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ph: 7086463468
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dwagner
Another perspective that hits the nail on the head,
Dave
(Still in the Grave a/o October 2008)
A Repeat & Update
The following article was originally released for publication in August of 2002 by John S. Lyons, President of J. Lyons Fund Management, Inc., an investment advisory firm founded in 1985 to use active management principles to manage retirement money for clients.
John Lyons shared his investment views on a business program on WCIU-TV in Chicago for 20 years as well as in other national and local publications. He is a charter member and current member of the board of directors of NAAIM (National Association of Active Investment Managers)., a professional group of registered investment advisers managing assets for clients using dynamic asset allocation, market timing, sector rotation and other active strategies. Collectively, its members manage an estimated $14 billion in assets.
Schooled in all areas of investment during his career, Mr. Lyons has served on boards of directors of both public and private companies. Additionally, he has been active in international real estate investing. He is a graduate of Duke University. J Lyons Fund Management’s offices are located at 310 Forsythia Dr., Deerfield, IL 60015. He can be reached at jlyons@jlfmi.com.
Buy and hold, buy and hope, buy and fold. As much as it is inevitably destined to fail, “buying and holding” has been the “road most traveled”. Investors have been hoodwinked by the Wall Street establishment into believing that one must be completely misguided not to employ buy and hold.
Despite the fact that buy and hold would have worked well over the entire period from 1982 through February 2000, very few investors ever experience success with it. That is the essence of the problem with this investment technique. It makes sense in the classroom but has little chance of aiding the vast majority of investors in practice.
Yet, buy and hold investing is espoused by mainstream Wall Street, and as a result, by the financial press and the grass roots financial planning community. It is one of those beliefs whose mythical success is unchallenged simply due to its popularity and ease of use, not because of its objectively proven efficacy.
Update: One has only to ask themselves now in October of 2008 as on many other dates in history the following. "Whether the market comes back in the next few years or not, wouldn't I feel better if I weren't sitting here with a portfolio down as much as 40%?" I don't care if you're 20 or 70 years old, ask the same question. It seems to be popular Wall Street wisdom that younger people don't mind getting beaten up in the market as much as older people. I don't think so. They just may be not as frantic .
Why the popularity…
The reasons for its popularity (buy-and-hold) are basically two-fold. First of all, it best serves the bottom line of Wall Street brokerage firms and mutual fund companies. These firms have but one overriding objective and that is to “gather assets” and then to have those assets be the source of income generation which will obviously impact their bottom lines. Despite the fact that this goal by itself is noble enough, the problem enters when it becomes incompatible with good investment advice such as “go to cash and do nothing”. To give a client such advice would risk stopping the income stream as well as losing the client altogether.
Secondly, buy and hold is popular because it really doesn’t take any investing acumen to employ it. That is basically why most individual investors adopt it as their own strategy.
Additionally, the thousands of financial planners in this country who take a year or a two year long course to get their credentials for the most part have no experience in managing investments. When they decide that managing money would be a good revenue source along side their financial planning, “buy and hold” is not only the most obvious choice, it is the only choice they might be capable of even attempting. While one may learn much about the intricacies of estate planning and taxation from correspondence courses or in a classroom, I maintain that to come to grips with investment markets, literally years of experience are required.
Update: While financial planners might be excused for not having the tools to try to protect investors, Wall Street can not be. Most firms have market analysts and technical analysts and have had them for decades. I imagine these analysts cringe when their firm's message to investors is to just passively run headlong into the regularly occurring bear markets- and then not having the stomach to open their monthly statements for a few years. No, the state of investment tools is beyond not being able to protect clients. There is more to it than that. Needless to say, we don't have to discuss here how important it is to retain investor's assets in order to make year end bonuses on Wall Street ?
The debate…
The argument over market timing versus buy and hold- investing rages constantly. My intent is not to urge investors to attempt market timing themselves without the extensive experience and time commitment needed to develop a sound, unemotional system. Without such preparation, the chances of success in such an endeavor is very low. Rather, it is meant to inspire them to carefully consider the advice they are receiving - that the only way to invest is to buy and hold - and to take the time to carefully consider other investment counsel. Those who say market timing can’t be done usually fall into one of three categories or a combination of them: those who never tried to do it; those who tried and failed and those who have a vested interest that prevents them from being objective about it. It would seem obvious at this stage of the market’s decline that buying and holding is a failure, however, its proponents continue to march into the jaws of investment destruction with proud suicidal tenacity.
Update: The term "market timing" predates the bastardizing of that process by Eliot Spitzer, the now disgraced ex-governor and former Attorney General of the State of NY. He used it incorrectly to label trading foreign mutual funds the prices of which weren't current with the closing prices of the stocks within (a perfectly legal endeavor, by the way). The correct definition of "market timing" is determining when the market risk is too excessive to warrant investing or low enough to accommodate investing. We should know as we were among the pioneers in developing that process back in the early-mid 70's.
During this past bull market, investors really shunned the stock market until at least 1992. Even by 1992, they only started sticking their toes in the water. This chart clearly shows one reason why buying and holding doesn’t work - the investing public puts the least amount into the equity market at lows – see 1982, and the most at highs – see 2000.
