In football, Gary Lineker is England’s second-leading goalscorer of all time.
He jokes that most of his goals were scored from inside the six-yard box – simply because he had the uncanny knack of being in the right place at the right time. He instinctively knew where the ball was going to drop, and he’d be there ready to tap it in.
It’s the same thing in cricket. A top cricketer doesn’t whack the ball to the boundary, he caresses it. Perfect timing means the ball crosses the ropes with the minimum amount of physical effort – it’s a joy to watch.
We’re very familiar with the idea of good timing in the world of sport – but what constitutes good timing in the investment world?
We can all agree it’s a crucial piece of the investment puzzle. And if we had Lineker’s happy knack of knowing what was about to happen next, we’d be even wealthier than he is!
That’s why I’ve always been rather shocked by the way timing gets dismissed by ‘the experts’ – certainly as far as timing the market is concerned. I’ve lost track of the number of commentators who’ve informed me that “market timing doesn’t work” on the basis that it’s very difficult.
Well of course, it’s very difficult! But that doesn’t mean that it’s sensible to ignore it.
Of course, I would never pretend that I, or anyone, could time every move in the market to perfection. In that sense, the experts are right.
In fact, if you try to predict every move, you’ll end up overtrading, incurring huge transaction costs and no doubt bruising your confidence as a result of the disappointing returns.
But we all have to try and get on the right side of the big moves in the markets. It’s too important an element of returns to ignore.
Stop congratulating investors who time the market wrong
In the investment world, this dismissal of timing can lead to some warped thinking and weird commentary.
For instance, I’ve always been irritated when I’m told that a ‘great investor’ got the market right, but was just too early. He wasn’t too early – he got it wrong!
There were a few examples of this in the lead up to the dotcom crash in 2000-2003. Sure, the markets became irrationally exuberant and valuations ended up far removed from reality. The whole situation was only ever going to end with a crash.
But the time to jump off was during the later months of ‘99 and early 2000.
So in my view, it was rather strange to be handing out plaudits to those who saw it coming as early as 1997. They missed over two years of strong performance.
It’s a similar story today. We have a lot of managers who did well by being on the bear tack ahead of the crisis. That was great timing, but many of them have stayed that way.
One well-known bear turned down the chance to buy the S&P 500 at its low of 666, because he was convinced it wouldn’t hit bottom until 400.
Today, five years on, it trades over 1,900 – around 200% higher!
And I’ve lost track of the number of articles I’ve read over the last few years telling me the markets are about to collapse. Yet they keep on going up.
Just because it’s difficult, doesn’t mean it’s not important
So, why do people indulge those who time the market wrongly? Why do we let them off by saying they were right, but just too early?
I think it’s got something to do with our natural fear of suffering losses. Somehow we regard a cautious bear as morally superior to the rest of us who are greedily making money in a bull market! And if our timing is wrong, it seems more acceptable to be wrong by being cautious, than being wrong because we were too bullish.
It’s certainly true that a bearish stopped clock will be right twice a day – but it’s pretty useless the rest of the time!
Timing can’t simply be ignored because it’s ‘too difficult’. We need to spend at least some of our investment time thinking hard about it.
If I had called the market badly, I would’ve lost my job
One reason that I feel pretty strongly about this issue is that I used to be a fund manager. My career depended on getting my timing broadly right. I don’t mean calling every twist and turn – I agree no one can do that. But I had to stay on the right side of the market most of the time and certainly not get major calls wrong. If I did, I would lose my job.
As you can imagine, that’s one sure way to focus the mind!
A client might let you off a few dodgy quarters if your reasoning seemed sensible and you hadn’t done too much damage. But no one would respect your ‘investing integrity’ if it meant selling out of a bull market two or three years early. Or failing to get back in once things had clearly turned. The scale of the returns forgone in these cases just can’t be replaced.
So what’s the best way to proceed?
Well, good investors have clear styles and processes which they follow. For instance, some managers take a value approach, others are growth investors.
Value investors do well in the early stages of a recovery, but get killed in a downturn when defensive stocks do best. Meanwhile, mid and small-cap investors do well when the market is good, but need to pull back their exposure if things get tricky.
The important thing is that these investors have a frame of reference to work from that follows – and sticks to – a clear methodology that works over the long term.
As a result, this can lead to periods when they find good returns hard to come by. This is perfectly OK in my view, because over time, things will even out. But it doesn’t excuse an investor from ignoring the issue of timing.
If we have a distinctive style, the most important thing is that we are pragmatic. We need to recognise this in our timing – we should be full-on when our style is in favour and dial it down when it isn’t.
You should apply this thinking when looking at any investment – even my beloved small caps. Small caps aren’t magic. Even the good stocks will go down as well as up.
But if we remain true to our investing methods, and get the timing right more often then we get it wrong, we have the potential to make some serious gains while others bale out or buy in at the wrong time.