Market Timing: Should You Attempt It?

» Kirk - Re: Never Mind Timing.........

Why try to time the market? Just buy good companies, take some profits when up, buy some extra shares when down and you get returns like I do.

It is funny that it sounds so easy, but buying through the fear when all are selling and taking some profits when up along with buying good businesses (for the most part... I have my fair share of turkeys) works well for me. SteveT has subscribed since I started to offer the newsletter here and he should be able to verify that I am not making this up or leaving stuff out. Even I have a hard time believing my results, but I look in my personal account and smile. Also, I track my results on BOTH Excel and Quicken so I have a double check to make sure the numbers are correct.

Little bit of timing... like 10% cash to bonds at once or 10% from stocks to bonds sure, but to do these big moves of 25 to 100% of a portfolio some talk about seems plain reckless to me.

  Date       Kirk    S&P500   Delta
2003 YTD    +48.5%   15.2%    33.3%  as of 8/28/2003
 

                                Kirk   S&P500+  NASDAQ 
4.5+ Yrs 12/31/98 to 08/28/03  123.4%  (13.8%) (19.5%)
Annualized Annual Return        19.3%  ( 2.9%) ( 4.1%)
 
+with dividends reinvested. All Numbers unaudited. 
Click for a free issue of my newsletter .

-- posted by Kirk

» axolotl - Re: Re: Never Mind Timing.........

-- posted by axolotl

» Kirk - Re: Re: Re: Never Mind Timing.........

It is Labor Day and you are up nearly 50% - I admire your discipline not to celebrate big time.

Thanks. I sure feel loads better than I did when the market was bottoming last Fall. The shrinks say losses feel much worse than gains and we had three tough years where I lost money in two of the three.

Kirk's Newsletter performance vs the S&P500

  Date       Kirk    S&P500   Delta
2003 YTD    +48.5%   15.2%    33.3% as of 8/28/2003
2002        (21.2%) (22.1%)    0.9% 
2001          1.3%  (11.9%)   13.2% 
2000        (11.5%)  (9.1%)   (2.4%)
1999        117.0%   21.0%    96.0% 

Perhaps I am just cautious knowing how large these bear market swings can be?

Warren Buffett should give one of his employees a few mill and tell him to follow your method.

I've wondered why I have not been approached directly by any money managers, but I think many of them do use what I do but with ETFs rather than small and mid cap stocks. My method would not work for the same level of gains for large amounts of money because taking a 5% of portfolio position in a small cap stock would buy all the shares in the company for these billion dollar funds. Part of what I do is buy these small company shares when people are throwing them out with the bath water. Taking a small position then hardly moves the price.

OTOH, I do have many new subscribers that have never posted here on this site so perhaps some of them are from big money firms just watching to see if I do what I claim?

I have had a couple of firms suggest I get a Series-7 so I can work for them handling money but I like to do new things and that has been done. I am looking into setting up a way to apply my "method" to a basket of EFTs or index funds along with how to manage and charge for it. Who knows where it will go but I'd love to be able to undercut Schwab, Fidelity and Vanguard on management fees. I think some of my ideas will get folks over their natural and deserved distrust of having any firm that sells funds also tell them what funds to buy and sell. Maybe someday I'll have some interesting news to share?

FWIW, I got several of my ideas on how to do what I do by reading articles telling us why you want index funds because of what managers of large money can not do. I read the articles as guides to what managers of small amounts of money (like under $100M) can do to beat the markets over the long haul. It is helpful to be a contrarian! LOL

Finally, if I get too cocky, I know it will be thrown back at me so I try to just present the results and not call others idiots or whatever for not getting similar results. I am full aware that even with the best TA and FA, probably 1/3rd of the returns for small amounts of money (under $100M) has a great deal to do with luck. I do think some of us adjust to bad luck better than others (like how I made some of my WCOM losses back and how I didn't let those losses deter me from applying my method to my other picks in the sector where I used CACS to make back all the losses and perhaps much more. )

-- posted by Kirk

» KLR - Re: Re: Re: Re: Never Mind Timing.........

In a recent interview, Bernstein says...

Mathematics is the language of investing," says Bernstein. The odds that any given fund manager will beat the market 12 years in a row are minuscule. But among thousands of managers, the odds that someone will beat the market 12 years in a row are close to 100%--and Legg Mason Value Trust's Bill Miller just happens to be that one. "I think the guy is a competent securities analyst," says Bernstein, "but he's also very lucky."

I know that you are saying that it is possible to beat the market over the long haul because you are not hampered by size constrictions of the average money manager, i.e. you are free to invest in small float, (pardon the expression) penny stocks.

You are, of course, too modest to say that you possess superior stock picking abilities.

You seem to agree with the experts on the folly of marketiming, but not the folly of individual stock picking.

