Image Source: Unsplash

— Predicting the market or “do you feel lucky, …”

— Paradoxically the prediction business can be very profitable for some and not because their predictions are correct.

— Being out at the wrong time — Its hard to get back in.

— Observations on beating the market

Predicting the market or “do you feel lucky, …”

Since the June 16 bottom we’ve enjoyed a really nice move in the market and, as usual. there has been a choir of naysayers pointing out all the reasons that this was a flash in the pan and why we should ignore it and not be reeled into making a bad buy decision. I might point out that was the case after the lows were reached in 2009 and every major market break since and before.

This is always a common media message (unless we’re at a real secular bull market top): sell and avoid stocks today because bad things  are about to take the market lower. Below I’ve attached a piece by Taylor Muckerman of Seeking Alpha that I hope will disabuse you of the idea that this type of advice should be taken. It reaffirms a constant warning in kortsession.com that Trading Is Hard. It speaks volumes for a “buy and hold” philosophy. 

Based on the above information should we buy, sell or hold this market. Better yet “Dirty Harry” once asked, “do you feel lucky?” 

Paradoxically the prediction business can be very profitable for some and not because their predictions come true

After many years of witnessing faulty predictions I find it very interesting that so many consumers of market news and opinion still get wrapped up in them. For example in the most recent period leading up to the current rally people knowing my background in the investment business would constantly quarry about “the coming recession” and the constant question, “should I sell now?” This was even after predictions of this recession may have been priced into the market after a 20% pull back in the S&P 500 and the Ark Innovation Fund (ARKK), the poster child for speculation and overvaluation, had declined almost 80% from peak to trough.

Not so unusual was that the lower prices went on to frighten these folks even more as the pundits and media continued to trumpet a forecast of bad times ahead. Selling and fear intensified. This is a feature unique to the stock market: lower prices instead of attracting demand created additional supply for sale. 

Who got rich on this drop? Obviously adept short sellers (most of us are not) and the media (scary times are good for ratings) and all those paid contributors to the media … the pundits. On top of this you have people in the industry interested a making a name for themselves … making the “Big Call.” Getting it “right” would burnish their reputations tending to bring assets to them or the firms they represent … bigger pay checks for all. One good call seems to have a shelf life much longer than its useful life (i.e.- those making the call are continued to be held in high regard long after their “big call” even if they have been 100% wrong since they made that call).

Being out at the wrong time — Its hard to get back in.

If you do sell out in fear listening to the bombardment of negatives and the market turns sharply upward as it has done, it is extremely difficult to get back in because of the speed of the rally and the fact that the people who convinced you to sell are now telling you that this is a flash in the pan, a sucker’s rally, don’t buy. Of course if the market keeps moving higher you wished you hadn’t listened but you don’t want to chase .. you are frozen out. Again the higher the market goes, the more difficult it becomes to pull the trigger. The Seeking Alpha table above is a stark reminder of the cost of being out.

Observations on beating the market timers

— Just be there, invested in a diversified equity portfolio and tune out those voices that claim that they know best when to BUY and SELL. 

— One easy way, and the one that Warren Buffett has recommended his own heirs to use, is to buy an S&P 500 index fund and plug your ears to the siren songs of the pundits who try to convince you they have a better way to make money in stocks. Buy, hold and add to that position over time if you are accumulating a nest egg. Most professional money managers routinely miss their benchmarks. Being in the market(the S&P) over the long term you should do quite well. Since 1965, when Berkshire Hathaway came on the scene, the S&P 500 has compounded at a 10.5% rate (Berkshire did 20.1%). This is a sleep-well, low cost, tax efficient, easy-to-implement strategy that bets only on the long-term resilience of the US economy. Of course, no guarantees on 10.5% , but if you just did 6% or 7% after inflation you’d be doing just fine. FYI, Jeremy Siegel’s work (Stocks for the Long Run 5E) studying the US equity market from 1802 until 2012 indicated that stocks during that period produced a real (inflation adjusted) return of 6.6%.  

— If you are more adventuresome and willing to do a lot more work, buy individual stocks and ETFs(Exchange Traded Funds). This will require that you really understand and that you KNOW WHAT YOU OWN AND WHY YOU OWN IT.  As we saw in 2020 markets and even more recently we have had periods of unhinged volatility. Investors have been taught erroneously over the years that you can trade and time markets use stocks, derivatives and ETFs as conveniences to move small to very large amounts of money into and out of certain indices and industry groups. When money moves, especially when it moves out of the market, it can be extremely destabilizing to individual stocks or industry groups. WARNING- If you can’t stand this heat don’t play. You want to know what you own so well that you won’t panic even if it drops 30, 40 or 50%. This holds especially true for smaller cap, less liquid names where the action can be extremely irrational. Remember your shares represent an ownership interests in a companies ,indices or industry groups (ETFs). They are not chips at the roulette wheel.

As to my opening title question, “Who’s dumber …?” It’s you and me if we take their misguided advice and try to time the market.

Bottom Line: There is a legion of people out there who make their living by convincing their audience that trading and market timing is easy and appropriate for all investors. Don’t buy what they are selling. Trading and market timing is tough and can be very costly. 

What’s your take?

More By This Author:

Are The Sellers Exhausted?
Has Warren Buffett Gone Mad?
What’s A “Ponzi?” Should We Be Greedy?