"Average Investors Should Try and Time Markets. Just a Little."

It doesn’t mean going all in or out but rather tweaking allocations in response to telltale signals. 

Novice investors are constantly told to never – never! - time the market. Just buy and hold stocks, dollar-cost averaging over time. That is good advice. I know some novice investors who have done very well through various economic cycles, buying stocks in both good and bad times – especially the bad times. They have unshakable faith that the market will always come back. If you didn’t have such faith, you wouldn’t be able to invest in this fashion. 

I am a professional investor and have timed the market with some success, but not too much because it is very hard to do. But I think novice investors should attempt to time the market once or twice in their investing careers. Sacrilege, I know. I’m not talking about getting totally in or out of the market, but rather about making changes in asset allocation that have the potential to boost returns substantially over time.

Here is how it works. Imagine you have your money in index funds in a traditional 60/40 portfolio. That means 60% in a stock index fund and 40% in a bond index fund. The moment when you are feeling the most ebullient about your portfolio, when it seems like it’s going up most every day and you can’t believe how much you are making, that is the point at which you want to adjust your stock allocation down to 50%.

A friend of mine, Brent Donnelly, president of Spectra Markets, calls this “The Cheer Hedge.”  It was from his days working on a foreign-exchange trading desk where he observed that the moment someone made a lot of money and started high-fiving others was the moment at which the position stopped working. If at the moment you were happiest about your investments you reduced risk, you would probably come pretty close to getting out of the market at the highs. When you feel the urge to tell everyone how much you are making is usually when the piano is about to fall on your head. This would have worked exceptionally well during the dot-com bubble and 2021.

Likewise, when you are feeling the worst about your portfolio, when you have abandoned all hope and are considering just liquidating everything to stop the pain, it is probably time to be taking more risk. If you increased your allocation to stocks from 60% to 70%, you would have more exposure when the market inevitably rallied. During the depths of the financial crisis, if people increased risk rather than liquidated, they would have been much better off today.

For example, in a year when stocks return 15% and bonds return 5% in a 60/40 portfolio, the blended return would be 11%. By adjusting the stock portion up to 70% and bonds down to 30%, the return rises to 12%. A small, but noticeable difference. Of course, in the early days of the post-financial crisis market, equity returns were much higher, with the S&P 500 Index gaining 23.5% in 2009. Alas, many missed out on such gains. Surveys by the American Association of Individual Investors showed that most novices only had 41% allocated to stocks at the time.

Financial advisers say it’s impossible to time the market, but it really isn’t. If you can sense big turning points in sentiment, you can make subtle changes to your asset allocation and increase returns over time. But it requires people to go against their intuition, which is hard because when people feel good about their portfolio, they usually want to buy more stocks, and sell when they feel terrible. Humans are hardwired to be terrible investors. So, if you were to do the opposite of what your instincts told you, you would probably be better off.  This is not heretical advice. The legendary Warren Buffett has often said to be a successful investor once must be fearful when others are greedy, and greedy when others are fearful.

Some people might interpret this advice as a license to trade actively, but it’s not. I’m talking about extremes in sentiment that happen only about once every 10 or 15 years. One of those came in the first half of last year, when meme stocks were spinning off into space and crypto millionaires were being minted by the thousands. You can monitor magazine covers and the like, but the best way to gauge sentiment is to talk to your neighbors. If they tell you they’re making or losing haystacks of cash in the market, it’s probably time to tweak your portfolio.

This latest downturn in the stock market would not qualify as an extreme in sentiment - at least not yet. We need to get to the point where people believe that the economy is going into a depression and the stock market will go to zero, and it doesn’t feel like there is any sort of mass capitulation happening. Sure, the latest AAII data shows the percentage of bulls hanging right around the lowest levels of the last 30 years, but it’s also notable that Cathie Wood’s flagship ARK Innovation ETF – seen as the pandemic era’s ultimate barometer of investor exuberance - has posted its longest streak of weekly inflows in over a year.