-- posted by KLR

» KLR - Re: Re: Re: Re: Never Mind Timing.........

Here's an article re:

Asset allocation with ETFs
Best solution when market timing gets too risky

By Paul B. Farrell, CBS.MarketWatch.com
Last Update: 12:02 AM ET Aug. 21, 2003

LOS ANGELES (CBS.MW) -- If I have to read another breathless column on the collapse of the 12-year bond market I'll scream. What's a passive investor (that's most of us) supposed to do? Dump bonds, rush into stocks, and start timing the market?

The solution: Forget about timing the market. It's irrationally controlled by unpredictable world events and the inane bumbling of domestic politicians. Instead, develop a well-balanced portfolio using asset-allocation principles that have nothing to do with short-term breaking news.

Here's my simple, long-term, portfolio-building strategy, using exchange-traded funds. ETFs are index funds that have expenses lower than mutual funds, although you have to pay broker's commissions to buy, sell and trade them. Still, they are becoming increasingly more popular for passive investors, with over $100 billion in assets:

The first step is to allocate your bond ETFs. In most how-to discussions of ETF portfolio asset allocations, bond-index ETFs get little emphasis when they should be a primary focus: You still need fixed-income bond funds in order to build a successful portfolio.

Whether you're a 20-year-old college grad or a 60-year-old retiree, make darn sure you focus on fixed-income funds before equities. Buy your stock ETFs only after you allocate and purchase your bond ETFs.

Bond ETFs are newer to the market. Barclay's iShares has several solid ones, including short-, intermediate- and long-term Treasury bond ETFs, and one corporate-bond ETF:

The four iShare ETFs are Lehman 1-3 Year Treasury Bonds (SHY: news, chart, profile), Lehman 7-10 Year Treasury Bond Index (IEF: news, chart, profile), Lehman 20+ Year Treasury Bond Index (TLT: news, chart, profile) and the iShares GS $ InvesTop Corporate (LQD: news, chart, profile).

Keep in mind that you can invest directly in bonds or bond funds, rather than these suggested bond ETFs, and just use ETFs as a substitute for your stock ETFs or stocks.

Next, add stock ETFs

Once you have locked down your fixed-income allocation, it's time to diversify the remainder of your money across the stock ETFs. For example, if you have a $100,000 portfolio and you put $40,000 in fixed-income bond ETFs, then you'll be allocating the remaining $60,000 to stock ETFs.

Here's one recommended allocation for that $60,000: Put 50 percent in large-cap stocks, 30 percent in midcaps and small caps, and 20 percent in international funds. If you're so inclined, you can take 5 percent out of one category and move it into sector ETFs.

The biggest large-cap stock ETF is the Spider or Standard & Poor's Depository Receipts (SPY: news, chart, profile). The Spider tracks the S&P 500 index just like an S&P 500 index mutual fund. There's also a Barclays iShares S&P 500 (IVV: news, chart, profile), and Value (IVE: news, chart, profile) and Growth (IVW: news, chart, profile) versions of the S&P 500.

And if you prefer the blue-chip Dow-30 Industrials, buy the "Diamond" (DIA: news, chart, profile). Other large-cap variations include the Fortune 500 Index Tracker (FFF: news, chart, profile) and State Street's streetTRACKS U.S. Large-Cap Growth (ELG: news, chart, profile).

For midcaps, grab the S&P 400 Mid-Cap Spider (MDY: news, chart, profile) and the iShares S&P Mid-cap 400 (IJH: news, chart, profile). For small caps, try Barclays iShares Russell 2000 (IWM: news, chart, profile) and iShares S&P Small-Cap 600 (IJR: news, chart, profile). There are also growth and value ETFs for both midcaps and small caps.

Alternatively, there's the Vanguard Extended Market VIPER (VXF: news, chart, profile), which represents the entire market less the largest 500 stocks. You can also keep-it-simple and invest in Vanguard's Total Stock Market VIPER (VTI: news, chart, profile), which tracks the Wilshire 5000.

For your international allocation consider iShares S&P Global 100 (IOO: news, chart, profile). If you want exposure in the developed markets, try iShares S&P Europe 350 Index (IEV: news, chart, profile), iShares MSCI UK Index (EWU: news, chart, profile) or iShares MSCI Japan Index (EWJ: news, chart, profile).

There are lots of smaller regional and individual-country ETFs, but they're highly volatile and far riskier for a passive investor, so stick with the developed nations and regions.

Remember, you'll pay broker's commissions every time you buy or sell an ETF, so be careful; the advantage of the lower ETF expense ratios can be easily wiped out by trading.

If you can't resist trading occasionally, sector ETFs offer temptation: The most popular are the Spiders and Nasdaq Qubes (QQQ: news, chart, profile), which together make up 60 percent of the total ETF market.

