“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in the corrections themselves. 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.” – Peter Lynch
With equity markets having been through an unusually volatile period of late, the subject of market timing has inevitably reared its head. Indeed, it is probably fair to assume that a good proportion of the selling that propelled global stock market indices into official “correction” territory (defined by a decline of more than 10%) will have been by investors seeking to avoid further anticipated downside and buy back in once the sell-off is over.
Meanwhile, in a time of the year that is traditionally light on news – for us in the UK, “the silly season”, but in many European languages (get this:) “cucumber time” (!) – even the mainstream media has been making a big deal of the markets’ woes. Needless to say, this has paled into insignificance when compared with the coverage seen in the specialist financial outlets. Switch on any of CNBC, Bloomberg News, MSNBC, or (heaven forbid) Fox Business at any point in time over the past five weeks and it has been virtually impossible to avoid the sight of some smug looking perma-bear pontificating with undisguised relish at the sight of falling markets. They, of course, had seen this coming and are perfectly positioned to profit from this latest directional shift.
Except they aren’t and they won’t.
While it may well be that a very small proportion of these talking heads had sold out at the very top, or perhaps, even better, put on short positions, the vast majority will have been way too early to do so and missed a good deal of the preceding upside, the opportunity cost of which is very conveniently forgotten. Moreover, we rarely, if ever, will get to hear of the point at which they have bought back into the market or covered their shorts. Indeed, the history of markets is littered with the names of strategists and money managers who correctly made “The Big Call”, but then faded into obscurity when their subsequent pronouncements and decisions proved far less successful (Elaine Garzarelli, anyone?).
“My favourite time frame is forever“
Warren Buffett
Private investors have proved equally ill-equipped to call market tops and bottoms, as the statistics relating to ownership of the fund that was managed the author of our headline quotes – the legendary Peter Lynch – attest. In the 13 years between 1977 and 1990 that he ran it, the Fidelity Magellan Fund averaged a return of 29.2% per annum and in so doing outperformed that S&P500 Index by more than 1% per month. Such was his success and popularity among the investing public that the fund grew from $18 million at the beginning of his tenure to $14 billion, making it the largest and best performing mutual fund in the world as a result. Anyone who had put $1,000 into the fund on the day he took over and hung onto it until his departure, would have seen their holding grow to be worth $28,000. Remarkably, however, thanks to a predilection for market timing, the average investor in the fund over the period of Lynch’s stewardship gained less than 10% (n.b. not per annum, that’s 10% in total) and the majority lost money!
At MitonOptimal, rather than aiming to make the kind of market calls that lead to a big, binary (and, if wrong, very damaging) outcome, we prefer to make small adjustments to our long-term strategic asset weightings on a tactical basis in response to anticipated short-term market influences. While our internal risk rating that drives these tactical decisions can theoretically range from 0 to 10, in practice it is unusual for us to stray too far from a range of 3 to 7 (we are currently at 4½). To use a sporting analogy, we are aiming to accumulate a winning score by hitting singles, rather than looking to clear the pavilion with a big six. Though perhaps not as exciting as the approach pursued others in our industry, it is one that has served us and our clients well.
Market timing; does it work?
