Point being you have to get both sides right. If you get out at -25% when the market drops 50%, that sounds great, but if you then wait until the market has recovered to -15% … not hard with all the fear … then you have left money on the table.
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How so? If the market drops 50% and you are out when it gets down 25% and it drops another 25% you just saved yourself 25%. You are ahead. Then it comes back up 15% you get in you are still ahead 10%. How did you leave money on the table? The buy n hold dropped 50 percent and still has to make up the next 35%, You are way ahead of them.
Yep. William P. Bengen, the Godfather of the 4% rule, got spooked after the 2008 market drop in the waning days of the Bush Administration, and adopted some kind of ill-defined market timing strategy that never game him the buy signal. He admits that he’s been in fixed income ever since.
And market timing guru John Hussman has predicted something like 15 of the last 2 recessions. You’re not going to make any money like that, sitting onm the sidelines.
intercst
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I’m being generous saying it’s 2%. I direct your attention to the chart on page 6 of the Dalbar study showing 30-year investor returns versus the 10.70% annualized for the S&P 500.
It’s easy enough to track your own returns vs. the S&P 500 and tell whether you’re winning or losing vs. LTB&H. Like I’ve often joked, “I read Wharton Finance Professor Jeremy Seigel’s “Stocks for the Long Run” when it was first published in 1994. I haven’t had a need for employment since.” {{ LOL }}
Re: Healthcare. I estimate that about 1/3 of what the average American family spends in a year is lost to “skim, scam and fraud”. And the biggest sinkhole is the US healthcare system.
Since I was diagnosed with a potentially deadly (and expensive) autoimmune disease 25 years ago (lupus nephritis), I’ve saved several hundred thousand dollars over that period by spending some time understanding all the ways our healthcare system is screwing us. And of course, that savings has been invested in the stock market over that period of time and compounded from there. I was fortunate to have a lot of detailed knowledge of the drug industry through my long history of investing in Pharma, so when my doctors prescribed an expensive immunosuppressant drug in 2000, I knew it was time to head to Canada to fill the prescription. And today, I can buy a year’s supply for $200-$300 if I pay cash, while my insurance company keeps telling me it’s necessary to pay 5 or 10 times that amount for the drug. It’s just a matter of doing the arithmetic and ignoring the conventional wisdom — which is so often wrong.
Investment fees and expenses, and the failure to use a “rent vs. buy” analysis to inform your housing choices are the other big sources of “lost spending” for the average family.
intercst
No, I said “recovered to -15%”, i.e., 15% below the starting point. Obviously, with the benefit of hindsight, one wouldn’t wait that long, but lots of people do, freaked out by the -50% and uncertain whether the recovery will continue.
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Actually you are not. You are trying to find studies that prove your point but they are flawed. The study you showed me was done on Mutual Funds. I have never invested in Mutual Funds and to take that study and say it is indictive of all investors would be wrong. I would say that people that invest in Mutual Funds might be the average investor but are not investors that are active and enjoy investing. I would think they are more the investor that does not watch their investments and are more likely to invest on emotion.
I agree it is easy enough to track your own returns but I noticed you didn’t pick a book that said “Mutual funds for the long Run”. You still haven’t proven your point that 2% of the people are able to time the market. I think we have a different view of investing. Yours is more passive and think that everyone that invests is like you, mine is more active and I think people that are active are more intune with the market. Maybe for people like you, you would be correct, but for people like me, I would be correct.
Slight clarification: The active fund managers themselves underperformed the market, not just their clients. These are investment professionals.
But same thing holds true for individual investors. As a group, those who trade infrequently vastly outperform those who trade actively.
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Actually the results are even worse for picking individual stocks.
About 25 or 30 years ago there was a Finance Professor at UC Berkeley (Terrance Odean) who convinced Charles Schwab (the founder, not the company) to give him access to an anonymized database of the annual return of customer accounts over a lengthy interval.
Odean, T. (1999). Do investors trade too much? American Economic Review, 89, 1279–1298.
O’Hara, M.,Yao, C., & Ye, M. (July 22, 2011), What’s Not There: The Odd-Lot Bias in TAQ Data. Johnson
School Research Paper Series No. 31-2011. Available at SSRN
{{ The data for this study were provided by a
nationwide discount brokerage house. Ten
thousand customer accounts were randomly
selected from all accounts which were active
(i.e., had at least one transaction) in 1987.