Moreover, in January and February of 2000, at the exact top of the market as measured by the major weighted averages, investors put an amazing, record $94.5 billion into equity funds. That buying frenzy total compared to $18 billion in the same two months one year earlier. Such a manifestation of emotional investing is certainly an example of what drives investors.
Similarly, investors that bought heavily – and they did - at the top of the great bull markets ending
in 1968 (as can also be seen on this chart) and in 1929 would have had to weather a decade or more of declining years, backing and filling years and recovery years just to get back to even. Such patience to “hold” for that period of time is rarely encountered in the real, non-academic world, I’m afraid.
Now, the same challenge awaits those involved in the buying frenzy that culminated in the months of January and February of 2000. It is pure foolishness to expect or to counsel investors to endure that experience. Those who suggest that buying and holding is the way to investment success would do well to take a stroll through the real world. While that technique may have a chance for success with the comatose investor, it does not have a chance for the vast majority of investors who happen to have the misfortune of being affected by human nature.
In fact, these instincts that elicit buying high and then holding constitute a foolproof formula for disaster. Unfortunately, these ubiquitous, psychological aspects of investing that manifest themselves as fear and greed entirely escape proponents, academic and otherwise, of buy and hold investing. Not addressing such reality subverts any chance of success for unwitting investors.
Investors who do hold from one bull market to the next own yesterday’s heroes One of the ancillary benefits of market timing is that it allows one to periodically “refresh” ones portfolio. An examination of any bull market will reveal that its best performing companies, as well as its largest companies in terms of both assets and market capitalization, will not be the same leaders in the next. In other words, the hypothetical buy and holder will end up holding a portfolio of stocks that represent yesterday’s heroes rather than today’s. An examination of the past once again reveals that.the Polaroids and Xeroxes of the bull market that ended so badly in 1973-74 never did regain their luster and in fact many have flirted with financial ruin.
Update: Examine the shooting stars of the high flying Nasdaq tech market now that we have perspective regarding that period of the 90's. Many of them have completely disappeared and even the performance of the super heroes like Microsoft, Intel, JDS Uniphase were investment shadows of their former selves during the 2003-2007 bull run. I suspect that the Apples, Googles, Research in Motions etc that have been recent crop of heroes may never attain such attractiveness again.
Buy and hold does not address the most important principal of investing – at least the most important principal according to Warren Buffett, myself and many other investment professionals who have experienced the investment management process – and that is not to lose money.
Studies have shown that approximately 70-75% of the risk in a stock or a mutual fund can be labeled market risk. Only 25-30% is non-market risk. What that says is that far and away the greatest reason for a stock to move up or down is the direction of the overall market. That fact coupled with the absolutely pathetic job done by Wall Street analysts in getting investors out of stocks prior to devastating declines makes assigning a high priority to timing a no-brainer as the source of investment assistance.
Be fully aware that not only will security analysts provide little help in the all-important task of determining when to sell, but, quite obviously, corporate officials will not admit to problems within their own firms until it is too late. Although there may be a brief effort to reform both Wall Street and corporate insiders from their failings in light of the travesties of recent years, to expect those changes to be long lived is the height of wishful thinking.
In seeking an investment adviser, the first question that an investor should ask a potential advisor is “how will you protect my portfolio from significant losses?”. If the answer is indefinite and can not be backed up by clear evidence of success for some period of time historically, the investor should, without hesitation, go on to the next candidate.
Update: None needed.
In summary…
When examined with objective scrutiny, market timing, if practiced well, is a superior technique to buying and holding. First and foremost, its goal is to protect a stock market participant from incurring injurious losses that buy and holders are inevitably going to suffer because no such protection is even attempted. Almost equally as important, by reducing or eliminating exposure to declining markets, the necessity is eliminated for an investor to have to make decisions while under the pressure produced by having incurred substantial losses and still facing more.
Investors, as well as most advisers, typically have no benchmarks to guide them as to the amount of risk present in the market. As a consequence, they always perceive too much risk at times they should be buying and not enough risk when they should be selling, and I would underscore the latter. Throughout the ages, with any investment vehicle, be it tulips or real estate or stocks,
investors have always have had the most difficulty in determining when to sell. Perhaps the most important goal of market timing is to gain such guidance. So unless the laws of human nature are repealed, finding timing advice to accompany one’s investment moves should be an investor’s highest priority. It will seem counter to the crowd to do so, but being successful in investing requires a contrarian’s mindset. As with other endeavors in life, if you find the road that you’ve chosen to take, the one that is most traveled, it might be well to rethink the route on which you find yourself.
Final Update: After 40 years as a professional investment assistance provider of one form or another - and that includes 20 years discussing the subject with viewers of my business TV program in Chicago - I have concluded that there is one dominant problem with investors attaining good investment results. Yes, there are a lot of advisors of one type or another that do a poor job and yes, investment markets, including the real estate market, contrary to recent opinion, are worthy adversaries. However, the most prominent reason for poor investment performance is that people don't put any real effort into finding help. The problem may especially appear daunting to those who know nothing about investing but doing nothing is not an alternative. Common sense and recognizing that investing is not a "get-rich in a hurry" endeavor is what's needed for starters.
