Effective "Market Timing"

[KinAlberta]

Upfront Note: I have minor mixed / ulterior motives for asking this but don't want to initially taint any well thought out, objective responses and dilute the discussion.

 

Should investors try to time the markets? What criteria should be used? When and how should it be implemented?

Why, specifically, doesn't market timing work for most investors?

Just because it doesn't work for most investors, is that a reason not to work on a methodology to improve one's own performance?

 

 

So, in terms of markets we have as Hussman would say: "historically informed" reference data. Application of that data is another matter, as Hussman has learned. Nonetheless, historic ratios, current conditions etc. should provide some basis for intelligent approaches to asset allocation and hence changing those allocations over time (somewhat a form of market timing).  In my mind, periodically, market timing should prove a profitable approach to investing. I'm just looking for reasonable factors that would improve the odds of success in timing the markets.

 

 

For those that say, don't try to time the markets, why not?

[benhacker]

Can you define what you mean by market timing?

[CorpRaider]

https://www.portfoliovisualizer.com/

 

Bottom right hand corner tile "Timing Models"; you can back test/play around.  Alpha Architect, Meb Faber, AQR and RAFI (I think) have published a bunch of stuff. 

[racemize]

I wrote an essay about this a few years ago.

 

https://www.dropbox.com/s/zr93pt8tqkij6m8/2014-11-15%20Why%20Hold%20Cash.pdf?dl=0

 

 

[Gregmal]

I don't know if you'd call it timing the market or not, but simply exercising discipline in terms of valuation monitoring is something that can absolutely be done consistently. There's definitely an overlap with timing the market so to speak. For instance, I believe it was August 25, 2015 when there was that major China induced draw-down at the open. You had GM(I think at about $25 a share) and AAL both trading at sub 5 PE with sustainable forward earnings. It didnt take a rocket scientist to add, so I did. One could say I timed the market effectively. All I did is see a bargain though. Last January/February a company called Consolidated-Tomoka traded below half of its NAV despite being a fundamental rock. All I did is add. It just made sense. That happened to be the market bottom. Maybe it's oversimplified, but its worked for me in the limited dozen years or so I've been investing.

[vinod1]

This is a topic that is close to me and have spent a lot of time thinking through over the last 17 years.

 

The first question in carrying out such an undertaking is to ask if anyone has successfully done it in the past for a long time. If so, find them and study their methods. GMO would be a good starting point. If what they do is called market timing so be it, but I think if there is a way to do it that would be the approach that makes most sense to me.

 

Another way is by studying the history and thought process of investors like Keynes, Graham, Buffett, Fisher and Klarman would be most helpful. What did they find and what conclusions did they come to and why? If you disagree with those conclusions the burden of proof should be on you.

 

This way you can learn from the experience of giants in the field.

 

I have given up on timing the market a long time back. Now as long as I find a security that meets my return hurdle, I will keep buying until it reaches my position size limit -even if I am dead convinced that the market is likely to fall 50% in the next 6 months.

 

Vinod

[vinod1]

 

Just because it doesn't work for most investors, is that a reason not to work on a methodology to improve one's own performance?

 

 

The keyword is not most but has it worked even for a single person? Value investing is not something most people can implement but it does work for a few who are temperamentally suited for it along with a host of other criteria. We do have reasonable level of evidence for that.

 

I cannot think of one person who has timed the market well over the last 40 years. Can anyone think of a person?

 

Market timing to me means forgoing investments (or hedging) that meet your return hurdle because you think the market is going to go down over the short or long term.

 

Vinod

[blainehodder]

 

Just because it doesn't work for most investors, is that a reason not to work on a methodology to improve one's own performance?

 

 

The keyword is not most but has it worked even for a single person? Value investing is not something most people can implement but it does work for a few who are temperamentally suited for it along with a host of other criteria. We do have reasonable level of evidence for that.

 

I cannot think of one person who has timed the market well over the last 40 years. Can anyone think of a person?

 

Market timing to me means forgoing investments (or hedging) that meet your return hurdle because you think the market is going to go down over the short or long term.

