Secrets of Success: No one sees when bullish turn to bearish
Saturday 12 March 2005
Market timing, a hundred academic studies have told us, does not really work.
Market timing, a hundred academic studies have told us, does not really work. Calling the precise points at which markets turn from bullish to bearish, or vice versa, is simply not a feasible option. You might get lucky once or even twice in a row, but to hope to do it on a consistent, regular basis is the stuff of dreams (though that does not stop investment banks and a host of other dream-peddlers continuing to offer advice of this sort).
This is one reason why, for most of us, professional and amateur alike, a more sensible approach is not to try. It is a better use of your time and emotional energy to stick to focusing on a few big-picture trends and stick with them until or unless they begin to show signs of excess. Investing on a regular basis and rebalancing your portfolio once a year to adjust for valuation shifts is another tried and tested way of protecting your assets from bad timing calls.
Yet the reality is that most of us cannot resist getting involved in trying to call the twists and turns of each successive market phase. Market timing is an addictive drug, which fulfils some deep-seated emotional need we all share. Why do bull markets have to "climb a wall of worry", as the old market saying has it? Because deep down we are all market junkies and would not have it otherwise.
The same goes for the age-old debate about whether "growth" or "value" is the better investment approach. There is no debate, as far as I am aware: all the evidence I have seen shows that, in the long run, a buy-and-hold value-based approach will provide the better, more reliable returns. But it can be dull work putting such a philosophy into action.
The real fun in the stock market comes in phases when either growth stocks do spectacularly well as a class, or there is some great speculative surge that holds out the prospect of sudden, large-scale returns. We are seeing one develop in the mining and natural resources sector at the moment. You only have to look at the exotica now finding its way daily to the Alternative Investment Market (AIM) to see that.
It is all intoxicating stuff - and probably worth joining in with your fun money. The evidence that we are entering a new long bull market phase in commodities and natural resources seems pretty robust. Coupled with a low interest rate environment (the essential precondition of any speculative bubble), that provides a useful backcloth against which speculative stocks can flourish.
Many new mining exploration companies now appearing will turn out to be worthless. It will all end in tears, though not for some time. The prudent investor will look to play the new bull market in commodities in a more cautious, strategic way: for example, through well-diversified dedicated funds and the larger diversified oil and mineral companies.
There is, as the market strategist David Fuller points out, a common theme in these developments. It is what he calls "supply inelasticity", the notion that demand for many natural resources and industrial commodities is growing strongly while, after years of weak or falling prices, the investment needed to bring on new sources of supply will take time to mature. That imbalance will underpin the upward trend in the oil, gold and industrial commodities markets for some years to come, although the trend will be obscured from month to month by periodic sharp falls in prices.
By contrast, Fuller suspects that stock markets in general will shortly be heading in the opposite direction: in his view, we are now two years into a typical "bear market rally" that will in due course see Wall Street and other leading markets resume the secular downward trend that began in 2000. This seems a plausible argument to me, and one I find that is quite widely shared by the professionals whose opinions I rate highly. We should all be preparing ourselves for such an eventuality.
As a long-standing Warren Buffett watcher, I think that this is also the real message contained in his latest letter to shareholders, which came out last weekend. Having moved a lot of money into bonds four years ago, and bought into the energy sector in a big way more recently, Buffett is now sitting on $40 billion of cash and signalling that he is not tempted by values in the stock market at current levels.
But the most important thing to remember, as a pragmatic investor, is not to let feelings about markets, however strong they might be, tempt you into too much precipitate action - which is the real snare of market timing.
The bullish phase of the stock market is still running, and there is no powerful reason yet to jump off, at least without more compelling evidence that the markets have turned. Fuller advises us to look out for what happens to the Australian and New Zealand stock markets. In his experience, the markets that lead the global stock markets up tend to be the ones that "top out" first.
Australia and New Zealand have both carried out that role in the global stock market rally of the past two years. When they start to deteriorate, that could be a powerful signal that the bigger market trend is drawing to an end - especially if it is seen to be combined with evidence that bond yields are also starting to rise.
Just don't expect to catch the turn precisely. Most successful investors are brilliant market timers in retrospect, but rarely in advance.
What they tend to do, if they think the market might be turning, is put a small bet on the fact and then gradually increase their exposure to that point of view, if the subsequent market action suggests that the move is indeed becoming an enduring trend, rather than a short-term alarum of the kind that keeps all market junkies happy.
Fuel poverty could kill 100,000 vulnerable people over the next 15 years, charity warns
Bargain Hunter: Affordable art - suddenly being a collector is just a walk in the park
Phoenix Life: Chance of a refund for overcharged policyholders has risen
Simon Read: You're guilty until proven innocent when HMRC sends in the tax credit detectives
Simon Read: That's right, BT, they'd rather pay for a free service
- 1 Michelle Rodriguez: Fast & Furious actor apologises after telling 'minorities' to stop taking on 'white' roles
- 2 The black and blue dress: Makers considering a white and gold version
- 3 This is what it's like to be dead, according to a guy who died for a bit
- 4 PornHub turns masturbation into energy in bid to save the planet
- 5 The remarkable archaeological underwater discovery that could open up a new chapter in the study of European and British prehistory
New theory could prove how life began and disprove God
This is what it's like to be dead, according to a guy who died for a bit
'Cash for access' scandal: Sir Malcolm Rifkind says 'unrealistic' for MPs to live on £67,000 salary
'Jihadi John': CAGE representative storms off Sky News accusing Kay Burley of Islamophobia
Ukip would cut billions from Scottish budget to fund English tax cuts
Russia's roadmap for annexing eastern Ukraine 'leaked from Vladimir Putin's office'
iJobs Money & Business
£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...
£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...
£250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...
£230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...
Day In a Page
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads