Crawling Road
The Permanent Portfolio, Investing, Finance and Random Thoughts.
Timing Matters, but Emotions Matter More
0Market timing is something I’ve found many investors get drawn to eventually in their search for performance. My opinion is that market timing simply doesn’t work for a host of reasons. However it’s common to hear that if an investor just timed these various assets correctly they could have made X amount more. Yes, that’s true. But my take is simple: Timing matters but market timing doesn’t fix it.
Timing matters but market timing doesn’t fix it.
The issue is not that in hindsight that some mix of correctly timed buys would produce superior results. I don’t dispute that. But what I do dispute is that these things can be known ahead of time.
It is interesting because running this blog and forum I get people writing me all the time about timing the assets. Asset X is too much, Asset Y is a better buy, I’m going to wait on Asset Z. Etc.
I just tell them to buy all at once and be done with it. And that has proven to be the best advice over and over again. Not just because they will worry less about their money, but they will take their emotions out of the decision going forward.
It’s one thing to say an investor found some kind of timing mechanism that works on historic data. But it’s another thing entirely for them to actually follow it. What I’ve seen over and over again is that even if I thought their strategy were sound (which is practically never), they just don’t have the follow-through. More specifically, their timing system probably doesn’t work anyway and they’re using it as a way just to confirm their own biases and feelings for or against some asset class.
I had people writing me back in 2008 saying they didn’t want bonds because they were too expensive. By end of 2008 they went up +30%! So they got way more expensive.
Then in end of 2008 I told people to rebalance into stocks because they were decade low prices. But someone would write and point out all these technical analysis graphs showing, conclusively, that the Dow was going to 3,000 or whatever so they weren’t going to buy.
By end of 2009 stocks posted almost +30% gains.
Then in 2010 someone would write and not want to buy LT bonds. They said they got killed in 2009 with -20% losses and that 2010 would be just as bad because “interest rates have nowhere to go but up.”
Well they were wrong. Bonds were +9% for the year.
Then in 2011 someone would say that bonds, again, were going to lose money and they wanted to sit in ST cash because some guru had gone short on their maturity.
In 2011 LT bonds posted +30% gains.
But you know if someone had just bought all the assets and done nothing they’d have pulled in very good gains over these years with no hassle or stress. It’s easy money.
I understand the desire to time the markets. But aside from the technical aspect of knowing if the strategy will even work (it won’t), the bigger problem on top of it is that humans just aren’t good at controlling their emotions. They seek out data to confirm their biases. I have found repeatedly that this behavior not only makes them lose more money than someone that just bought in, but probably keeps them exposed to other market risks.
Here is a clip of Harry Browne discussing the same exact problem. De Ja Vu all over again:
Harry Browne on Timing Assets: Don’t do it!
Market timing doesn’t work. It doesn’t work for technical reasons and it doesn’t work for emotional reasons. Just buy the assets all at once and keep them rebalanced and you’ll be fine.
Reminder: Be sure to stay up to date on the upcoming Permanent Portfolio Book by signing up for the announcement list.
Aquamira Water Purification Chemical Review
22 weeks ago
Aquamira is a very lightweight water purification chemical. It comes in two parts, mixes easily, and produces water with no bad tastes. This is a good solution for hikers looking to save a lot of weight over a filter. Also, for those that don’t want to deal with a clogging filter, broken parts, busted seals, etc. that many pumps may have.
According to the Centers for Disease Control (CDC), chlorine dioxide (the chemical of Aquamira) is one of the best chemical treatments for a wide number of pathogens. A chart detailing the various methods is here:
CDC Backcountry Water Treatment Options
Aquamira is a simple, light and reliable way to get clean water. Highly recommended!
If you want to use a filter, then I highly recommend the Platypus GravityWorks system. It is a great solution as well:
If this review was helpful to you, please consider making your purchase through my Amazon store. It costs you nothing extra but helps support my work. Thanks!
Trading Against Pros
0Doing some research recently I’ve found that almost 9 out of 10 of the trades on any given day on Wall Street are between professionals, not individuals. Think about that for a second. When you go to make a trade, 9 out of 10 times you are doing it against someone that does it for a living. And not just a living, but paid really big bucks to do it and has a tremendous amount of resources behind them. This includes mutual funds, pension funds, hedge funds, professional speculators, investment banks, etc.
But it gets even better. If 9 out of 10 trades are between professionals that means that most of the trades pros do are between each other. Now that’s interesting to consider. That means the average you see in the investing products on Wall Street represents the best that the pros on Wall Street can do in any single year.
Often I read about an investing strategy or trading method that claims to beat the broad market indices. That’s a pretty bold claim. I have to wonder if the sellers of these ideas are aware of the reality of trading on Wall Street. To think that you’re going to teach an individual investor to go up against a highly skilled pro and win. It’s kind of like telling an amateur golfer they are going to turn into Tiger Woods if they just buy the right golf club. It’s a fun thing to think about, but just not very realistic.
Even much vaunted hedge funds, the supposed masters of secret Wall Street strategies, often bomb. If they can’t do it, what chance does an individual have?
THERE’S yet more evidence that it makes sense to invest in simple, plain-vanilla index funds, whose low fees often lead to better net returns than hedge funds and actively managed mutual funds with more impressive performance numbers.