The point isn’t to pick tops or bottoms with precision; the point is to take a little less risk when others are taking more, and vice versa. People try to accomplish this in different ways, such as by studying things like valuations or charts, but the best method is by using sentiment. Novice investors have a voice in their heads that tells them to do the exact wrong thing at the exact wrong time. If you can step back and have some self-awareness of your own emotions, that is what produces outperformance in the long run.

Jared Dillian,

June 28, 2022

Jared Dillian is the editor and publisher of the Daily Dirtnap. An investment strategist at Mauldin Economics, he is author of "All the Evil of This World." He may have a stake in the areas he writes about. @dailydirtnap

Are you more like Warren Buffet or Cathie Wood? Or neither?

 

Happy Sunday and Happy Father's Day. Tale of the Tape: Warren Buffett and Cathie Wood Last Monday, the S&P 500 nearly took the rarest of tumbles. Every single one of the 504 stocks on the index was trading in the red. Only once since 1990 had such a uniform drop lasted to the end of a trading day.   The painful trading session acted as a microcosm of markets in 2022 — just about everything is down.   Stock picking can be a nightmarishly tough game, even in the best of markets. This year, scrutiny on the financial world’s most famous quasi-celebrity stock pickers has reached a fever pitch. Perhaps no two names are bandied about more than Warren Buffett and Cathie Wood.   They are two wildly different and uniquely successful investors. One is an old-school stock-picking legend, a sage Nebraskan who still lives in the modest Omaha house he bought in 1958 and has a fondness for railroads, utilities, and his beloved Dairy Queen. The other is a tech-savvy Californian, an investor in bleeding-edge innovation who uprooted her Wall Street fund from its Manhattan digs to sunny Florida last year.   Many place them on opposite poles of the investing spectrum, but their influence is so profound that analysts often cite their portfolios as economic indicators. And that’s what we’re looking at today — a tale of the tape between two heavyweights, why they inspire dedication from fans on par with Justin Bieber, and how their investing strategies led them to fame.   A Trip to the Buffett Warren Buffett, as you probably know, is considered by many to be an investing genius. Tens of thousands of people — fans — flock to Nebraska to attend the annual general meeting of his company Berkshire Hathaway for the chance to hear Buffett, and his straight-talking lieutenant Charlie Munger, pontificate on the state of markets. One fan, in particular, agreed to pay $19 million this past weekend just to have lunch with Buffett, a record for a charity auction he has held since 2000. Buffett, whose high school yearbook entry presciently called him “a future stock broker,” was born in Omaha in 1930 into relative privilege — his father was a four-term US congressman. But he built his business empire through sheer hard work. After selling chewing gum and magazines door-to-door as a kid in the 1940s, he and a friend in high school bought a used pinball machine and put it in a barbershop. They used the earnings to buy more machines, put them in other salons, and then sold the business for $1,200 in 1947.   By 1962, after graduating from the University of Nebraska and Columbia Business School and forming three investment partnerships, he was a millionaire. Over the next few years, Buffett used his various investment vehicles to take out soon-to-be-lucrative stakes in American Express and Disney, the latter after a personal meeting with Walt himself. He also built up a 29% stake in a floundering textile business called Berkshire Hathaway, which he advised to start taking out positions in the insurance industry. In 1970, he became the company’s chair and CEO. The rest, of course, is history: With holdings in everything from batteries to undershirts to diamonds and private aviation, Buffett’s empire is a $600 billion behemoth that serves as a barometer for the overall US economy. And he keeps finding success: In the twelve months ending in March 2022, Berkshire generated $276 billion in revenue, marking the second consecutive year of 12% or better year-over-year growth from the company’s core business — plus $78.5 billion of additional investment gains from Buffett and Munger’s steady bets like Bank of America, American Express, and Apple. Knock on Wood Like Warren Buffett, Cathie Wood has superfans, but rather than flocking to rockstar-style AGMs they express their love at a different venue: Reddit, Twitter, and TikTok. The CEO of Ark Investment is one of the most popular investors among retail traders on social media, and her strategies have probably launched more memes than the Marvel Cinematic Universe. But Wood’s path to being at the vanguard of online, tech-savvy investors followed a conventional Wall Street pattern… until it didn’t.   Born a generation after Buffett in Los Angeles, Wood graduated from the University of Southern California in 1981 after studying economics. By age 25, she moved to New York to join the investment shop Jennison Associates as chief economist.   