by Rob Bennett
That’s the premise of this new column.
Relying On Old-Fashioned Stock Picking, Lee Ainslie Reports His “Strongest Quarter” Ever
Lee Ainslie's Maverick Fund USA enjoyed its "strongest quarter in the fund's history" during the three months to the end of June. According to a copy of the firm's second-quarter letter to investors, which ValueWalk has been able to review, Maverick Fund USA gained 18% in the second quarter. Following this performance, the fund was Read More
If you cannot buy into that claim, nothing that follows here will make sense to you. If you do buy into that claim, or if you are at least open to the possibility that you may someday buy into it, I believe that in time I will be able to persuade you to become part of a community of investors pointing the way to a new and improved and more profitable and more emotionally balanced and more life-affirming way to invest in stocks.
There’s a sense in which the claim that “timing works” is as controversial as all get-out. There is no message that has been repeated by investing experts as often over the past three decades as the claim that “timing never works.” But do even the experts who say this really believe it without reservation? There is a mountain of evidence today that they do not.
Consider what Brett Arends said in a recent Wall Street Journal article entitled “Ten Stock Market Myths That Just Won’t Die.” Myth #7 is the myth that “You Can’t Time the Market.” Arends explains that: “This hoary old chestnut keeps the clients fully invested. Certainly it’s a fool’s errand to try to catch the market’s twists and turns. But that doesn’t mean you have to suspend judgment about overall valuations.”
The correct way to say it is that there is a certain kind of timing that doesn’t work. Short-term timing, trying to guess where prices are headed over the next six or twelve months, really does not work. That’s a critically important insight, one that the experts properly drill into our heads.
But there’s a huge distinction between the claim that “short-term timing doesn’t work” and the claim that “timing doesn’t work.” To say that “timing doesn’t work” is to say that all forms of timing don’t work, that it’s a bad idea to consider the price at which stocks are selling at a particular time when setting your stock allocation for that time. Huh? How could that be? That doesn’t make even a tiny bit of sense.
When you buy a broad U.S. index fund, you are buying an income stream that in the past has always generated a long-term return of 6.5 percent real. If you pay fair price, that’s a great deal. But what if you pay two times fair price, as you had to to obtain stocks for the entire time-period from January 1996 through September 2008? Or what if you pay three times fair price, as you had to to obtain stocks at the top of the out-of-control bull, in January 2000?
The deal is obviously not as good when you pay two times fair value or three times fair value. A regression analysis of the historical stock-return data shows that the likely long-term return on a broad U.S. index fund purchased at the top of the bubble was a negative number.
The purpose of this column is to explore the benefits of the form of timing that works. The form that works is long-term timing, changing your stock allocation in response to big price swings with the understanding that you may not see benefits for doing so for up to 10 years. All investors should be both forswearing short-term timing and practicing long-term timing, in my view.
Why? You should forswear short-term timing because short-term timing never works. Engaging in practices that never work will increase your risk while lowering your return. You should practice long-term timing because long-term timing always works. Engaging in practices that always work will lower your risk while increasing your return.
What I am saying here is painfully simple. Of course all intelligent investors want to follow practices that diminish risks and that increase returns. Why even discuss such matters?
Because today’s reality is that most do not do this. Nine out of ten of today’s investors have doubts as to whether long-term timing is really necessary or beneficial or required or sure to work. To make people better investors, we are going to need to explore why that is. How did we ever get to such a strange place in our understanding of investing that millions of otherwise smart people have come to believe that long-term timing might not work or might not be necessary or might not be a good thing to do or might even be a bad thing to do?
Is there a study that shows that long-term timing does not work? There is not. Not one. Every study of this question shows that long-term timing always works.
Is there any commonsense argument for why long-term timing might not work? There is not. Every one of the investors who fails to engage in long-term timing considers price when he is buying computers and cameras and cucumbers and comic books. I have asked tens of thousands of investors this question and not one has ever been able to provide me with any sensible reason for believing that long-term timing might not work or might not be a good idea or might not be required for long-term success.
Are there experts who question the merit of long-term timing? There are not. Not really. There are many, many experts who put forward blanket claims that timing doesn’t work. But I have never run into one who was willing to say openly and plainly and clearly that long-term timing doesn’t work. I’ll tell you the name of one fellow who agrees that long-term timing works — John Bogle! Mr. Buy-and-Hold! Are you surprised to learn this? I sure was. But it turns out that Bogle has said in interviews both that Valuation-Informed Indexing can work and that he himself has engaged in long-term timing successfully.
No one really believes that long-term timing doesn’t work. All the evidence available to us indicates that investors who practice long-term timing enjoy greater returns while taking on less risk. Valuation-Informed Indexing is a win/win/win with no possible downside.
So why do I even need to make the case for this strategy? Why haven’t we all been as sure to practice long-term timing as we have been to avoid short-term timing?
It’s by coming to terms with the answer to that question that you will in time come to feel comfortable with the Valuation-informed Indexing strategy. The purpose of this column is to over time convince you that “time” truly is not a four-letter word, that the single most important thing you can do today to make yourself a better investor is to vow always in the future to be as sure to practice the good form of timing as to avoid the bad form of it.
Short-term timing? No! Never!
Long-Term timing? Yes! Always!
Future columns (please look for them on Tuesdays) will examine how it can be that one form of timing can be as beneficial as the other form of it is dangerous.
Rob Bennett writes the “A Rich Life” blog. His bio is here.