Avoid market timing

Chas Craig, BridgeTower Media Newswires

On the eve of the November 2020 elections, I wrote a column discussing the perils of weighting too heavily the election’s result on investment decisions, observing that “Power has shifted between different parties in this country regularly since its founding, and there is no discernable causal relationship to market returns.”

It is not that public policy is not important, but it’s just one variable amongst many, and those variables interplay with one another, creating more variables, and on and on. Point being, as you know, the election and the public policy consequences from it don’t occur in a vacuum.

Given space constraints and lacking concise clarity, I avoided listing other important “variables.” Fortunately, Philip A. Fisher possessed such concise clarity in the mid-20th century, writing about stock market influences in Common Stocks and Uncommon Profits that in addition to the stage of the business cycle, “the other four influences are the trend in interest rates, the over-all governmental attitude toward investment and private enterprise, the long-range trend to more and more inflation, and – possibly most powerful of all – new inventions and techniques as they affect old industries.” In addition to supporting the argument against market timing, one probably cannot find a better explanation for the strong stock market rally off the March 2020 lows. Viewed in a vacuum, the dissemination of the business cycle was pulling stocks furiously in a negative direction, yet the other four forces Fisher identified almost 70 years ago collectively pulled even more furiously in the positive direction.

In Fisher’s words, “These forces are seldom all pulling stock prices in the same direction at the same time. Nor is any one of them necessarily going to be of vastly greater importance than any other for long periods of time. So complex and diverse are these influences that the safest course to follow will be the one that at first glance appears to be the most risky. This is to take investment action when matters you know about a specific company appear to warrant such action. Be undeterred by fears or hopes based on conjectures, or conclusions based on surmises.” To Fisher’s counsel on avoiding market timing, I would add an alternative, and that is to regularly add to a diversified, low-cost fund or funds comprised of profitable companies. Depending on one’s available time and competencies, a combination of the two could also be a reasonable route.

This column has recently discussed pockets of excess and elevated investor enthusiasm. To this point, I have saved the front page of the “Exchange” section of the Jan. 23-24, 2021, edition of The Wall Street Journal where the headline read “Attack of the SPACS.” I think it is reasonably possible this will be a fun artifact to have at some point. However, there are pockets of excess in almost every market environment, and investor enthusiasm ebbs and flows; meanwhile, stocks in general tend to increase over time.

Having said that, those who cite “this is not 1999” as a primary reason for bullishness seem to miss the mark. There probably are important differences between now and then. But the dot-com bubble is one of the most notable manias in human history. Using this as an index seems to fail the common-sense test.

Perhaps caution is more in order now than is typical. If one has not recently revisited their target asset allocation to ensure it is consistent with their long-term return and risk objectives, now may be an opportune time to do so. Also, regularly rebalancing a portfolio to its target allocation is a prudent risk management tool.

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Chas Craig is president of Meliora Capital in Tulsa (www.melcapital.com).