show this weekend

The Seers and Their Wares
12-Jul-02 13:32 ET

[BRIEFING.COM - Gregory A. Jones] VIX over this, put/call ratio of that, dwindling bullish sentiment, capitulation by some unknown definition - what is your favorite rationale that strategists cite when calling a stock market bottom? Since you hear 5-10 per day on average, ultimately a few of them will be right, but since you don't know which ones in advance, who cares?

We've seen the Internet bubble, Enron, Worldcom, the Spitzer investigations, and yet after it all, the market still reacts to the forecasts of sell-side strategists. There is some value in Wall Street research, but the broad market calls are perhaps the least valuable of all Wall Street research.

Lies, Damned Lies, and Statistics

The VIX index? It's a measure of volatility whose history dates all the way back to the mid-1980s. That's not even two business cycles of market history! In statistics, there is a concept known as degrees of freedom. Without getting into the dull details, let's just say that the VIX history doesn't have enough degrees of freedom to get you out of Sing-Sing; watching hem-lines is a better bet.

Unfortunately, using just about any stock market indicator in this manner is an exercise in futility. That's because most indicators are used to predict stock market peaks and troughs, and these peaks and troughs are associated with business cycles which are infrequent events.

The history of most market indicators is often post-war, or perhaps post-1929 crash. Over those respective periods, there have been 10 and 12 business cycles. To put into perspective why this is too short a period to prove that any indicator is reliable, consider the following. Given the track record of an indicator to be successful over those periods, we can tell you how many indicators you would have to sift through to find one with that success rate even if it had no relationship to the stock market (think hem-lines again).

* Successfully calls the turn 8 of 10 times: 23 indicators.

* Successfully calls the turn 10 of 10 times: 1000 indicators.

* Successfully calls the turn 9 of 12 times: 19 indicators.

* Successfully calls the turn 11 of 12 times: 333 indicators.

To translate the first example: to find an indicator with no relation to the stock market that had successfully predicted 8 of the past 10 market turns, probabilities suggest that you would have to sift through 23 indicators.

Given that there are 1000s of possible stock market indicators such as the VIX or put/call or whatever that can be claimed to have predictive power, probability tables suggest that it shouldn't be hard to find one with a perfect track record for the post-war period, and that this perfect track record is just as likely to be luck as to be proof of cause and effect.
The Lesson: Buy It Because It's Worth the Price

The lesson? Market indicators that purport to predict the future based on the past probably have no better chance of doing so than the nickel in your pocket (which, coincidentally, might be what you end up with if you bet on these indicators).

The same goes for chart-reading, which can sometimes be useful for short-term trading, but will probably not help you call the bottom. Naturally, someone will claim that their chart did, but with 10,000 different chart analyses out there, quite a few will probably call the bottom. Too bad you won't know which ones until after the fact.

What we're working up to is this: the only way you can comfortably invest in a stock in the midst of an ugly market is by determining that the company issuing that stock can produce future cash flow whose discounted present value is greater than the share price. Or if you're looking at a broad index, you need to be confident that the S&P 500 companies or the Nasdaq 100 companies can accomplish that feat.

Say No to the Gremlin

Ultimately, that's what investing is about, yet this type of analysis is almost always nonexistent when sell-side strategists come to the market's defense. They say there has been capitulation, that the VIX is sending a buy signal, that an NFC team won the Super Bowl, yada yada. And my used car salesman tells me that the AMC Gremlin he's pushing on me will be a valuable antique soon.

At the end of the day, the VIX, put/call, bullish sentiment, and every other market indicator won't make a lick of difference to the company you now own - either that company can generate the cash to justify your purchase price or it can't.

There are reasons to be optimistic about the future - we voiced some in yesterday's brief about capitalism's creative destruction. And we would add that justifying higher prices through valuation analysis becomes easier when prices go down despite little change in underlying fundamentals.

