This is the — the timely sign that people say “never” looks like. You know – announcing that the stock market is at an all-time low, so “Buy!”
Disclosure: The author is fully invested in actively managed US equity funds
Why the silence at such an important time? Because bottoms happen when there is widespread negativity (AKA, popularity) accompanied by dire predictions of the worst in the future. Look for the Stock Market now and torrential pessimism is clear today. Thus, the environment is one of the negatives hopping. Positives? no interest. But there is more to this lack of upside…
During these periods, professional investors (whose careers are based on performance) are rarely heard of. Instead, they focus on taking advantage of buying opportunities as they compete with other professional investors. Providing random investors with unjustified insights works against their goals.
A good example is the start of 2020 when the risks of Covid-19 first hit the stock market.
Throughout 2019 and into early 2020, the stock market has been rising. At the time of the little plunge, I wrote this positive piece (January 31):
In this bull market, there was a healthy and balanced flow of bullish and bearish commodities as the market went up. However, after two weeks, something happened that I had not seen before – the descending articles suddenly disappeared. There was no apparent reason, so I assumed the fund managers decided to sell and stop doing interviews. So, 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 word about stock market timing
The standard advice is not to do this. The assumption is that investors who try to miss the opportunity to buy and sell are too late. Certainly, this is what happens if an investor follows media reports and popular trends (in addition to relying on sentiment about stocks).
But there is another problem. Nobody can predetermine the underlying causes and investor reactions to all major market fluctuations (or many, some, or even a few). We regularly read, “The investor who contacted [fill in the blank] says now [whatever]. “The underlying/investor-specific issues underlying each major period are unique. Therefore, past success is irrelevant because the rationale applied for one period is not transmitted.
Using the example above, I clearly had no insight into Covid-19 concerns about market criticism and investor psychology – nor about Oil dropping below $0 – nor about a wave of margin calls at the bottom. Instead, I relied on a conflicting indicator reading.
Contrasting investing can be successful because there are some common characteristics that accompany dramatic trend changes. They do not specify the reasons, but can indicate excesses that cannot be supported. Excessive optimism (fads) and excessive pessimism (fear) are reliable indicators of market tops and bottoms. Both can apply to the stock market in general and any of its components or investment subjects. And this is where conflicting investing can really pay off. Just don’t call it market timing. Instead, consider it opportunistic timing, in which the potential return and risk are ‘optimized’.
Bottom line: “Optimization” today means having actively managed equity funds
Stock picking can be rewarding and fun. However, the period we entered has unusual characteristics compared to previous periods of growth and bull markets. Therefore, choosing a variety of money management professionals, each taking a different approach, seems to be the best investment strategy – at least at the initial stage. Choosing a special position here and there is certainly acceptable, but having the brain power, experience, and breadth of research should improve return/risk characteristics – and allow for better sleep.
Another thing about actively managed funds. They are in the minority at the moment as investors have a strong belief that funds with low fees and negative indices always win. The changing environment we experience, where eclecticism is key, can cause a dramatic reversal. If, as in the past, when investors switch from passive to active, the shares held by active managers will benefit from positive cash flow. Naturally, this improves the performance of actively managed funds – and so the cycle continues.