A light beckons on Wall Street
This is it – the timely signal that people say “never” sounds. You know – the announcement that the stock market is at a bottom, so “Buy!”
Disclosure: Author is fully invested in actively-managed U.S. equity funds
Why the silence at such an important time? Because bottoms occur when there is widespread (AKA, popular) negativity accompanied by dire forecasts of worse to come. Search for “stock market” now and today’s torrent of pessimism is obvious. Thus, the environment is one of leapfrogging negatives. Positives? No interest. But there’s more to that lack of bullishness…
During such periods, professional investors (whose careers are based on performance) are seldom, if ever, heard from. Instead, they are focused on taking advantage of buying opportunities as they compete with other professional investors. Providing random investors with gratuitous insights works against their goals.
A good example is from early 2020 when Covid-19 risk first hit the stock market.
Throughout 2019 and into early 2020, the stock market was rising. At the time of a small dip, I wrote this positive piece (January 31):
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In that rising market, there was a healthy, balanced flow of bullish and bearish articles as the market moved up. However, two weeks later, something happened I had not seen before – the bearish articles suddenly disappeared. There was no obvious cause, so I presumed that fund managers had decided to sell and to stop giving interviews. Therefore, I sold everything and posted this article on February 16.
This graph shows the Dow Jones Industrial Average movements during this period.
DJIA at outbreak of Covid-19 selloff (Oct. 2019 – Mar. 2020)
A word about stock market timing
The standard advice is don’t do it. The assumption is that investors who try miss out by buying and selling too late. Certainly, that’s what happens if an investor follows media reports and popular trends (as well as relying on feelings about stocks).
But there’s another problem. No one can determine the fundamental reasons and investor reactions in advance for all (or many or some or even a few) major market swings. We regularly read, “The investor who called the [fill in the blank] now says [whatever].” The fundamental/investor issues underlying each major period are unique. Therefore, past success is irrelevant because the applied rationale for one period does not carry over.
Using my example above, I clearly had no insight into Covid-19 concerns about to slam the market and investors’ psyche – nor about oil going below $0 – nor about a spate of margin calls at the bottom. Instead, I relied on reading a contrarian indicator.
Contrarian investing can work because there are some common characteristics that accompany dramatic trend changes. They don’t identify the causes, but they can signal unsupportable excesses. Over-optimism (fads) and over-pessimism (frights) are reliable indicators of market tops and bottoms. Both can apply to the overall stock market and any of its components or investing themes. And that’s where contrarian investing can really pay off. Just don’t call it market timing. Instead, consider it opportunistic timing, where potential return and risk are “optimized.”
The bottom line: “Optimizing” today means owning actively-managed stock funds
Picking stocks can be rewarding and fun. However, the period we have entered has unusual characteristics compared to previous growth periods and bull markets. Therefore, selecting a diversified group of fund management professionals, each following a different approach, looks to be best strategy for investing – at least in the initial stage. Picking a special situation here and there is certainly acceptable, but getting brain power, experience and breadth of research should optimize the return/risk characteristics – and allow for better sleep.
One more thing about actively managed funds. They are far in the minority currently with investors having a strong belief that low-fee, passive-index funds always win. The changing environment we’re going through, where selectivity is key, could cause a dramatic reversal. If so, as has happened in the past, when investors shift from passive to active, the stocks held by the active managers will benefit from the positive cash flow. Naturally, that improves the actively-managed fund performance – and so the cycle goes.