In 1998, Wood took on the role of active investor, co-founding the hedge fund Tupelo Capital. In 2001, global asset firm AllianceBernstein named her chief investment officer of global thematic strategies, and she oversaw $5 billion in assets. And then, in 2012, the epiphany came.   Wood was inspired to start a firm of actively managed exchange-traded funds (ETFs) focused on disruptive innovation. The idea was to create an investment vehicle that harnessed the potential of high-growth companies and use ETFs — which anyone can buy like a stock — to make it accessible to everyday investors. AllianceBernstein thought it was too risky, so Wood left, put $5 million of her own savings into the venture, and Ark Invest was born.   The rest, of course, is (recent) history: By 2020, a Bloomberg News headline dubbed Wood the "best investor you've never heard of," with Ark taking significant stakes in growth-focused stocks like Zoom, Roku, Square, and Shopify. The ETF share price increased over 300% in the 11 months from March 2020 to February 2021, peaking at $152 per share. As of May, Wood’s flagship ARK Innovation ETF had $14 billion in assets under management and has become a barometer for high-growth sectors of the economy after Wood placed smart early bets on firms like Tesla. But 2022 has been a different beast entirely for the growth-focused tech firms populating Wood’s funds, testing the faith of die-hard Ark believers.   Fork in the Road In the two years leading up to this year’s market downturn, Buffett’s Berkshire and Wood’s Ark ETF performed surprisingly similarly, despite their radically different investment approaches. Both delivered returns of roughly 35% in the 24 months leading to January.   But then the economic picture flipped. Interest rates started to go up, inflation crept up (more like shot up), and the global economy was done no favors by the war in Ukraine and a new round of Covid lockdowns in China. Suddenly, Buffett’s value investing approach, where a company’s fundamentals and a solid margin of safety matter above all else, was in vogue once again. Meanwhile, Wood’s strategy of concentrating on innovative tech firms focused on growth at the expense of profits —  which thrived during the era of ultra-low interest rates — was exposed to an economic storm: Berkshire Hathaway, down just 6% this year, has weathered that storm. The S&P 500, down 21% on the year, has flirted with bear market territory in recent weeks. The Ark Innovation Fund is down 57%. Arks’ $14 billion may be a fraction of the $40 billion it had in March, but Wood’s war chest is still on par with major hedge funds like Bill Ackman’s Pershing Square. Investors are also keeping the faith: Wood's nine ETFs at Ark brought in $167 million worth of capital inflows this year, according to Bloomberg. Can History Repeat? Wood, for one, sure hopes so. In the early 1980s, while still at Jennison, her bosses would bring in leading economists like Henry Kaufman — who believed the double-digit interest rates and inflation of the time were there to stay — to debate Wood, who thought interest rates had peaked.   Flash forward to earlier this month, when Wood said huge inventories now piling up at US companies after months of supply chain disruptions suggest inflation is ready to die down (retail giant Target cut its profit outlook twice recently, citing too much inventory). She’s also doubled down on the pandemic tech darlings that helped burnish her reputation as an investor — in April, Wood bought over 100,000 shares of e-commerce firm Shopify, 330,000 of Zoom, 740,000 of gaming site Roblox, and 575,000 of streaming device maker Roku after the stocks plummeted.   So Who’s Right? Whether Wood can recapture the spark of the last few years remains to be seen, but her commitment to innovation remains admirable (or admirably stubborn, depending on your view).   Take earlier this year, when Buffett said he believes Berkshire’s railway investments, namely its ownership of BNSF Railway, the largest US railroad by revenue, “will be a key asset for Berkshire and our country a century from now.”   But Wood's Ark Invest sees the railroad business differently. Ark published a “Bad Ideas Report” which included freight rail investment — and argued autonomous electric driving trucks were the future of shipping goods.   And, while it may be Wood who is down now, Buffett has been there before. Berkshire has taken its fair share of bitcoin-sized tumbles over the years. In 1999 just as the internet economy was emerging in full force, Berkshire’s stock was down 20% and the Oracle of Omaha’s beloved S&P 500 up the same amount. A Barron’s article famously asked “What’s Wrong, Warren?” and quoted an internet forum user who called Berkshire a "middlebrow insurance company studded with a bizarre melange of assets, including candy stores, hamburger stands, jewelry shops, a shoemaker and a third-rate encyclopedia company the World Book."   Buffett had the last laugh in that case, but it wouldn’t be his last tumble. Nor, would a reasonable market watcher say, that Cathie Wood’s current setback is likely to be her last.   Who will be right? In their own way, both investors are playing the long game. We’ll just have to check back in 100 years. Written by Sean Craig