Sector selections

There are more than 100 other smaller sector ETFs. Most of them have assets under $1 billion, plus they're more volatile than index mutual funds. Here are the five most popular ETF sectors that you're likely to pick from:

Technology. SPDR Technology (XLK: news, chart, profile), iShares Dow Jones US Tech Index (IYW: news, chart, profile) and iShares Goldman Sachs Technology (IGM: news, chart, profile). Also look at the Merrill Lynch HOLDR series: Software (SWH: news, chart, profile), Wireless (WMH: news, chart, profile), Semiconductors (SMH: news, chart, profile), Telecomm (TTH: news, chart, profile), Broadband (BDH: news, chart, profile) and Internet (HHH: news, chart, profile).

Healthcare. iShares Dow Jones US Healthcare (IYH: news, chart, profile), iShares Nasdaq Biotech Index (IBB: news, chart, profile), Holders Pharmaceuticals (PPH: news, chart, profile) and Holders Biotech (BBH: news, chart, profile).

Financial. Financial Select Sector SPDR (XLF: news, chart, profile), iShares Dow Jones Financial Services (IYG: news, chart, profile) and iShares Dow Jones Financial Sector (IYF: news, chart, profile).

Sector SPDRs: Basic Industries (XLB: news, chart, profile), Consumer Staples (XLP: news, chart, profile), Consumer Services (XLV: news, chart, profile), Financials (XLF: news, chart, profile), Cyclical/Transportation (XLY: news, chart, profile) and Utilities (XLU: news, chart, profile).

Real estate. Consider iShares Cohen & Steers Realty Majors (ICF: news, chart, profile), iShares Dow Jones Real Estate (IYR: news, chart, profile) and streetTRACKS Wilshire REIT Fund (RWR: news, chart, profile).

The bottom line for an average passive buy-and-hold investor: ignore all the breaking news about dumping bonds and jumping back on the stock bandwagon and focus on your long-term asset allocations. You'll sleep better.

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

-- posted by KLR

» Kirk - Re: Re: Re: Re: Re: Never Mind Timing.........

Man that was a great post KLR for starting a series of books to answer!

Market Timing:

Market timing is nothing more than "predicting the economy." What all my research says is the best predictor of the economy is the stock market. Consider the Nasdaq Boomed and peaked out in March 2000. Here where I live jobs were plentiful and it looked like it could go on forever for nearly a year after that. We started to see cracks in August 2000 as I remember attending a wedding of a friend I used to work with (we even had a date river rafting for two days back in 1980 when I was a young engineer and she was a summer intern! ) Anyway, they paid with the wedding from selling HP stock which had just peaked at $67 and many there were all flush with market gains. One guy who ran our Fab when I was there said he was unable to buy capacity in Asia and all of a sudden capacity was for sale. He warned me that Semiconductor capital equipment stocks could decline quite a bit if the trend continued. Of course I didn't sell on that bit of news but I sure remember how the clues like that leak out and it leads to "distribution." The economy was still booming yet the stock market was going lower.

Don Wolanchuck, one of the best market timers ever (he won so many Timer Digest Awards they stopped following him so they could sell their service) and one I've made friends with says the reason FA doesn't work like Brinker uses in his model for market timing is the market drives the economy! What an amazing statement but so true. I am not sure if Don really adds value with his timing (he won't publish a model portfolio) but if the market goes to new highs in the next two years, then I'll have to say he does add value. He does have some short term money flow stuff he shares for free so others help him track the large set of data. Those that follow it swear by the short term accuracy but I have yet to spend the time to learn and follow. Right now I am tagging along to see what I can learn. I like to learn how others time the market even if I don't really use much myself as you never know what you could learn if you keep a closed mind. I will admit to using a sliding asset allocation in my system now which engineers might just call "hysteresis."

I do think you can do systematic market timing with some degree of success if you stick to something like Dr Ed Yardeni's Fed Model variation I talk about here. I think the taxes from selling so much plus the massive amount of buying at maximum fear points means most will not be able to follow that method and they will under perform.

As for stock picking.

You seem to agree with the experts on the folly of marketiming, but not the folly of individual stock picking.

I don't "pick stocks."

I buy companies I think will make money, hopefully a great deal of it, and then I will get rewarded with a higher stock price. I look at it as if I were hiring a CEO and staff to invest my money into the business they are in. I want to see what sort of return I can get for my money. I see this as no different than Bill Gates deciding to start MSFT or some famous chef starting a restaurant. If they have a great product and can offer it at a competitive price with barriers to entry and I can get good return on my investment, then I buy. Stock pickers in mutual funds try to do this for hundreds of companies. I only have to do it for one every market cycle (my goal) and I do well. Warren Buffett is probably somewhere in between as he too concentrates portfolio holdings but buys several per cycle compared to my fewer buys and much smaller amount of money. Like Buffett, I to will do some bond timing when things look like a fat pitch.

