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Industry Biases (Part 2)

October 29, 2014
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Kicking right off where I left last week, I’m turning my focus back to the Robin Bowerman article called – The perils of market-timing and over-confidence. If you haven’t read the article, you can do so here.

https://www.vanguardinvestments.com.au/retail/ret/articles/insights/smart-investing/The-perils-of-market-timing-and-over-confidence.jsp?utm_source=SmartInvesting&utm_medium=email&utm_campaign=October2014

I agree with Robin that humans can certainly suffer from over-confidence and “illusory superiority” in many parts of their lives as these self-same individuals can also suffer from poor feelings of self-worth, lack of ability or even an overestimation of their weaknesses. Are the writers in the linked article suggesting that drivers (investors) shouldn’t drive (invest) themselves because the majority suffer “illusory superiority” and hence are a danger to themselves and others on the roads (markets)?

The analogy is a poor one. So should drivers outsource driving and not drive themselves? Or should drivers take responsibility and try to improve? Should the driving (investing) industry invest in improving drivers (investors) knowledge and skills for the collective betterment of our community? The driving industry certainly does. Whereas the investing industry continues to spend millions upon millions convincing the investing public how pathetic they are as individual investors!  Here’s a novel idea. Why doesn’t the investing industry and regulators instead instil the equivalent of 120 hours of ‘L plates’ and 3 years of ‘P plates’ investing experience?

Just as the article mentions using Vanguard tools to back test asset allocation so can private investors do the same with all sorts of tools to back test market timing of equities, futures, ETFs and others. If the authors, and indeed the whole managed fund and institutional fraternity, spent more than a nanosecond researching the world of market timing with a neutral mindset rather than making un-researched sweeping generalised regurgitated statements about it they might just have a different view on it that extols a more balanced view to readers in their articles that covers more ways of solving the investing problem than just theirs. Next week I’ll provide conclusive proof of some of the drivel that the big end of town puts out there.

Market timing is not “managing to somehow foresee the market”. Sometimes people unknowingly make statements that they believe are credible but actually displays their complete and utter ignorance for a subject about which they hold an opinion. This is one.

Market timing is about reacting to price action, not predicting or foreseeing. It is about understanding researched probabilities and executing according to those probabilities. Market timing is not perfect because practitioners understand not to expect or even strive for a probability of 1. Market timers will be wrong more often that they are right, if the outcome being a loss or a profit trade is, incorrectly in my view, called wrong and right. However the total of their wrongs will be far less than the total of their rights such that when measured over many years their compounded annual growth will be far more than the averages mentioned in the linked article which, over many years, will grow their savings for retirement to many 100’s or 1000’s of dollars more than if their have succumbed to the incessant one-sided misinformation that comes from the big end of town that their way is the only way.

There are many boutique funds and money managers that have been using market timing for many years on a purely quantitative basis who have successful track records in the public domain. And there are many individuals that have done so too with records in the public domain. Just google Tim Rea World Cup Trading Championship and others that have entered this event over the years. Perhaps John Bogle’s comment is outdated and has passed its use-by date. Maybe somebody can check when he made the comment but it can be proved by many market timing money managers, and indeed individuals, to be invalid. I wonder if Mr Bogle ever had a discussion with Richard Dennis or William Eckhardt who, in just two weeks, trained the Turtles in the 1980’s to use market timing to make millions of dollars profits in the future markets?

Make no mistake, market timing and investing as the authors suggest in the linked article are both tough gigs. Just as driving a car is a tough and frightening gig when a 16 year sits behind the wheel for the first time. So it is with DIY investing. There is plenty of knowledge to learn and there are many skills to acquire.

DIY investing is a journey where the “illusory superior” will be cut down to size, but not by death on a road, and will be able to live to fight another day to learn humility; where the meek and low self-worth can work out a way and grow in confidence, but too much; where the tenacious can be rewarded for their will to find a way; where the greedy can be taught that there is abundance and to share it around; where the fearful can grow to overcome their fears and pay it forward to be achieved by others; where the irresponsible can learn self-control; where the blameful can learn that it is not what happens that counts but how you take it….

But the journey can only be taken and progress made if the market is engaged in a way that the individual is doing the thinking, feeling, saying and doing themselves. Outsourcing and paying huge fees for others to do it for you achieves no growth in knowledge and skills. Let’s face it, at some stage of our lives this knowledge and these skills will be required when we will have to manage our own investments. My view is that all investors owe it to themselves to engage the market as soon as they can but to start small and slowly, so that the inevitable mistakes will have a small effect on their overall wealth but they can over time acquire the necessary skills to do far better than the so called investing professionals.

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