 

Vinod

 

Well it only takes one stroke of luck to build a cult following and kickstart a huge career as an "expert" timer... Even though it wasn't skill in the first place.  See Paulson.

[KinAlberta]

 

Just because it doesn't work for most investors, is that a reason not to work on a methodology to improve one's own performance?

 

 

The keyword is not most but has it worked even for a single person? Value investing is not something most people can implement but it does work for a few who are temperamentally suited for it along with a host of other criteria. We do have reasonable level of evidence for that.

 

I cannot think of one person who has timed the market well over the last 40 years. Can anyone think of a person?

 

Market timing to me means forgoing investments (or hedging) that meet your return hurdle because you think the market is going to go down over the short or long term.

 

Vinod

 

So, this raises the issue of buying bonds. With general interest rates low, a lot of people are avoiding bonds thinking that inflation and interest rates will rise. There's always the possibiliyt that deflation could take hold and so bond returns could maintain their stellar long-term record.

 

Are those investors who are avoiding bonds, essentially market timing?

 

As for successful market timers. I'm not sure what success looks like. eg Avoiding collapsing markets while earning less than market beating returns long term to me would still be a success because if no one can predict the future, then one can neither tell in advance neither how calamitous a downturn might nor how long it might be before the market recovers to yield a long term positive post recession/depression return. So there is no certainty that future returns will exceed anyone's current returns.  Or no certainty that it will recover before one has to cash out. ("There is nothing so disastrous as a rational investment policy in an irrational world." - Keynes,  An old trading saying…. that, by the way is very true… “The market can stay irrational a lot longer than you can stay solvent!”…. Thinking about a trade in terms of what the world can and can’t afford can be a dangerous habit. - 1995 Usenet),“Then we may have a clearer idea of the interest rate picture, ...Given the volatility, you’re really rolling the dice. I’m on the sidelines. The market can remain irrational much longer than I can remain solvent." - A. Gary Shilling)  Now, though, not being able to predict the future means that trying to avoid a collapse has some strong odds against success in actually achieving that. That's where some mitigating methodology might improve the odds of market timing - in the sense of avoiding the deepest market collapses.

 

Market timing success in terms of beating long term returns is another view of success. Possibly the conventional view, though people regularly redefine long term depending on the market environment of the day (eg. investing in bonds).

 

Examples of successful people market timing? (I assume where long term returns have still been pretty good, mayb emarket beating.)

 

1) Warren Buffett 1974 and Buffett 2008 (both times quoted as being out of the market in one sense or anther)

 

2) Jeremy Grantham 2000, 2008

 

Others?

 

[Cigarbutt]

Interesting topic.

Mr. Buffett commented on general market levels at the beginning of his partnership years but he said also: ""All of the above is not intended to imply that market analysis is foremost in my mind. Primary attention is given at all times to the detection of substantially undervalued securities."

I would tend to agree with the previous quote. However, Mr. Buffett's definition of "substantially undervalued securities" has evolved over time Hasn't it?

Not everybody consider Mr. Buffett as a market timer.

Even if he is or not, what is clear is that he has recurrently been able to opportunistically deploy capital when needed. I respect that. Maybe it has to do with margin of safety.

Even if my focus in on specific securities, that market timing issue has been on my mind for some time.

For those interested, here is a link introducing to a series discussing this issue of Mr. Buffett as a market timer. (The Brooklyn Investor)

http://brooklyninvestor.blogspot.ca/2014/03/buffett-market-timer-part-1-partnership.html

The real challenge with this, if you look from the top, is that you have to elevate the bar for your buying and selling decisions probably at the expense of missed gains which may be hard/impossible to recoup.

Probably better to stay fully invested most or all of the times unless perhaps during exceptional circumstances.

How do you define substantial or exceptional? Simple but not easy.

[KinAlberta]

Buffett was never right out of stocks however this comment quoted below was interesting. If you can't find anything to buy and you sell off everything you think is overvalued or at risk, is that Market Timing?

So given the comments below, was it 'market timing' or just good luck in temporarily packing it in at the right time.