Market Rout 2022

Well, I’m certainly not enjoying this. Today my portfolio fell another 6%. That means I’m down about 40% for this year so far, nearly twice as bad as the S&P 500. Is that worse than yours?

 

Hey folks. An update on market conditions, investment status, and general support.

 

This has been a terrible year for nearly every investor. Speaking for myself, my portfolio is now beaten down to a place I last saw in early April 2020. Two years of research, of analysis, of frugality to make funds available for investment, and of difficult decision making— all wiped out in a few months. This is a brutal experience requiring both grit to stay the course and self-care to soothe the pain. 

 

2022 is why we invest for the long term. It is why we only put money into stocks (or ETFs or bonds or funds) which we can live without for as much as 5 years: sometimes it falls and has to claw its way back. Remember that money in the market is meant to someday pay for your children’s college, or a far-off dream vacation, or seed a second career, or for your retirement.

 

But I expect that right now you have serious doubts. You’re reconsidering your decision to have ever invested at all. You want to ‘rescue’ your money, to salvage what’s left of your portfolio. I know, because I feel that pull too.

 

As fearful and frustrated as we are, however, we don’t know what’s coming. We can only suspect, with history as our guide. I suspect that 2022 is the forest fire which clears the deadwood and creates fertile soil for new growth. If you sell now, all that ugly red in your portfolio, which represents lost value, becomes actual realized losses. You take a big hit, but then you’re out and you think you’re safe. But with inflation nearing 9% annually (the worst since the early 1970s!) you obviously can’t just put your cash into savings; if you just piggy-bank your money today you would literally be losing nearly 9% of value every year. So investing is necessary to even try to stay even, never mind build a future.

 

And what if the market doesn’t continue to fall? What if things level out next week, if we begin a long slow climb back? If you’ve sold your stocks, when will you feel confident enough to buy back in? How much of that eventual market rise will you miss because you’re on the sidelines waiting to be certain?

 

Timing the market is throwing darts at a moving target. You better have perfect aim because you’ll have to be right twice: Right about when to sell, and right a second time about when to buy back in.

 

Instead, reassess your holdings: remember that the stock price is merely a momentary measure of the resale value of one share of a company. Is there something fundamentally wrong with that business? Are sales falling? Is your business being outmaneuvered by a competitor? Losing executives left and right? In legal or regulatory trouble? Making seemingly bad strategic decisions? Or is it just that the value has dropped for no clear reason specific to the company?

 

Staying put requires serious fortitude, no question. But do you know what’s even harder? Being greedy when others are fearful: recognizing that if the stock is down, it might represent a tremendous value looking forward. Deciding to buy deeper into the company at a time like this— now that’s hard. What would a truly great investor do?