Here’s it – the timely signal that people say “never” sounds. You know – the announcement that the stock market is at a bottom, so “Buy!”
Disclosure: Author is fully invested in actively managed US equity funds
Why the silence at such an important moment? Because bottoms occur when there is widespread (AKA, popular) negativity accompanied by bleak predictions of worse. Now search for “stock market” and the current torrent of pessimism is obvious. So, the environment is one of the overriding negatives. Positives? Not interested. But there’s more to that lack of bullishness…
During such periods, professional investors (whose careers are based on performance) are rarely, if ever, heard from. Instead, they focus on taking advantage of buying opportunities while competing with other professional investors. Offering random investors free insights works against their goals.
A good example is from early 2020, when Covid-19 risk first appeared on the stock market.
Throughout 2019 and into early 2020, the stock market rose. At the time of a little dip, I wrote this positive piece (January 31):
In that bullish market, there was a healthy, balanced flow of bullish and bearish articles as the market rose. However, two weeks later, something I hadn’t seen before – the bearish articles suddenly disappeared. There was no obvious cause, so I assumed fund managers had decided to sell and stop giving interviews. That’s why I sold everything and posted this article on February 16.
This chart shows the movements of the Dow Jones Industrial Average over this period.
A word about the timing of the stock market
Don’t is the standard advice. The assumption is that investors trying to miss out by buying and selling too late. Sure, that’s what happens when an investor follows media reports and popular trends (and also relies on feelings about stocks).
But there is another problem. No one can predetermine the fundamental reasons and investor reactions to all (or many or some or even some) major market swings. We regularly read: “The investor who… [fill in the blank] says now [whatever]The fundamental/investor issues underlying each key period are unique. Therefore, past success is irrelevant because the rationale applied for a period of time is not carried over.
Using my example above, I clearly had no understanding of Covid-19’s concerns about beating the market and investor psyche – neither about oil going below $0 – nor about a wave of margin calls on the downside. Instead, I relied on reading a contrarian indicator.
Contrary investing can work because there are some common features that come with dramatic trend changes. They do not identify the causes, but they can signal unbearable excesses. Over-optimism (fads) and over-pessimism (fear) are reliable indicators of market tops and bottoms. Both can apply to the overall stock market and any of its components or investment themes. And that’s where contrarian investing can really pay off. Just don’t call it market timing. Instead, think of it as opportunistic timing, ‘optimizing’ potential return and risk.
The Bottom Line: “Optimizing” Today Means Owning Actively Managed Equity Funds
Picking stocks can be rewarding and fun. However, the period we have entered has unusual characteristics compared to previous periods of growth and bull markets. Therefore, selecting a diversified group of fund management professionals, each taking a different approach, seems to be the best strategy for investing, at least in the early stages. Picking a special situation here and there is certainly acceptable, but gaining brainpower, experience and broad research should optimize the return/risk characteristics – and allow for a better night’s sleep.
One more thing about actively managed funds. They are currently far outnumbered, with investors strongly believing that low-cost passive index funds always win. The changing environment we’re going through, where selectivity is key, could trigger a dramatic turnaround. If so, as has happened in the past, the active managers’ stocks will benefit from the positive cash flow as investors switch from passive to active. That, of course, improves the actively managed fund’s performance – and so goes the cycle.