But be sure that the reasons you choose to invest (as opposed to trade) are the right reasons - not because the latest vogue indicator or chart is flashing a buy signal, and definitely not because someone who gets paid by a firm that makes money selling stocks is telling you to buy stocks.

-- posted by Kirk

» CaptRon - Four year market cycles

-- posted by CaptRon

» Smedly - Re: Re: Re: SY HARDING SITE

"I know of no one with an investment horizon of 65 years"

My dads biggest investment mistake was not investing $10,000 for me 65 years ago.

-- posted by Smedly

» Kirk - The Market Cycle Guru Effect

To:Truman Bradley who started this subject
From: geode00 Sunday, Jul 28, 2002 10:09 PM
Respond to of 16343

From that other board:
"For many decades, the US stock market has generally followed a four-year cycle. Significant bear market lows occurred in 1962, 1966, 1970, 1974, 1978 and 1982. The broad stock market has normally spent 2.5 or 3 years going up and 1 or 1.5 years going down.

A new market cycle guru emerges in almost every major stock market cycle, once every 4 years. A guru's fame tends to last for 2 to 3 years. The reigning period of each guru coincides with a major bull market in the United States.

A market cycle guru forecasts all major rallies and declines. Each correct forecast increases his fame and prompts even more people to buy or sell when he issues his next forecast. As more and more people take notice of the guru, his advice becomes a self-fulfilling prophecy. When you recognize a hot new guru, it pays to follow his advice....

The success of a market cycle guru depends on more than short-term luck. He has a pet theory about the market...At first, the market refuses to follow an aspiring guru's pet theory. Then the market changes and for several years comes in gear with theory. That is when the star of the market guru rises high and bright above the marketplace....

A guru usually earns a living publishing a newsletter and can grow rich selling his advice. Subscriptions can soar from a few hundred annually to tens of thousands....

At investment conferences, a guru is surrounded by a mob of admirers. If you ever find yourself in such a crowd, notice that a guru is seldom asked questions about his theory. His admirers are content to drink in the sound of his voice. They brag to their friends about having met him.

A guru remains famous for as long as the market behaves according to his theory---usually for less than the duration of one 4-year market cycle. At some point the market changes and starts marching to a different tune. A guru continues to use old methods that worked spectacularly well in the past and rapidly loses his following. When the guru's forecasts stop working, public admiration turns to hatred. It is impossible for a discredited market cycle guru to return to stardom....

Mass psychology being what it is, new gurus will certainly emerge. An old cycle guru never fully comes back. Once he stumbles, the adulation turns to derision and hatred. An expensive vase, once shattered, can never be fully restored."

"The personalities of market gurus differ. Some are dead, but those who are alive range from serious academic types to great showmen. A guru has to produce original research for several years, then get lucky when the market turns his way."

"When a trade goes against them they feel like punished children and try to keep their losses secret. You can read traders' emotions on their faces.
Many traders believe that the aim of a market analyst is to forecast future prices. The amateurs in most fields ask for forecasts, while professional simply manage information and make decisions based on probabilities."

----Elder

83 ====> 21.64 = -74% wow (emphasis on the ow) zer.

-- posted by Kirk

» Jen_ - To Time or Not to Time

Should you try to ‘time’ the market?

Stock strategists are split on whether it pays to look for market cycles

By John W. Schoen
MSNBC

After a painful plunge on fears widespread bogus accounting and widening corporate scandals, the stock market is now surging — with the Dow leaping 1000 points in the last five sessions. Will the rally continue? Should you even try to pick the bottom? With adherents of “buy-and-hold” investing still wincing from the recent raging bear market, the idea of “market timing” is winning renewed attention.

CONVENTIONAL WISDOM on Wall Street holds that market timing is a fool’s game. Trying to move your money in the market before it rallies and out before it declines, according to this view, requires a crystal ball that just hasn’t been invented.

“The person who can tell you infallibly when we’re at the bottom or the top has not yet been born,” long-time market watcher Louis Rukeyser told his CNBC viewers Friday night. Still, just as “trees don’t grow to the sky,” he said, “submarines don’t dive to the center of the earth,” and many market watchers “think a bottoming process is now truly underway.”