When I find a company or sector I like, I buy into it slowly as I could be too early. If I am late and it takes off, then I just enjoy the gains but I seldom chase once it gets past my cheap metrics to buy. If I am too early, I take hits from the peanut gallery for "a crummy pick" and I buy more as it goes lower while I monitor the business. Sometimes I am very wrong like happened with WCOM but I invested in the telecom sector using three individual stocks Agilent, Carrier Access and WorldCom. I've done well enough with Agilent selling some when up and buying it back when down, I lost 95% in WCOM and I made it all back and then some with CACS and I think that could go 4 to 10x higher still. Folks that want to follow along to make sure my opinion doesn't change subscribe to my newsletter and few complain. My renewal rate this month was 133% meaning some that used to subscribe but got scared out during the bear have come back. The confidence they have to try me again is a great ego booster. For months before this current month, my renewal rate ranged between 80 and 100%. I hear 50% is doing well for most.

Click for a free issue of my newsletter.

-- posted by Kirk

» bob90245 - Re: Re: Re: Re: Re: Re: Never Mind Timing.........

"Don Wolanchuck ... says the reason FA doesn't work like Brinker uses in his model for market timing is the market drives the economy!"

Someone else said the stock market predicted 9 out of the last 5 recessions. Not sure what market history Wolanchuck is looking at. For example, the Oct 87 market crash barely made a dent in the economy.

-- posted by bob90245

» Kirk - Re: Re: Re: Re: Re: Re: Re: Never Mind Timing.........

Actually, in CA techland, it was the pits on and off after the crash of '87. Some others will say the market finished 1987 up and the crash was just correcting a tech bubble.

But your point is a good one. The market can drive the economy but it can still act like a mule.

-- posted by Kirk

» axolotl - Market does better job predicting economic ..

-- posted by axolotl

» KLR - Top market-timing system now bullish

I know some of you nay-sayers will point out that it returned only 13.9% over a buy and hold return of 12.7%...but, you're only in the market one-third of the time. WOWSA!

Top market-timing system now bullish

By Mark Hulbert, CBS.MarketWatch.com
Last Update: 1:12 AM ET Aug. 29, 2003

ANNANDALE, Va. (CBS.MW) -- The stock market timing strategy that, according to the Hulbert Financial Digest has the best long-term record, has just turned bullish.

But before you get too excited, note carefully that this same strategy will turn bearish against next Friday, one week from today.

What kind of timing strategy would flip from one extreme to another in just a few trading sessions? And why would it be turning bullish now if it is going to flip back to bearish so soon?

It is the seasonality timing system. It is an entirely mechanical system that uses nothing more than the calendar to determine when to be invested in stocks: Investors are advised to be invested in stocks around the turn of each month and immediately prior to exchange holidays, and to invest in a money market fund at all other times.

To be sure, the system is for short-term traders only. It involves around 17 round-trip trades per year, for example.

But it also is very conservative. It calls for being invested in the stock market just one-third of the time.

According to the Hulbert Financial Digest, a portfolio that switched between the Wilshire 5000 and 90-day T-Bills on this timing system's signals would have made 13.9 percent annualized over the past two decades, in contrast to 12.7 percent for buying and holding.

Better yet, this outperformance was turned in with volatility (or risk) that was 44 percent less than the market as a whole.

That's a winning combination, which accounts for why this timing system is in first place on a risk-adjusted basis among all timing systems the HFD has tracked over the past two decades.

This timing system considers the two trading sessions at the end of this week to have especially strong bullish probabilities. That's because those days represent the confluence of both sources of bullish seasonality -- the pre-exchange-holiday and the turn of the month.

Though the pre-holiday seasonality comes to an end at the close of trading today, Friday, the turn of month seasonality continues through the end of next week. As a result, followers of the seasonality timing system will stay invested in stocks through then.

Credit for this timing system goes to Norm Fosback, who devoted a chapter to it in his 1974 book, "Stock Market Logic." He also regularly reported on its status in the various newsletters he edited during the 1980s and 1990s, including Market Logic and Mutual Fund Forecaster.

Time Warner, subsequently AOL Time Warner (AOL: news, chart, profile), acquired those publications in 1999 and folded them into a publication called Mutual Funds Magazine. While this monthly magazine continued, episodically, to report on the Seasonality Timing System, AOL discontinued the magazine altogether a year ago.

Because the strategy is entirely mechanical, however, the HFD is able to continue tracking its performance - by constructing a hypothetical portfolio that uses its mechanical rules to get into and out of the stock market.

In addition, Fosback last year inaugurated a new newsletter, Fosback's Fund Forecaster, which reports on a modified version of his seasonality timing system.

-- posted by KLR