Should You Be 100% Invested or 100% in Cash?
“How many insecurities traded on Wall Street today?” — Franz Pick
“Owners of sound securities should never panic.” — J. Paul Getty
Last Friday at the Orlando MoneyShow, I debated market timer Mike Turner on the subject, “The Economist vs the Mathematician: Buy-and-Hold vs Market Timing.”
There couldn’t be a bigger difference between our two investment philosophies. Even though the market had just gone through a treacherous sell-off, I remained 100% invested in the markets, while he was almost completely in cash watching for the next trend.
Turner thinks he has discovered the Midas touch, knowing “exactly” (his word) when to get in and when to get out of the market. His technical system promises to avoid major bear markets and still take full advantage of bull markets. His sessions are always full because he plays on investors’ two greatest emotions, fear and greed.
Based on years of experience as an applied financial economist, I am highly skeptical of anyone who says he can predict the tops and bottoms of markets. The toughest challenge for any investor or money manager is to decide if a sell-off like the one we just went through is merely a correction or the beginning of a full-scale bear market.
Nobody wants to see their portfolio drop 50%, as it did in 2000-2003 and 2007-09 on Wall Street, or what happened with bitcoin in January. So, I can understand the appeal of Mike Turner’s message. Investors are always searching for easy answers.
The danger is that, at other times, you might be whipsawed and be in cash when the market suddenly soars. That’s what happened last Friday. If you were 100% in cash last week, you missed out on a huge market rally that started on Friday.
Risks in Trying to Time the Market
For years, market timers used the simple 200-day moving average to avoid a market crash or bear market. But the problem is that the moving average triggers too many buy-and-sell signals during bull markets. The University of Pennsylvania’s Wharton School Professor Jeremy Siegel, author of “Stocks for the Long Run,” tested the 200-day moving average on the Dow Jones Industrial Average (DJIA) since the 1980s. It barely avoided the crash on October 19, 1987, and the terrible 2007-09 bear market, but in 2010-2012, investors were whipsawed, switching in and out of markets, 20 times!
Granted, Mike Turner’s system is more sophisticated than a 200-day moving average, but Siegel’s study demonstrates the danger in such technical systems.
The Loser’s Game
Investment advisor Richard Bernstein did a study of individual investors’ buy-and-sell habits over a 20-year period from 1994 to 2014 and found that the average investor made only a 4% annual return on his portfolio, compared to 10% for the S&P 500 stock index. The average investor underperformed T-bills! You can see why Charles Ellis wrote a whole book about investing called “The Loser’s Game.” Why? Two reasons: 1. Investors tried to cherry-pick individual stocks. And 2. Investors tried to time the market.
My Best Strategy
Over the years, I’ve developed the safest way I know to maximize returns on your portfolio. Invest in fundamentally good companies (I prefer ones that are highly profitable and paying rising dividends), buy them when they are priced low, and hold through thick or thin. To protect yourself from severe bear markets and when an individual company starts losing money and falls in share price, use a generous protective stop around 25% below the current price.
J. Paul Getty said it best: “The seasoned investor buys his stocks when they are priced low, holds them for the long-pull rise and takes in-between dips and slumps in stride.”
Or as Jesse Livermore advised, “Buy right, sit tight.” He learned the hard way. He was always tempted to be a market timer and, as a result, made and lost a fortune three times. He ended his career bankrupt.
Note: The quotations above are all found in my book, “The Maxims of Wall Street,” now in its 5th edition. It is a compilation of all the great sayings, proverbs and words of wisdom on investing. Alex Green calls it a classic, and the book has been endorsed by Warren Buffett, Jack Bogle, Dennis Gartman, Richard Band, Bert Dohmen and many others. Amazon sells it for $24.95, but you can order it directly from me for $20 for the first copy, and all additional copies are only $10 each. I autograph each one, and I pay the postage for domestic shipments. If you order a whole box of 32 copies, the cost is only $300 postpaid. They make a great gift. To order, call Harold at Ensign Publishing, toll-free 1-866-254-2057, or go to www.miracleofamerica.com. (Note: For orders from outside the United States, please call Harold for a quote, as additional mailing costs apply — all shipments outside the United States are via airmail.)
In case you missed it, I encourage you to read my e-letter article from last week about the three lessons that you could learn from last week’s stock market crash.
Never Give up on a Dream
In a world full of tragedy, the Winter Olympics are a relief and joy to watch.
I was especially moved by the comeback victory of the “Germans” Aliona Savchenko (actually Ukrainian) and Bruno Massot (actually French) in the Olympic pairs ice dancing competition in South Korea. It took Savchenko five trips to the Winter Games, working with three different partners and representing two different nations, to finally achieve Olympic glory.
Performing to beautifully moving music by Armand Amar, the German pair advanced from fourth place to first and beat the Chinese skaters by less than half a point. The Canadians came in third to become the first pair to land a quad throw in an Olympic competition.
It was truly amazing to watch the Germans skate, both in technique and style. Savchenko stuck a huge triple twist lift to open their program, going so high that it seemed to me she would scrape the ice rink’s ceiling, and the couple was perfect on a throw triple flip. They followed with a gorgeous combination and a side-by-side triple toe in such perfect unison that it drew gasps from the crowd.
When the music stopped, Savchenko lay on the ice gasping for air. The pair knew they had skated their best and could win. And they did.
The other victory that impressed me was American snowboarder Shaun White. Famous for his long hair and high-risk style, White used to be at the top of his game. But he missed medaling in the previous Olympic games in 2014 after winning a gold medal in 2010 and 2006.
White re-focused on training but sustained severe injuries last October while attempting a double cork 1440 when his snowboard clipped the top of a 22-foot-high halfpipe while practicing.
He hit his head and fell face first, requiring 62 stiches to close his wounds. The skin on his face was gashed from his forehead to his mouth, with his upper lip split so badly it was blurred from the video link above.
His lungs also began to fill with blood after the crash due to a pulmonary lung contusion that caused him to be put in an intensive care unit. Doctors advised him to take a “few weeks off” after successful surgery. He resumed training as soon as he felt up to it and hoped to win a place on the U.S. Olympic snowboarding team to compete for another gold medal. He now is facing the sports’ young guns who are up to 15 years his junior.
White recovered his form as a top-flight snowboarder in time to earn a berth on the U.S. Olympic team. He arrived in Korea with his hair cut, determined to win the gold medal in the half pipe competition.
Before his final run, he watched a competitor, Ayumu Hirano of Japan, throw down possibly the greatest back-to-back trick combo in snowboarding history, and receive a score to match it. To win, White needed to top the incredible performance he had just witnessed. But White had his own new trick that he showcased in his final run. White won the gold medal and the glory that goes with it.
As someone wrote on Facebook: “Watch the footage again. Watch him hug his mom. His coach. His friends. Watch his body buckle under the emotion of it. Watch the clip of him this morning of the Today Show. He cries again watching the replay. He holds back tears the entire interview.”
Never give up on a dream.
