Market Timing: Should You Attempt It?

Top 60. Jun 5, 2001 9:48 AM

» KLR - Another Propritary Model

Here is another secret formula but 'ol Kurt Linder probably took it with him to the great board room in the sky...Now don't be to quick to snicker at this one because it is, after all, based on valuations and P/Es something a lot of folks love around here. I guess a "low" P/E is sometimes low for a reason, huh?

- Mutual Fund Hall of Shame - page 6
Lindner Growth

Kurt Lindner was a character, all right -- so cheap that he wouldn't offer customers an "800" number and sent an underling to a brokerage office across the street to price the portfolio at the close of each trading day. But Lindner, who died in 1995, did earn for Lindner Growth fund (launched in 1973) a reputation for solid returns and low risk. That reputation has been tarnished lately. Growth now ranks in the bottom 10% of all long-term-growth funds over the past one, three, five, ten and 15 years, and is now slightly more volatile than the S&P 500.

It's not hard to identify the problems. Managers Eric Ryback and Robert Lange are longtime bears who sought shelter in gold and energy stocks -- both of which floundered. The fund fell 27.7% during last year's bear market -- eight percentage points more than the S&P. The managers also held about 20% of assets in stocks of small foreign companies, which have been battered. Their dabbling in Russian stocks hasn't helped, either.

The fund has also been hoisted by its own petard. Kurt Lindner insisted that Lindner Growth pick stocks using a proprietary formula that, among other things, called for buying only stocks with price-earnings ratios of less than 10. His method worked well through the late 1980s. But then stocks began their seemingly relentless upward climb, with P/E ratios rising in tandem. Laments Ryback: "It forced us to buy companies that were dogs." In mid 1997 Ryback reworked the stock-picking formula, which still governs the fund. It now allows the fund to buy stocks with P/Es in the mid teens -- still extremely cheap by today's standards.

Many of the fund's U.S. companies are linked to the ups and downs of the economy, which has hurt it still further. "Anything cyclical has suffered," says Lange. While almost all small-company value funds encountered rough sledding last year, Lindner Growth was stuck in a snowdrift.

Says Ryback: "It's been hell for us, but we're just not changing at this point. We live and die by a valuation formula, and we're not going to chase companies at this point in the game." Nevertheless, Ryback and Lange have retooled the fund, cutting the number of stocks from more than 200 to 115, slightly raising the size of the companies they buy, paring foreign holdings, and loosening their value criteria a bit. One favorite holding: Quixote Corp.

-- posted by KLR

Top 61. Jun 5, 2001 11:05 AM

» Kirk - Re: Another Propritary Model

In response to message posted by KLR:

"Lindner Growth Fund"...
Man does THAT bring back memories!
I subscribed to some timing letter by a guy my old boss liked named "Jay Schwabacker" back in the 1980's... That was one of the favorite funds and the newsletter seemed aimed at those of us new to investing on our own and SCARED.... I dropped the newsletter after several years of underperformance by the guy's funds AND his allocation was so conservative that it included GOLD! That was one of the funds I sold too... I thought the guys ideas were good (like own international funds) but his picks were piss poor. I subscribed (with my father) to Brinker's for awhile and found out his fund picks, at least the ones I bought when he highlighted them, did worse than my stock picks also... This is why it is SO IMPORTANT to benchmark how these timers do for you vs what you would or do on your own... even if you are a novice.. just use the S&P500 and a buy n hold to start.

-- posted by Kirk

Top 62. Jun 5, 2001 11:24 AM

» Rande - Re: Re: Another Propritary Model

In response to message posted by Kirk:

Kirk,

Benchmarking IS KEY -- and it doesn't matter whether the active management involves market timing or not. Take the W5000 or the S&P 500, or other appropriate apples-to-apples index, add in dividends to get total return and subtract 15-20 basis points (or just follow the various Vanguard index funds for net total return comparisons). The manager MUST beat that net return (on an after-tax basis in taxable accounts) in order to justify his/her existence, it's just that simple. Not over any single short-term period necessarily, but hopefully at least on a 3 or 5-year trailing basis (preferably longer, but you can't wait forever when there's consistently gross underperformance). Otherwise, what's the point? Devotion, loyalty, entertainment, a bit of action, etc. are all well and good, but at what cost?

-- posted by Rande

Top 63. Jun 5, 2001 11:54 AM

» walkerman - Re: Re: Seriously

In response to message posted by Kirk:
Impressive...I've never been a fan of TA. But, don't we all "market-time" to one degree or another? For example, Kirk, it seems to me I have seen the phrase "taken profits" in some of your posts with regards to some of your holdings. What is the difference between your taking profits, and a market move of, oh, say, going 60/40 in equity allocation?

-- posted by walkerman

Top 64. Jun 5, 2001 12:18 PM

» Kirk - Re: Re: Re: Seriously

In response to message posted by walkerman:

Good question.

I "take profits" when a security I own has reached a percentage of my portfolio that is no longer comfortable. For example, in December (12/15/00) LRCX was 7.9% of my total newsletter portfolio after I bought the last 300 Shares @ $15.875 on 10/17/00.

I was COMFORTABLE with having that much LRCX as I liked its valuation on 12/15/00 when SPY was at $130.9688.

Within 2 months, LRCX was up 64% to $26 so I sold those 300 shares to bring my total percentage in LRCX to 10.7%! SPY was up less than 3% at $133.3400.

