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Doomsayers and Market Timing

A response to client questions

We think a great deal about crashes. Since we invest some 6 million of our money and are your money buddy, we think and know a lot about crashes and how to handle them. As such your question is not something new to us.

It is human nature to try and be prepared for the worst possible outcome. We do not fault you for getting worried about the possibility of a crash. After all, it is human nature to try and be prepared for the worst possible outcomes. However, the reality of crashes – their causes, timing, magnitude, etc. – makes avoiding them and trying to “get ahead” an almost impossible exercise.

There are several angles that you must try and come to grips with. Here are a few that make getting ahead of crashes an impossibility.

There has never been a shortage of doomsayers. You are unlikely to be aware of the fact that in general, one can ALWAYS find writers predicting crashes at almost all times. Even when the market has already gone down 50%, you will still find doomsayers predicting another 50% on top of that! This has something to do with human psychology that thrives on being negative. It is also a deliberate strategy used by some writers to get attention in order to sell subscriptions to their newsletters.

We also know that the vast majority of these predictions turn out wrong. In order to understand this point, all you have to do is to look at this long-term chart where markets continued to soar defying the doomsayers. As such we are quite dismissive of writers predicting crashes.

Even a broken clock gives correct time twice a day. Yes, a few doomsayers do get the crashes right, now and then. But such timings largely turn out to be flukes. These doomsayers are like the broken clock: yes, they do give the correct time twice a day, but is not worth buying the clock.  If we had listened to such warnings, yours and our results would have been quite mediocre.

Politics and investing: The US has had some 25 Presidential elections over the last 100 years alone and each election has its own set of noise to go with it. Political noise is nothing new and those who governed their investments based on political noise have only mediocre results to show. We would like to put you in touch with two of our money buddies who are already regretting that they did not understand this point. Please talk to them.

We also request you to visualize the 25 elections on the chart above and you will soon realize that political noise has never stopped the relentless upward slope of the markets. One may even conclude that upward move, perhaps the noise is good for the markets.

Ironically, predicting a crash is no big feat. In fact, we guarantee there will be many. Please see the attached article called ‘Pattern of Stock Market Returns’ where we explicitly point out periodic crashes that will take place. 

Predicting its timing and its subsequent up turn is a HUGE feat. The problem is predicting the timing and magnitude of it… and then predicting the up turn and its timing and its magnitude!

No one has been able to do it successfully. ALL of this then makes the exercise of anticipating a crash, exiting the market, and subsequent re entry a multi dimensional exercise that almost no one has ever been able to get it right. Because of this, those that do not get it right, often miss out on huge gains. Imagine, if you anticipate a crash and get out of the market and exit. Imagine you are wrong and market then climbs another 20%. Well, you are behind by 20% already!  Now, the market declines and you are waiting for your favorite doomsayer to tell you when to renter. But he gets it wrong and you miss that opportunity. Next thing you will find you are behind even more than 20%. Those who do not see the math of it are either naive or just trying to exploit others for the sake of selling a subscription. Please realize that as being professional investors, we see such malpractice again and again.  We do not know of anyone who has been able to time the stock market with accuracy. We have horror stories to tell you how investors missed out on entire bull markets based on such fears.

Ironically, there is little need for worrying about crashes anyway. A simple plan of buy and hold and tolerating the crashes would do the trick. And you will go even further by having a saving plan and adding to your holdings on a consistent basis. Most of our money buddies have already experienced such crashes while they were money buddies and experienced robust returns just like yourself.

You will end up behind if not poorer. Free advice is cheap and plentiful.  In general, there is no shortage of advice from writers who care to write whether they are qualified or not. It is a free world and all are allowed to write. You as an investor MUST differentiate as to whose advice you will listen to. You must be careful in selecting only that advice that comes from a source that is experienced and has a track record of making money. If you can not vouch for the track record of a writer, then you are taking a huge chance. We will be remiss if we do not say that you will end up behind if not poorer if you start acting on most advice that appears in the popular press.

We do have expectation that you as our money buddy would make a reasonable effort at being logical. Please remember that we are always here to answer questions. We do have an expectation that you will carefully review what we are sharing with you as money buddies and do your best to understand what we present to you. Otherwise, we have the danger of going into circular arguments.

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