 

Additionally, I believe Buffett was quoted in 2009 as saying to the US government that is personal portfolio was all cash and short term instruments to the tune of $600 million.  So, BRK largley rode out the 08/09 collapse being selectively opportunistic, but personally, Buffett was sitting on cash during the collapse. 

 

So interestingly, as an aside, without ever selling any shares of BRK or taking much compensation at all, he may have been able to become a billionaire twice - as in via two semi-independent accounts.

 

"If he had stuck around, he concedes, he would have had mediocre results."

 

excerpt:

 

Swing, You Bum!

 

Buffett is like the legendary guy who sold his stocks in 1928 and went fishing until 1933. That guy probably didn’t exist. The stock market is habit-forming: You can always persuade yourself that there are bargains around. Even in 1929. Or in 1970. But Buffett did kick the habit. He did “go fishing” from 1969 to 1974. If he had stuck around, he concedes, he would have had mediocre results.

 

Source:

Warren Buffett--In 1974

https://www.forbes.com/2008/04/30/warren-buffett-profile-invest-oped-cx_hs_0430buffett.html

 

[Cigarbutt]

Helpful. Thanks.

As an input to our thought process, I would love to know his present personal portfolio allocation versus dry powder.

Are we in times of a cheery consensus?

[fuzzhead1506]

At the risk of sounding like a fear monger, I am gonna bump this one since my ear to the ground is signalling weird stuff in macro signals (albeit with no real new insights). 

 

There was a post on Philisophical Economics a few years back that more or less said: use a filter for the 10 month MA to reduce false positives in the signal.  I found a lot of value in the approach and felt that I should find some good signals to take advantage of it.  The writer mentions a few different data points to consider and my favorites were industrial production growth, housing starts, and unemployment trend.  I also like the data point RECPROUSM156N which comes from St Louis Fed...

 

Last quarter, the 10 year - 3 month yield curve inverted for the first time since the recession.  This signal tends to be VERY early so take it with a grain of salt.

 

Industrial Production growth slowed last quarter... it isn't negative yet, but something to watch.

 

Housing Starts slowed last quarter, growth is negative YOY, and is trending lower. 

 

One signal that seems to have a lot of false positives is the Advance Retail and Food Services Sales change YOY.  This is currently slightly positive, but showed a slight dip negative in 12/2018.

 

Another signal the writer mentions is real personal income growth which is also only at 2.3% YOY which is a bit below the 3% break-point mentioned as a possible filter. 

 

Unemployment rate trend is nowhere near to heading higher which is indeed different than the above mentioned signals so... when the numbers are in the ~3.8 range, extreme caution should be warranted.

 

Zooming out on the SPX we see a nearly perfect double top at the beginning of the month.

 

As a final measure, the indicator I above mentioned that I like which last updated on 5/1 for March: RECPROUSM156N is showing a higher number than has been shown since 2013.  The last time it was higher than that was coming out of the recession.  The tough part about using this one as a confirming indicator is that it is just an amalgamation model of the others already mentioned. 

 

All this being said, just yesterday WEB said something along the lines of: stocks are cheap if interest rates stay at these levels, and, to the point I agree.  Perhaps best to stay long for a bit longer??  Like I said, I offer no insights over the next person...just hearing and relaying what the tea leaves are telling me!  :P

 

Also, I have no idea when the bottom will be so it is probably best to hedge somehow here or in the near future instead of selling to buy at a later date.

[Spekulatius]

I can’t comment on market timing, but as far as Buffet is concerned, check what he does, not what he says. Come to think about it, they true for anyone.

[SHDL]

I can’t comment on market timing, but as far as Buffet is concerned, check what he does, not what he says.

 

This is very true.  FWIW I’m more than 100% hedged at the moment.  I might even do a “big short” if all the stars align.

[mjm]

I can’t comment on market timing, but as far as Buffet is concerned, check what he does, not what he says.

 

This is very true.  FWIW I’m more than 100% hedged at the moment.  I might even do a “big short” if all the stars align.

how do you hedge stocks?

[SHDL]

how do you hedge stocks?

 

Via put options for the most part.  I have some straight shorts too but those aren't material.