Market timing is buying and selling based on the market, internals, valuation, sentiment, etc. For me, taking profits is done after I buy a stock I think is under valued and it goes up to a level that is more than I want in my portfolio. What the market does is not an issue. I would sell ALL the stock if I did not like it going forward just as market timers might say they will sell ALL their stock if they think the total market is going lower.

IF I am comfortable with a stock for the long term, then I EXPECT it to get under and over valued at times and I just hold through the cycles but try to add when low and take profits when high but that is all based on fundamentals for the individual stock.

Remember, individual stocks have an Alpha and a Beta component. The Beta part is what Market timers try to trade. The simple fact that someone "trades" individual stocks is already much different than market timing as the Alpha factor gives it a whole different equation so they can't be the same (unless Alpha is zero).

-- posted by Kirk

Top 65. Jun 5, 2001 12:20 PM

» Rande - Matter of Degree?

In response to message posted by walkerman:

walkerman,

The issue of degree can be important. There are those who are willing to make dramatic, wholesale shifts in allocation based on their prediction of future market direction. Then there are those who opt for something less dramatic, fine-tuning the edges when they perceive overvaluation here or a "fat pitch" there. We can get lost in semantics when discussing terms such as market timing or tactical asset allocation. For those who believe it is both futile and counterproductive to make changes based on predictions of future performance, any amount of tinkering with the long-term strategic allocation is too much. After all, such an allocation was put in place to begin with as a means of achieving longer term goals and objectives based on individual circumstances no matter what the market does over the shorter term. The problem with wholesale shifts in either direction are the costs and the risks of being wrong. The problem with the long-term strategic approach is that for some it's too boring and for others takes too much discipline. Maybe a compromise is the "core and explore" method we've discussed before. Dedicate the serious core money to a long-term approach based on prudent, mainstream strategic asset allocation and take whatever portion of the portfolio seems suitable and explore with such things as timing, individual high-fliers, options or whatever speculative whim strikes your fancy and satisifies the urge for action. If you're right on your explore bets you might add value and if you're wrong you won't nuke your hopes and dreams for the future.

BTW -- Following is a favorite quote of mine on "matters of degree"...

....there are confident ones; they move from ninety-ten in stocks-bonds to five-ninety-five in stocks-bonds. That implies a degree of self-confidence bordering on hubris and self-deception. Over the decades, when both groups...have equal limited (!) ability to "time," the cautious chaps who alternate between sixty-five-thirty-five in stocks-bonds and sixty-forty are likely to end up with a superior risk-corrected total return score. [Paul Samuelson, "Journal of Portfolio Managment," Fall 1994]

-- posted by Rande

Top 66. Jun 5, 2001 2:46 PM

» walkerman - Re: Re: Re: Re: Seriously

In response to message posted by Kirk:
Kirk...I cannot agree with you that selling a stock because it has increased to a level higher than you are comfortable with is different from selling mutual funds because they have increased to a level higher than one is comfortable with. To me, they are the same thing, just at different degrees. Reminds me of the story of the man who asked a woman if she would sleep with him for a million bucks, and she said "sure." He gave her 5 bucks and said let's go. She looked at the 5 bucks and screamed "5 dollars, what do you think I am?" He replied, we already know what you are, now we're just haggling over the price. If you sell a stock, a mutual fund, or a certain percentage of you portfolio, because you are uncomfortable with it's level, it's a form of market timing. I suspect that you sold the stock, more because of it's valuation, than because of it's percentage of your portfolio. I would guess that if it had become a larger percentage of your portfolio without increasing its valuation so much (ie, it had remained the same, but the rest of your equities had dropped in value) that you wouldn't have sold it. Taking profits applies to valuation in my view, and not portfolio percentages.

-- posted by walkerman

Top 67. Jun 5, 2001 3:17 PM

» Rande - Re: Re: Re: Re: Re: Seriously

In response to message posted by walkerman:

Perhaps the distinction is between approach and philosophy. By any acceptable definition of the term "market timer," the overall "market" must be involved. The market timer takes a top-down macro approach to the market as a whole, looking at such things as the economy, interest rates, money supply, inflation, etc. to determine when to be in or out of the entire market. A traditional bottom-up stock picker relies on fundamental analysis to detmine the relative and/or intrinsic worth of an individual company. Certainly, there are those who would argue that either approach is a waste of time but few would confuse market timing with individual stock analysis.

I like the KISS principle, and have always held that there are ultimately only two reasons to ever sell a position:

1. There's a better investment alternative.
2. You need the cash.

How you define number 1. is what makes a market.

-- posted by Rande

Top 68. Jun 5, 2001 3:25 PM

» Kirk - Re: Profit Taking

In response to message posted by walkerman:

Lets see.

I just gave you a REAL example of where I sold about 15% of my position in an equity that had appreciated 64% while "the market" was virtually flat.

How is that market timing? The MARKET had nothing to do with my sale as it was flat (virtually).

Just because valuation is part of my decision does not mean it is "market timing". That would be like calling "an iced tea" a "vodka on the rocks" because BOTH had ice in them.

Look once again at the definition of market timing:
http://www.investorwords.com/m1.htm#mark...

market timing

Attempting to predict future market directions, usually by examining recent price and volume data or economic data, and investing based on those predictions. also called timing the market.

I made NO SUCH prediction of the future of my SECURITY when I took profits. In fact, I actually hoped it goes higher because I still hold a great deal since I ONLY sold SOME of it.

LOGIC: Just because some parts of "market timing" goes into other types of investment decisions in no way means that they are ALL market timing. That should be in your kid's prealgebra book if you want to read up on it more under "set theory".

-- posted by Kirk