In fact, after what turned out to be one of the biggest bubbles in the history of the U.S. financial markets, some market watchers think stocks are now hitting a bottom of historic proportions, including market strategist and historian Don Hays.

“The evidence is pretty overwhelming that the conditions you reached in the last 6 weeks have only been reached in a couple of time in U.S. history — 1932, 1974, 1982 — which were some of the best times in the U.S. markets,” he said.

Big Bear Markets

The stock market's recent slide is the one of the worst bear markets of the postwar era. Some notable bear markets of the past 60 years, including the crash of 1929:

 
Top      Bottom  Decline  Duration    Comment 
3/2000    ???     46.4%*   28 mo*  Recession began 3/2001 
8/1987   12/1987  33.5%     3 mo   Black Monday 
11/1980  8/1982   27.1%    21 mo   Recession began  7/1981 
1/1973  10/1974   48.2%    21 mo   Recession began 11/1973
 
11/1968  5/1970   36.1%    18 mo   Recession began  12/1969 
12/1961  6/1962   28.0%     6 mo
  
5/1946   6/1949   23.6%    37 mo   Recession began 11/1948 
9/1929   6/1932   86.1%    34 mo   Peak not regained til 1954 

* Through July 29,2002. All figures are based on Standard & Poor's indices.

Source: Global Financial Data, MSNBC research

That view helped propel Monday’s continued buying stampede, as investors sent the broader markets higher on fairly heavy volume.

During the Great Bull Market of the 80s and 90s, investors learned to simply “buy on the dips” and not worry about broader market cycles. Now, after a two-and-half-year slide has reintroduced the concept of a long-term bear market, market timing — the strategy of getting out at the “top” and back in at the “bottom” — is coming back into favor.

But it’s an investment strategy with only limited usefulness, according to Al Goldman at AG Edwards

“The only thing I think we can say with credibility we made a bottom,’ said Al Goldman. “Whether or not it was the bottom, nobody can answer.”

One of the biggest arguments against market timing is that mistakes can be costly. Though the Standard & Poor’s 500 index returned 13.26 percent over the past 10 years, if you missed the six best months in that period your return would have been only 8.29 percent, according to Barker French, Chief Investment Officer at Brinker Capital, a money management firm outside Philadelphia. Over the past 75 years, he says, the 62 best months returned about 11 percent per month; the remaining 838 months had an average monthly return of just 0.2 percent per month.

“Clearly timing doesn’t work,” he wrote in a recent note on the firms’ Web site.

But market timers say that argument has an important hole in it.

“What they fail to tell you is if you’re out of the market in, say, the 5 worst months, you did better, said Peter Eliades, editor of the Stock Market Cycles newsletter. “It’s a bad argument to use, but a lot of people fall for it.”

<img src="/files/mysites/jen14/dow65-83.gif" width=352 height=200 align="left"> The Dow Jones Industrial average topped near 1,000 five times before breaking through that milstone for good -- a process that took 16 years. (Data provided by CNBC on MSN Money)

Market timers like Eliades also note that “buy and hold” investing doesn’t work very well in a long-term bear market, like the period between 1966 and 1982, when the Dow topped out near 1,000 five times before breaking through that milestone for good. Given the scope of the recent market bubble, Eliades believes it could take a decade before the Dow sets new highs again.

“In 1929, when we topped out at 382 and came down to 40, we didn’t see the 380 level for another 25 years,” he said.

Despite the recent rally, few long-time market watchers are willing to predict that another long-term bull market has begun. And many gun-shy investors seem unlikely to believe them if they did. That has many investors ready to hit the “sell” button at the first signs that the current rally is running out of steam.

Some analysts also caution that stock prices may have to fall below their recent trough before another long-term bull market can begin. Eliades, who says he’s got his money in cash until the market shows clearer signs of its next move, is among the most pessimistic of that camp. He thinks the Dow could hit 3600 in the coming decade.

