Secrets of Success: No one sees when bullish turn to bearish

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.

jd@intelligent-investor.co.uk

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

PROMOTED VIDEO
Sport
Laura Trott with her gold
Commonwealth Games
Arts and Entertainment
Gal Gadot as Wonder Woman
film
News
Bryan had a bracelet given to him by his late father stolen during the raid
people
Sport
France striker Loic Remy
sportThe QPR striker flew to Boston earlier in the week to complete deal
Extras
indybestSpice up your knife with our selection of delicious toppings
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Training/Learning and Development Coordinator -London

    £28000 - £32000 per annum: Ashdown Group: Training/Learning and Development Co...

    Training Programme Manager (Learning and Development)-London

    £28000 - £32000 per annum + benefits: Ashdown Group: Training Programme Manage...

    .NET Software Developer (.NET, C#, ASP.NET, front-end)

    £30000 - £45000 per annum: Harrington Starr: A Global Financial Service Organi...

    C# Web developer (C#,MVC,ASP.NET,SQL)

    £30000 - £40000 per annum + Bonus+Benefits+Package: Harrington Starr: C# Web d...

    Day In a Page

    A new Russian revolution: Cracks start to appear in Putin’s Kremlin power bloc

    A new Russian revolution

    Cracks start to appear in Putin’s Kremlin power bloc
    Eugene de Kock: Apartheid’s sadistic killer that his country cannot forgive

    Apartheid’s sadistic killer that his country cannot forgive

    The debate rages in South Africa over whether Eugene de Kock should ever be released from jail
    Standing my ground: If sitting is bad for your health, what happens when you stay on your feet for a whole month?

    Standing my ground

    If sitting is bad for your health, what happens when you stay on your feet for a whole month?
    Commonwealth Games 2014: Dai Greene prays for chance to rebuild after injury agony

    Greene prays for chance to rebuild after injury agony

    Welsh hurdler was World, European and Commonwealth champion, but then the injuries crept in
    Israel-Gaza conflict: Secret report helps Israelis to hide facts

    Patrick Cockburn: Secret report helps Israel to hide facts

    The slickness of Israel's spokesmen is rooted in directions set down by pollster Frank Luntz
    The man who dared to go on holiday

    The man who dared to go on holiday

    New York's mayor has taken a vacation - in a nation that has still to enforce paid leave, it caused quite a stir, reports Rupert Cornwell
    Best comedians: How the professionals go about their funny business, from Sarah Millican to Marcus Brigstocke

    Best comedians: How the professionals go about their funny business

    For all those wanting to know how stand-ups keep standing, here are some of the best moments
    The Guest List 2014: Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks

    The Guest List 2014

    Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks
    Jokes on Hollywood: 'With comedy film audiences shrinking, it’s time to move on'

    Jokes on Hollywood

    With comedy film audiences shrinking, it’s time to move on
    It's the best of British art... but not all is on display

    It's the best of British art... but not all is on display

    Voted for by the British public, the artworks on Art Everywhere posters may be the only place where they can be seen
    Critic claims 'I was the inspiration for Blanche DuBois'

    Critic claims 'I was the inspiration for Blanche DuBois'

    Blanche Marvin reveals how Tennessee Williams used her name and an off-the-cuff remark to create an iconic character
    Sometimes it's hard to be a literary novelist

    Sometimes it's hard to be a literary novelist

    Websites offering your ebooks for nothing is only the latest disrespect the modern writer is subjected to, says DJ Taylor
    Edinburgh Fringe 2014: The comedy highlights, from Bridget Christie to Jack Dee

    Edinburgh Fringe 2014

    The comedy highlights, from Bridget Christie to Jack Dee
    Dame Jenny Abramsky: 'We have to rethink. If not, museums and parks will close'

    Dame Jenny Abramsky: 'We have to rethink. If not, museums and parks will close'

    The woman stepping down as chair of the Heritage Lottery Fund is worried