Posts tagged ‘market predictions’

Getting off the Market Timing Treadmill

Most investors have been stuck on the financial treadmill of the 2000s and have nothing to show for it, other than battle scars from the 2008-2009 financial crisis. A lot of running, sweating, and jumping has produced effectively no results.  Most media outlets continue to focus on the “lost decade” (see other Lost Decade story) in which investors have earned nothing in the equity markets. After a decade of excess in the 1990s should the majority of investors be surprised? Investing is no different than dieting and exercise – those topics are easy to understand but difficult to execute.

Where are the Billionaire Market Timers?

The financial industry oversimplifies investing and sells market timing as an effortless path to riches – even in tough times. In the search of the financial Holy Grail, the industry constantly crams new software bells and whistles and so-called “can’t lose” strategies down the throats of individual investors. Sadly, there is no miracle system, wonder algorithm, or get rich scheme that can sustainably last the test of time. Sure, a minority of speculators can get lucky and make money by following a risky strategy in the short-run, but as the global economic disaster caused by LTCM (Long Term Capital Management) taught us, even certain successful trading strategies or computer algorithms can stop working in a heartbeat and lead to a widespread bloodbath.

Are you still a believer in market timing? If so, then where are all the billionaire market timers? Famed growth manager, Peter Lynch astutely noted:

“I can’t recall ever once having seen the name of a market timer on Forbes‘ annual list of the richest people in the world. If it were truly possible to predict corrections, you’d think somebody would have made billions by doing it.”

Certainly, there are some hedge fund managers that have hit home runs with amazing market calls, but time will be the arbiter in determining whether they can stay on top.

Sage Speak on Market Timing

If you don’t believe me about market timing, then listen to what knowledgeable investors and thought leaders have to say on the subject. Larry Swedroe, a principal at Buckingham Asset Management, compiled a list including the following quotes:

  • Warren Buffett (Investor extraordinaire):  “We continue to make more money when snoring than when active.”  He adds, “The only value of stock forecasters is to make fortune-tellers look good.”
  • Jason Zweig (Columnist):  “Whenever some analyst seems to know what he’s talking about, remember that pigs will fly before he’ll ever release a full list of his past forecasts, including the bloopers.” (See also Peter Schiff and Meredith Whitney stories)
  • Bernard Baruch (Financier): “Only liars manage to always be out during bad times and in during good times.”
  • Jonathan Clements (Columnist): “What to do when the market goes down? Read the opinions of the investment gurus who are quoted in the WSJ. And, as you read, laugh. We all know that the pundits can’t predict short-term market movements. Yet there they are, desperately trying to sound intelligent when they really haven’t got a clue.”
  • David L. Babson (Investment Manager): “It must be apparent to intelligent investors that if anyone possessed the ability to do so [forecast the immediate trend of stock prices] consistently and accurately he would become a billionaire so quickly he would not find it necessary to sell his stock market guesses to the general public.”
  • Peter Lynch (Retired Growth Manager): “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

Market Timing Road Rules

Rather than make guesses regarding the direction of the market, here are some investment rules to follow:

  • Rule #1: Do not attempt to market time. Statistically it is a certainty that a minority of the millions of investors can time the market in the short-run – the problem is that very few, if any, can time the market for sustainable periods of time.  Don’t try to be the hero, because often you will become the goat.
  • Rule #2: Patiently make good investments, regardless of the economic conditions. It is best to assume the market will go nowhere and invest accordingly. Paying attention to a hot or cold economy leads to investors chasing their tails. Good investments should outperform in the long-run, regardless of the macroeconomic environment.
  • Rule #3: Diversify. In the midst of the crisis, diversification didn’t cure simultaneous drops in most asset classes, however ownership of government Treasuries, cash, and certain commodities provided a cushion from the economic blows. Longer-term, the benefits of diversification become more apparent – it makes absolute sense to spread your risk around.

In some respects, there is always an aspect of timing to investing, but as referenced by some of the intelligent professionals previously, the driving force behind an investment decision should not be, “I think the market is going up,” or “I think the market is going down” – those thought processes are recipes for disaster. I strongly believe an investment process that includes patience, discipline, diversification, valuation sensitivity, and low-cost/ tax-efficient products and strategies will get you off the financial treadmill and move you closer to reaching your financial goals.

Read the Full Larry Swedroe Story

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at time of publishing had no direct positions in BRKA or any other security mentioned. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

February 21, 2010 at 11:30 pm 10 comments

The Not So Good, Bad, and Ugly

There’s a new bounty hunter in town, and it’s not Clint Eastwood from the legendary western film The Good, the Bad and the Ugly. Rather, it’s John Carney from Clusterstock who is keeping the bold bears honest, even though they have received their heads handed to them in this supposed “sucker, bear-market rally.” Perhaps, the bears will ultimately be proven right, but in the mean time, these tape fighters are losing blood by the quart.

Music from what Quentin Tarantino calls the best-directed film of all-time.

I find the existence of accountability sheriffs in the business media world rejuvenating since these roles are sorely lacking. Too often, so-called pundits spout off bold assertive predictions and industry commentators make no effort to review the track records of those prognosticators. I commend many of the industry practitioners for putting their necks out on the line, but viewers need some sort of historical batting average to judge the odds of forecast reliability. The game of predictions is no science, but there can be some objective responsibility instituted by media researchers and commentators. Media outlets provide carte blanche to predictors without doing homework on the guests. Unfortunately, time-strapped viewers have little to no time to research commentator track records.

Typically how it works, especially in the massively fragmented media world (which I admittedly participate in on a relatively small scale), you have countless voices making extreme predictions across the broad economic and financial globe. Eventually, some forecasts will be right, including those correct for the wrong reasons – just think back to your statistics class where you learned about the “law of large numbers” or the family living room where the broken clock provides correct time twice a day (see my other article on bold predictions). Since any human likes to be associated with greatness, these future-seers are strolled into media studios, put on a pedestal and asked to share their brilliance, all without critically reviewing the past record of the purported expert.

Rather than make bold predictions about market direction, which is virtually impossible to predict with accuracy on a sustainable basis, I choose to look at the market with a perspective similar to the greats. For example, Peter Lynch who earned +29% per year from 1977 – 1990 (achieving about double the market return) says it’s best to “assume the market is going nowhere and invest accordingly.” Realizing your fallibility is important also. Even with Lynch’s incredible track record, he knows “you’re terrific in this business [if] you’re right six times out of 10.” According to Lynch fretting about the market direction is also useless: “If you spend more than 14 minutes a year worrying about the market, you’ve wasted 12 minutes.” Interestingly, even Warren Buffett, arguably the greatest investor of all-time, never comments on short-term directions of the market, despite being hailed as the “Oracle of Omaha.”

Predictions and forecasts will never go away, but I will sleep better at night knowing sheriffs like John Carney are keeping track of the good, the bad and the ugly. Who knows, maybe he’ll even take me on as a deputy.

View John Carney’s Full Article

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, and at the time of publishing had no direct positions in BRKA/B. Please read disclosure language on IC “Contact” page.

October 20, 2009 at 8:28 am Leave a comment

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