Even if you’re not that pessimistic, investment advisors suggest you still need to pay attention to the markets ups and down. Proponents of “buy and hold” investing say it never meant ignoring market conditions — you still need to be selling stocks that look overvalued and buying those that look cheap.

“You don’t put [stocks] in a safety deposit box and forget about them,” said Goldman.

And even money managers who say they don’t believe in market timing often use strategy know as asset allocation — periodically raising and lowering the portions of a portfolio invested in stocks, bonds and cash. To cycle-watchers like Eliades, that strategy sounds familiar.

“If you’re doing asset allocation between equities and cash, in effect what you’re doing is market timing,” he said.

and then there's this Dow chart from 7/19/02 WSJ....

<img src="/files/mysites/jen14/dow7400.gif" width=369 height=297>

<img src="http://pvcharts.quicken.com/bin/icenter...." width=470 height=250>
DJIA 5 YR Chart

.....Jen

-- posted by Jen_

» KLR - Protecting assets or missed chances?

He's betting the ranch big time and he had better be right or he is toast. Remember Jeff Vinik and Foster Freiss?....

Protecting assets or missed chances?

By Chuck Jaffe, CBS MarketWatch.com
Last Update: 12:01 AM ET March 2, 2003

BOSTON (CBS.MW) -- Art Bonnel doesn't know precisely what is in his mid-cap growth fund right now. He knows exactly what is NOT in it. Stocks.

In a move that has been the undoing of a number of managers in the past, Bonnel moved his Bonnel Growth Fund (ACBGX: news, chart, profile) entirely into cash on Jan. 24. Because Bonnel leaves the cash management to a partner, he's not entirely sure of the money market-type investments in the fund now. Instead he's focused on the market, anxious to get back in.

The move to cash is interesting because investors can view it in different ways. Only time will tell which view is right, but both sides merit consideration.

Bonnel says he is protecting investors, minimizing losses he foresees in the stock market. He's calling for the Dow Jones Industrial Average ($INDU: news, chart, profile) to bottom out at 5,000, with the Nasdaq Composite ($COMPQ: news, chart, profile) hitting the floor at 750. That's a drop of roughly 33 percent on the Dow and 50 percent on the Nasdaq.

The critical view of his move, however, is that Bonnel gets paid to invest in mid-cap stocks, and is now giving his shareholders what amounts to a very expensive money-market fund that is positioned to miss some or all of any market rebound.

"I consider myself a damned good mutual fund manager, but a poor stock picker," Bonnel explains. "In a good market, I'm going to get 60 percent of my picks right. In a bear market, when 90 percent of stocks are going down, I'll be right less often.

"Why should I try to find stocks that will be up a lot three years from now when I have to ride a 30 to 50 percent decline before they turn around?"

It's a question a lot of investors are asking given current market conditions. But few mainstream fund managers -- excluding those running bear-market funds -- have allowed themselves to ponder dumping everything, thanks largely to past history. Former Fidelity Magellan (FMAGX: news, chart, profile) manager Jeff Vinik, for example, was vilified when he moved the giant fund into bonds while the bull market was still rolling. Likewise, Brandywine (BRWIX: news, chart, profile) manager Foster Freiss saw money flood out of his fund after an ill-timed decision to go entirely to cash.

In those instances, investors didn't see the manager as "protecting" them, they saw the manager as "missing out" or "just plain wrong."

Bonnel gets a bit of a pass on that emotion because his move comes during a downturn. That makes "protection" a bit more palatable. He also benefits from having a smaller fund (roughly $110 million) in which his name is on the marquee, and where he has few institutional investors clamoring for him to stop messing up their asset allocation. The manager of a larger fund in a big family might be under too much pressure to make such a daring move.

