A light beckons on Wall Street
That’s it – the timely signal that people will say “never” sounds. You know – the announcement that the stock market is down, so “buy!”
Disclosure: The author is fully invested in actively managed US equity funds
Why the silence at such an important time? Because low points occur when widespread (AKA, popular) negativity reigns, accompanied by grim forecasts that worse is yet to come. Now search “stock market” and today’s tide of pessimism is evident. Thus, the setting is one of the skipping negatives. positive? No interest. But there’s more to this lack of bullishness…
At times like this, one rarely, if ever, hears from professional investors (whose careers are built on merit). Instead, they focus on capturing buying opportunities while competing with other professional investors. Giving arbitrary investors gratuitous insight is counterproductive to their goals.
A good example is early 2020 when Covid-19 risk first hit the stock market.
Throughout 2019 and into early 2020, the stock market rose. At the time of a small dip I wrote this positive article (January 31st):
In this rising market, there was a healthy balanced flow of bullish and bearish articles as the market moved higher. However, two weeks later something happened that I hadn’t seen before – the bearish articles suddenly disappeared. There was no obvious reason, so I assumed the fund managers had decided to sell and stop doing interviews. So I sold everything and posted this article on February 16th.
This chart shows the movement of the Dow Jones Industrial Average over this period.
DJIA on outbreak of Covid-19 sell-off (Oct 2019 – Mar 2020)
A word on market timing
The standard advice is don’t do it. The assumption is that trying investors are missing out by buying and selling too late. That’s certainly what happens when an investor follows media reports and popular trends (and relies on their feelings about stocks).
But there is another problem. No one can predict the fundamental causes and investor reactions to all (or many, or some, or even a few) major market swings in advance. We regularly read: “The investor who called [fill in the blank] says now [whatever].” The fundamental/investor issues underlying each major timeframe are unique. Therefore, past success is irrelevant as the rationale applied cannot be carried over for a period of time.
Using my example above, I clearly had no insight into the concerns of Covid-19 hitting the market and investor psyche – nor in relation to oil falling below $0 – or a flurry of margin calls on the bottom. Instead, I relied on reading a contrarian indicator.
Contrarian investing can work because there are some common traits that accompany dramatic trend changes. They don’t identify the causes, but they can signal intolerable excesses. Over-optimism (fad) and over-pessimism (fear) are reliable indicators of market highs and lows. Both can apply to the entire stock market and any of its components or investment themes. And this is where contrarian investing can really pay off. Just don’t call it market timing. Instead, think of it as opportunistic timing, “optimizing” potential returns and risks.
Conclusion: “Optimize” today means owning actively managed equity funds
Picking stocks can be rewarding and fun. However, the period we have entered has unusual characteristics compared to previous growth periods and bull markets. As such, selecting a diversified group of fund managers, each with a different approach, seems to be the best strategy for investing — at least in the early stages. It’s certainly acceptable to pick a special situation here and there, but gleaning brain power, experience and breadth of research should optimize the risk/reward characteristics – and allow for better sleep.
Something else about actively managed funds. They’re far in the minority right now, as investors firmly believe that passive index funds with low fees always win. The changing environment we find ourselves in, where selectivity is key, could bring about a dramatic reversal. When this is the case, as has happened in the past when investors switch from passive to active, the stocks held by active managers benefit from the positive cash flow. Of course, this improves the performance of the actively managed fund – and so the cycle continues.
