The Great Repression conference in Port Douglas has been an outstanding success.
The opening remarks of my presentation were:
‘You could call it fate, irony, destiny, a coincidence or perhaps a sign, that a conference on Financial Repression is being held in a venue (The Mirage) that was a symbol of the 1980s debt excess. The decade that spawned the greatest debt bubble in history.’
As you may know, Christopher Skase’s business, Qintex, was a debt-funded mirage…that ended badly for shareholders. The Skase story is but a footnote in the larger story of the economic mirage we’ve created over the past 30 or 40 years.
The illusion is starting to be seen for what it is.
Ray Dalio, founder of the $160 billion investment firm Bridgewater Associates, was invited to speak at the Federal Reserve Bank of New York’s 40th Annual Central Banking Seminar on 5 October, 2016.
Here are some extracts from his speech:
‘…we’ve (most of us alive) never been in a world like this.’
‘This [debt] is a global problem.’
‘Japan is closest to its limits, Europe is a step behind it, the US is a step or two behind Europe, and China is a few steps behind the United States.’
‘The biggest issue is that there is only so much one can squeeze out of a debt cycle, and most countries are approaching those limits.’
‘There are too many promises that can’t be kept, not only in the form of debt, but also in the form of health care and pension costs.’
This is probably not what the boffins at the Fed wanted to hear…but they needed to hear it.
The central bankers’ policies, together with political largesse in the form of welfare and healthcare, have created a monster.
No one really knows what straw will finally break the camel’s back, or how debilitating the fracture will be.
Debt crises do not end well. Promises of Neverland will be reneged upon. The options we appear to have in front of us are bad, very bad or horrendous. There are no good options out of the debt and entitlement monster we have created.
In spite of the warnings, the investment industry will tell you until they are blue in the face that it is time in the market that counts…even as you go over the cliff.
My latest book — How Much Bull Can Investors Bear? — explores some of the myths of the investment industry. This weekend, I’d like to share with you my thoughts on the ‘time in/timing’ myth. The following is an extract from my upcoming book.
It’s time in the market, not timing the market
This great little play on words is a favourite gem of the industry.
Time in the market — stay the distance and your patience will be rewarded.
That’s music to the fund management industry’s ears…investors who never leave their products. The rivers of gold — the fees earned as a percentage of funds under management (FUM) — just keep flowing.
Is that which is good for the industry good for you, as well?
The answer is…perhaps.
While that may seem vague, it’s because markets are rarely ever straightforward. Markets are bi-polar — periods on an extended high and periods on an extended low.
When markets are in the positive trend — a Secular Bull market — you want to stay the distance. Sit back and let the market take your capital higher.
Here’s the chart on the S&P 500 index secular markets (1900–2015).
Source: Crestmont Research
[Click to enlarge]
The triple-digit returns in the green areas (Secular Bull markets) sure beat the ‘negative to barley any’ returns produced during the market’s red areas (Secular Bear markets).
Another rhetorical question: Tell me which period you’d prefer to spend time in the market and which period you’d like to spend time out of the market?
Why would you want to sit through the agonising grind of a Secular Bear market spending years correcting the overvaluation of the preceding Secular Bull market?
Remember the trend? Look at the squiggly blue line on the bottom of the chart.
Secular Bull markets start with a low P/E and end with a high P/E.
Secular Bear markets start with a high P/E and end with a low P/E.
By now you’ll appreciate my investment approach is deliberately simple. When assets do not represent value — when the risk is greater than the reward — you should stay out, or transfer to cash.
When assets do offer an attractive risk versus reward equation, invest on a gradual (dollar cost average) basis into index funds.
Moving in and out of asset classes — buying low and selling high — is contrary to the ‘buy and hold’ mantra from the investment industry. The fund management industry has a vested interest in keeping your funds under their control for as long as possible — preferably for the remainder of your life.
While your money remains in their funds, they get to clip the ticket for 1–2% per year…irrespective of performance.