"Stock fund managers aren't paid to sit on cash," says Leonard Goodall of the No-Load Portfolios newsletter, "but they're not getting paid to lose money either. If he had done this in March of 2000, near the market's high, he would have been a genius but all of his shareholders would have jumped the ship. Three years of losses later, and you have to admit this will look conservative and smart to a lot of people."

But some investors may wonder what took Bonnel so long and use his past inactivity to question his current timing decisions.

Bonnel actually approached his board of directors about asking shareholders for permission to sell short -- a way to make money when stocks decline in value -- back in 2001. The board tabled his request. But if Bonnel was so negative back then, it's fair to wonder why he didn't go all-cash and spare investors the losses they have suffered since. Moving to cash required no board or shareholder approval.

In fact, Bonnel cashed out last September, but changed his mind during October's rally, only to go back to cash in January because "it wasn't the bull market I was looking for." While investors paid the costs for all of those trades, they also benefited from being out of the market, as Bonnel's fund was among the top performers in its peer group while he made those adjustments.

Bonnel is prepared to stay in cash indefinitely and expects to miss out on the precise market bottom, which may upset investors hoping for growth.

"But if the market drops 20 percent and I miss the first 10 percent of the rebound, I'm still ahead of the game," he says. "I will be able to be back in the market in a matter of minutes when I see the right conditions, and I can't wait to be there. I'd love to be wrong about where I think the market is headed, but I can't invest against the way I feel about the market right now."

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

-- posted by KLR

» Happy - Brinker Declares Death of "Buy and Hold"

When I heard Brinker say this, I couldn't help but think we are near the bottom.

Four years ago, when I read in the Chronicle that Steve Young and some of his friends were orgainizing a venture capital firm to provide capital to new tech start-ups in Silicone Valley,
I pointed out we were probably near the top.

-- posted by Happy

» mdorsey - Re: Brinker Declares Death of "Buy and Hold"

On a fundamental basis (PE, etc.) I don't see this level as anywhere near the bottom. OCICBW

-- posted by mdorsey

» Kirk - Stock trading website & business for sale on Ebay

One of my sponsors is selling his PROFITABLE business due to poor health. I wonder if this is a case where he does better just trading his system for himself than trying to sell his eBooks?

Performance: http://www.stockstrategy.net/performance...

I've often thought folks with systems like this could partner with our web site and post a trade a month in real time as a sample of their work. Then if readers here wanted to get more than one trade a month (or week or whatever time frame) then they would buy the system. I bet they could expand the business to include email trade advice for those that don't master the technique but want to buy and sell based on the system. Perhaps post a "trade a week" for free here and then offer a "trade a day" via email. I'd be interesed to see how well this works over time as I have seen many small traders with small followings build up some nice results.

BTW, I don't consider "Market timing" the same as "trading" as trading is a profession that takes work just like any job.

Hello,

I am writing to let you know that I am selling my stock trading business and I thought that you might be interested in it. The business is located at www.stockstrategy.net. I sell a stock trading system that I created called 'The Index Adjustment System'.

I must sell the business because I am in poor health and it is difficult for me to keep the business going.

I have decided to auction the business on Ebay.

The business made a net profit of $4,054.00 in 2001, and a net profit of $4,006.00 in 2002. A copy of my Schedule C's will be provided to the winning bidder.

I've set the reserve price for the auction at only $5,000.00 in order to facilitate the sale.

If you are interested in the business, I can provide you with a copy of the stock trading system ebook. Further details about the business and the auction is located in the Ebay listing, including a full business profile. This link will take you to the Ebay listing.

http://cgi.ebay.com/ws/eBayISAPI.dll?Vie...

If the link above is not working, try searching on the item number which is 2524437207, or go to the catagory 'Business & Indrustrial', then to the 'Businesses For Sale' subcatagory and then to the 'Web Sites' subcatagory.

If you have any questions, please contact me at mike9a@prodigy.net or at pennfield@stockstrategy.net.

Regards,

Michael Hoey
Owner
www.stockstrategy.net

-- posted by Kirk