The data are in three files: a trades file, a
security number to Committee on Uniform
Securities Identification Procedures (CUSIP)
number file, and a positions file. The trades
file includes the records of all trades made in
the 10,000 accounts from January 1987
through December 1993. This file has
162,948 records… }}
Forbes has an article on Odean’s results for the layman if you don’t want to wade through an academic paper.
{{ Stubbornness. Savvy investors sell losers to book tax losses, offset gains and stiff Uncle Sam. Logical as this is, few investors are willing to admit defeat. That was Odean’s conclusion after analyzing 10,000 discount brokerage accounts over three years. The exercise revealed that investors are more likely to sell winners and trigger capital gains taxes than to sell their losers and avoid them. }}
Obviously, I’ve been doing the opposite over the past 40 years.
intercst
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Warren Buffett’s BRK cash position over time varies from about 10% to it current high around 33%, but the vast majority of his holdings are LTB&H. Heck he held on to Wells Fargo Bank deep into the fraud before he sold. (Probably because, as he says, “we make more money when inactive”.
intercst
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Didn’t you say you held Cisco for 30 some years?
Now didn’t you say investors hold losers to long? Sounds like you are praising Warren for something you were denigrating other investors for. Warren holds core stocks but he has sold a lot of stocks over the years. In fact you could say Berkshire was built upon the sale of a company.
Just to show you Cisco.
Price CAGR#
$1.04 = 13.07
$5.03= 8.06
$10.28= 5.60
$82 = -1.23
Cisco started paying dividends in 2011 so it wouldn’t change the Cagr by that much. The price represented is with all splits. That is the problem with long term buy and hold. Cisco should have been sold on 5/31/2000 when it had that big drop to lock in the gains.
Thank you but I think there was a good deal of luck. I was down 40% during Covid and again down 40% during inflation.
YTD is -5%. I left some in and moved some to international, which while not down as much as the US, did drop in April.
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Keep an eye on the gold miners, NEM and IDR are the last to break out. The rest of already taken off. Gold seems to be a hot commodity for awhile now.
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Not a fan of gold. Seems too speculative for me. I’d rather ride a 2x index than gold. I didn’t own it at the time but I can’t forgot it going to 1900 an ounce in 2011 before it popped and dropped to 1100 an ounce and did not get back to break even for a decade. I see no reason why gold won’t eventually do that again - even if it seems very likely to continue to climb for the foreseeable future.
I can’t look at gold and know when to get out. At best I could only guess - and I fear that I would not make a wise decision to cut my losses (or bank my gains) when the time comes. No P/E ratio, no future earnings, no moat, etc. Nothing that I could use as I would the stock or bond market.
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I think you need to look at my post again. Because surely the miners have a P?E ratio, future earnings, and a moat. You can say they are cyclical but the other 3 things just are not true.
I was wondering about the “down 50%” thing, so I did a google search. Google says that down 50% has only happened 4 times in the ~150 years of recorded market history! However, most of them (3) seem to have been relatively recently (last 50 years).
OK, but that doesn’t mean that “trade actively” means market timing.
I’ve “timed out” four times since 1994 (when I took over our investments from the mutual funds and our advisor.) 1999, 2008, 2016, 2020 (a little) and (five, if you count) now.
I hasten to add that doesn’t mean we’re 100% out now. I have some Berkshire from the 90’s, and we’re still sitting on slugs of Exxon and Costco which have some heft gains. And there are a few smaller things kicking around down there, but overall, yeah, we’re mostly out. (Still short Tesla, tho.)
Does that make me “an active trader”? Of the four which are well in the past three were wins, one was a loss (2016.) The most recent, er, now, remains to be seen. Does anyone here have a rosy prediction for the next 12 months?
Now I’ll also mention that almost half our liquid net worth is in tax deferred accounts, so there are no tax consequences. The other taxable account stocks come and go but usually have a holding period measured in years, not months, certainly not weeks.
I would like to see3 some actual data on “market timers” such as myself. I can’t imagine that someone working on macroeconomic factors wild be trading “actively”; not that much happens over short periods of time, absent a diagnosis of ADHD or something.
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That is the Index, down over 50%, it isn’t unusual for a single stock to be down over 50%, it happens all the time with growth stocks.
When you said above “If the market drops 50% …”, were you referring to individual growth stocks or to market indexes?