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END
Copyright 2012. Permission to copy granted when attribution is included.
Study Points to More Dependable Returns from Active Management
Summary: The risk of selling and moving out of the stock market often focuses on missing good days and hurting overall returns. However, investors have an equal chance of missing a bad day and increasing returns. Since the best days often follow the worst days, back to back, it is statistically more likely that if an investor missed one he will miss the other. This updated study looks at the outcome of missing both the best and worst days.
Prescott, AZ - Moving into 2012, stock market averages are just coming off of a challenging year for investors, including those that actively trade their holdings.
Concerned investors looking for a better way will see articles and commentary telling them to stay fully invested and not to try to “time” the market. After all, runs the most common theme . . . What if you miss some of those very good days because you are out of the market?
The 2012 update to an ongoing study by Hepburn Capital Management, LLC confirms that missing the best days of the market really doesn’t matter, if investors also miss the bad days.
The S&P 500 stock index averaged 6.81% annual return for the 25 years ending December 31, 2011, the HCM study shows.
If you happen to be the unluckiest investor on earth, and you miss just the 10 strongest days over that 25-year period, your return would have dropped to 3.67%. Move out of the market and miss the 20 best days and you end up with only 1.65% gains, and miss the 40 best days over 25 years and your average gain drops to a negative 1.62% per year, explained Will Hepburn, president of Hepburn Capital Management. “Clearly it doesn’t pay to be unlucky.”
The luckiest person around might miss the 10 worst days in the market, instead, and boost their average returns to 10.89%. If you are on a roll and miss only the 20 worst days your returns jump to 13.55%, and if you are lottery-winning kind of lucky and your streak has you out of the market for the 40 worst days in 25 years your returns will soar to 17.74% annually, Hepburn explained.
But how likely to actually happen is either of these scenarios? Not very. Statistically, missing only the best or worst days of the market is virtually impossible. History shows that the best days tend to closely follow the worst days. Sometimes they occur back to back. So if an investor misses one, chances are he will miss the other, as well.
“What happens to an investor’s returns if one were to sit out for both the worst days and the best days?” asks Hepburn. “Remarkably, average annual returns actually increase and become more consistent at the same time. Our study shows that if one were to miss both the 10 worst and 10 best days the resulting average returns are 7.78%. Miss both the 20 worst and best, and annual returns become 8.14% and dodging the 40 worst and best days creates returns of 8.52%.”
S&P 500 – 25 Years Ending Dec. 31, 2011– Average Annual Return 6.81% | |||
| Miss the Best | Miss the Worst | Miss Both Best and Worst |
10 days | 3.67% | 10.89% | 7.78% |
20 days | 1.65% | 13.55% | 8.14% |
40 days | (1.62%) | 17.74% | 8.52% |
Source: Hepburn Capital Management 2012 Study
The earnings difference gained by missing the 40 best and worst days produces an annual rate of return, 8.52% compared to the buy and hold return of 6.81% , an increase of 1.71% which may not sound like much until you consider that this is an earnings increase of over 25% - from active management of the investment.
The reason that missing both best and worst days both increases one’s returns and dramatically reduces volatility is that the worst days in the stock market tend to be much worse than the good days are good. Throw in the math of gains and losses and the case for risk management becomes clear.
If you lose 10% you must have an 11% gain to break even. A 50% loss requires a 100% gain to return to breakeven making it much more important to avoid a large loss than make a gain of the same amount.
Although past performance does not assure future results, the Hepburn Capital study illustrates the point that investments actively managed for risk reduction may provide added potential benefits compared to a passive buy-and-hold approach, including more consistent returns and lower principal fluctuations.
Hepburn also points out that it’s also much easier to deliberately miss the worst days of the market, because they rarely occur in isolation, but rather follow steadily deteriorating market values.
“Before you make up your mind whether or not it makes sense to actively manage your assets, you have to look at both sides of the argument. And you have to realize that no trading system is going to be perfect. But the good news is you don’t have to be. Simply reduce losses and you don’t need eye-popping gains to exceed a buy-and-hold position. That’s what the buy-and-hold argument conveniently overlooks.”
Will Hepburn is a private investment manager who specializes in active investment strategies. He is President of Hepburn Capital Management, LLC, a Registered Investment Advisor, and a Director of NAAIM, the National Association of Active Investment Managers (www.NAAIM.org) He may be reached by emailing Will@HepburnCapital.com, by calling (800) 778-4610, by writing to 2069 Willow Creek Road in Prescott, AZ 86301, or by visiting our web site at www.HepburnCapital.com
The returns provided above are historical and shown for purely illustrative purposes. The S&P 500 is an unmanaged index and individuals cannot invest directly in the index. No consideration is made of costs that would have been incurred to actively manage a portfolio of S&P 500 stocks. Past performance is not a guarantee of future returns.
9108 Pine St
Orland Park, IL 60462
ph: 7086463468
fax: 7085903444
dwagner