The greatest Secular Bull market in history began in 1982. This was perfect timing for the fledgling investment industry. The industry’s marketing gurus point to performance data since 1980 to support the case of ‘shares for the long term’.
However, a look at the history of markets shows that extended periods of outperformance (Secular Bull markets) are followed by extended periods of underperformance (Secular Bear markets).
Therefore, timing is critical. The absolute worst time to invest is towards the end of a Secular Bull market. The herd is so conditioned (after decades of overperformance) to believe the ‘shares for the long term’ message.
Prices are subsequently pushed to extreme levels. The ‘bigger fool theory’ applies at the end of a Secular Bull market.
It’s for this reason that you need to make investment decisions anchored by long-term valuation metrics. Referencing where we might be in the cyclical trend — high, to low, to high — helps take the emotion out of the situation.
Timing does matter. The data is conclusive.
- Buy high = future low returns
- Buy low = future high returns
In case there is any mistake in what I mean by timing, you can never, ever time the entry into (or exit from) the market perfectly.
What I mean by timing is recognising when markets are heading into overvalued or undervalued territory.
In both cases you employ a dollar-cost averaging strategy — gradually sell out of (in the case of overvaluation) or buy into (in the case of undervaluation) the market.
This is what Baron Nathan Rothschild meant when he said ‘take the 80% in the middle.’
Long-term valuation metrics are not timing tools. They are useful warning signs that provide some historical context to the prevailing market. Where does it sit in relation to 145 years of data? High, low or somewhere in the middle?
Markets are a reflection of our collective mood. The Roaring Twenties was an upbeat time. The social mood was riding high. This was reflected in rising share prices.
The Great Depression was appropriately named because the social mood was dark and depressing. High levels of unemployment, bankruptcies and financial stress were the norm.
Making sound investment decisions — removing yourself from harm’s way or placing yourself in a position to capitalise on an opportunity — requires methodical analysis and an understanding of how social mood influences the pricing of assets and then acting on your findings.
Identifying a market is overpriced and then not acting to take your money (some or all) off the table because the industry says ‘it’s time in the market’ makes no sense to me.
Another furphy used to support the ‘time in the market and not timing the market’ myth is the ‘if you missed the 10 best days in the market’ argument.
The story goes that, if you missed the 10 best days in the market, your performance would be severely impacted. This is another invention of the investment industry’s marketing department to spook people out of moving in and out of funds.
What the marketing departments conveniently forget to mention is the calculations on ‘if you missed the 10 worst days’.
The investment industry’s agenda is to keep your funds under management. They do not want investors moving funds in and out…it disrupts their cash flow.
Mebane T Faber, from Cambria Investment Management, released a paper titled ‘Where the Black Swans Hide & The best 10 Days Myth’. The paper concludes:
‘We critique the “missing the 10-best-days” argument proffered by advocates of buy and hold investing, as we demonstrate that a significant majority of the 10 best days and the 10 worst days occur in declining markets. We continue to advocate that investors attempt to avoid declining markets where most of the volatility lies and conclude that market timing and risk management is indeed possible, and beneficial to the investor.’
What Faber identified is that the majority of ‘best and worst’ days tend to happen in declining markets. This makes sense when you think about it. A declining market is usually accompanied by big falls that are often followed by a ‘buy the dip’ bounce.
The following table from the report is a country by country look at what the outcome would have been if an investor had missed both the best and worst days.
In every single country the outcome is the same — missing both would have delivered a better outcome.
Source: Global Financial Data
[Click to enlarge]
The industry spin conveniently focuses on missing the best days. Whereas missing the worst days is far more profitable.
Because a 50% fall requires a 100% gain to get back to square one.
There’s an old saying that’s worth remembering: Share markets go down by the elevator and up by the stairs.
‘Time in the market’ is an industry myth that arose from the greatest Secular Bull market in history.
Take the time to review your portfolio position and decide how much of your money you are happy to expose to a potential 50% or more market downturn.
It will be time well spent.
For Markets and Money