Basic stock market index funds generally aspire to nothing more than matching the returns of a market benchmark. So in a miserable year for stocks, index funds may not look very appealing. But it turns out that, after fees and taxes, it is the extremely rare actively managed fund or hedge fund that does better than a simple index fund.
That, at least, is the finding of a new study by Mark Kritzman, president and chief executive of Windham Capital Management of Boston. He presented his results in the Feb. 1 issue of Economics & Portfolio Strategy, a newsletter for institutional investors published by Peter L. Bernstein Inc.
The Index Fund Wins Again, Mark Hulbert February 21, 2009
http://www.nytimes.com/2009/02/22/your-money/stocks-and-bonds/22stra.html
I’ve been to financial firms on Wall St. in the past and had a chance to see some of their trading operations. These firms are trying everything possible to make a buck off each other. They are highly competitive and highly compensated if they manage to do it. Many use cutting edge hardware, algorithms and trading techniques trying to sniff out every last penny of advantage. There are actually magazines for the field (http://www.automatedtrader.net) discussing advanced applications in areas of High Frequency Trading and other esoteric topics.
These firms are looking for every possible edge to gain. And the harder they look, the more efficient the markets become. It is almost impossible to get an information edge, and therefore consistent excess profits, over anyone else at those levels. This is why, despite their best efforts, many funds cannot beat the market average once you subtract the costs from what they do.
You cannot compete against Wall Street with a home computer and technical analysis charts. The NSA would have a hard time competing against some of the computing power these firms have.
Sitting back and letting these people slice each other to pieces on trading is the best strategy. A Permanent Portfolio using a simple stock index fund let’s you do just that. You cannot compete against Wall Street with a home computer and technical analysis charts. The NSA would have a hard time competing against some of the computing power these firms have. This is why trading against the pros is a losing proposition on all fronts. Not only are you not likely to beat them, but they can’t even beat the simple market average themselves.
Conclusion?
Just own index funds where appropriate for your Permanent Portfolio. Don’t waste time and money trying to compete against those that aren’t even competitive against market averages.
Reminder: You can sign up for the announcement list for the upcoming Permanent Portfolio Book here.
Callan Periodic Table of Investing Returns 2011
0I love the Callan Periodic Table of Investing Returns. This chart shows major asset classes and how they’ve done from 1992-2011. It shows very vividly the unpredictable nature of the markets and why holding a diversified investing portfolio is a good idea. It doesn’t show gold and long-term bonds that the Permanent Portfolio also uses, but the general idea still comes across.
Callan Periodic Table of Investing Returns
Thanks to the people at Callan for putting this together.
Market Timing vs. Efficient Market Hypothesis – Understanding the Problem
0Let me answer the common argument for market timing versus relying on the Efficient Market Hypothesis (EMH) for managing a portfolio.
The argument usually is something like: “EMH allows bubbles to form and other mis-pricings, therefore it is wrong and doesn’t work. Market timing works better.”
Well EMH does work. Or I should say it works most of the time for most situations. Yes it can go off the rails from time to time. But this is a small minority. EMH is not perfect, but it is much better than what competing explanations can say about markets and profiting over others.
For me it’s not a question of whether EMH explains everything because it doesn’t. Bubbles, etc. do exist and mis-pricing can happen. But in terms of theories that apply to the markets, EMH is the most consistently profitable despite the problems it has.
I hear a lot of talk about various timing mechanisms and how they did in the past, etc. But I never come across people that actually can show me real-world profits from those strategies. And I’m not talking about a string of lucky trades. I’m talking year in and year out consistent and reliable profits above the overall market. And I’m talking about profits that have all the associated trading and tax costs factored in as well – not a bunch of backtest returns in a spreadsheet or on a graph.
The problem with market timing is that people are not computers. A backtesting spreadsheet or computer analysis may make it seem so simple to buy and sell at pre-defined times according to market timing rules. But in reality there is a human that has to make those decisions and humans are emotional. Part of that emotion is the idea that an investor needs to not just decide when to sell out when the strategy says, but also when to buy back in. That’s two different decision points. And each time there is a chance they will question their judgment and waver. That’s where the problems start to multiply and the profits start to dwindle. People have a hard enough time rebalancing with static bands of the Permanent Portfolio (set at 15% on the low and 35% on the high). How in the heck do they have any chance when trades are happening monthly, weekly or even daily?
People have a hard enough time rebalancing with static rebalancing bands of the Permanent Portfolio (set at 15% on the low and 35% on the high). How in the heck do they have any chance when trades are happening monthly, weekly or even daily?
Taking these trading strategies into the real-world never seems to work the way the advocates state. Either because the strategy itself really doesn’t work but they’ve talked themselves into seeing a pattern that doesn’t exist. Or the strategy is simply too hard to put into practice due to trading costs and human emotions.
Finally, consider these two points:
1) If these strategies are so reliable, why do the advocates need to go back and keep tweaking them over and over again when new data comes to light? Shouldn’t they always work if they are so foolproof?
2) If these various trading systems did work and the markets were so simple to take advantage of, then why isn’t everyone doing it already? The firms on Wall St. spend millions a year looking for the slightest edge on each other. How did they manage to miss all this easy money?
Market timing doesn’t work. Stay away from it and you’ll make far more money in your investments.
The new Permanent Portfolio Book is coming soon. Read all about it and sign up for the announcement list here: Permanent Portfolio Book
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