Stock Market Bulls – It’s Your Turn
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This is it – a timely signal that people say “never”. You know – the announcement that the stock market is at a bottom, so “Buy!”
Disclosure: Author is fully invested in actively managed US equity funds
Why the silence at such an important time? Because bottoms are created when there is widespread (AKA, popular) negativity accompanied by dire predictions of worse to come. Search “stock market” now and today’s flood of pessimism is evident. Therefore, the environment is one of the biggest negative things. Positive ones? No interest. But it’s more that lack of wit…
During such periods, professional investors (whose careers are based on performance) are rarely, if ever, heard of. Instead, they focus on taking advantage of buying opportunities while competing with other professional investors. Offering free insights to casual investors works against their goals.
A good example is the beginning of 2020, when the Covid-19 risk hit the stock market for the first time.
Throughout 2019 and until the beginning of 2020, the stock market was on the rise. During a small slump, I wrote this positive piece (January 31):
This bull market had a healthy, balanced flow of bullish and bearish products as the market rose. However, two weeks later something happened that I hadn’t seen before – the declining articles suddenly disappeared. There was no obvious reason, so I assumed the fund managers had decided to sell and stop interviewing. That’s why I sold everything and published this article on February 16th.
This chart shows the movements of the Dow Jones Industrial Average during this period.
A few words about stock market timing
The normal advice is don’t do it. The assumption is that investors who try will miss out by buying and selling too late. This is certainly what happens if an investor follows media reports and popular trends (and trusts feelings about stocks).
But there is another problem. No one can determine in advance the underlying causes and investor reactions to all (or many, or some, or even a few) major market swings. We regularly read, “The investor who called [fill in the blank] now says [whatever].” The fundamental/investor issues behind each major period are unique. Therefore, past success is irrelevant because the fundamentals of one period do not carry forward.
Using my example above, I clearly had no idea of the Covid-19 concerns about hitting markets and investor psyches – and oil falling below $0 – and the explosion of margin calls at the bottom. Instead, I was counting on reading the opposite indicator.
Contrarian investing can work because there are some common traits associated with dramatic trend changes. They don’t identify the causes, but they can show invalid overshoots. Over-optimism (fads) and excessive pessimism (fears) are reliable indicators of market tops and bottoms. Both can apply to the entire stock market and any of its components or investment themes. And that’s where contrarian investing can really pay off. Just don’t call it market timing. Instead, consider opportunistic timing where potential return and risk are “optimized.”
Bottom line: “Optimizing” today means owning actively managed equity funds
Stock picking can be rewarding and fun. However, the period we are entering is unusual compared to previous growth periods and bull markets. Therefore, choosing a diversified group of fund management professionals who each follow a different approach seems like the best investment strategy – at least in the early stages. Picking a special situation here and there is certainly acceptable, but having the brainpower, experience and extensive research should optimize the return/risk characteristics – and allow for better sleep.
One more thing about actively managed funds. They are currently very much in the minority, as investors strongly believe that low-fee passive index funds will always win. A changing environment where selectivity is key can cause a dramatic turnaround. If this is the case, as has happened in the past, when investors move from passive to active, shares held by active managers will benefit from positive cash flow. Naturally, it improves the return of an actively managed fund – and so the cycle goes.