More Reasons People Can't Invest

Here are a few more reasons people say they can't take control of their investing.

"You can't time the market!"
Many would say this is true, but my experience is different.  Because some people don't  know how, that doesn't make it impossible.  

"I don't know where to start - there are so many unanswered questions!"
Questions are good.  First, practise.  Start small.  Seek help.  

"I know lots of people who have lost half their life savings!"
Does that mean you will?  Was it during the last great recession, perhaps? What if I told you there was a better method?

"It's too difficult!"
Most people would also say that about learning to ride a bike, or learning to skate.  It isn't so bad once you know how.  Mostly, it takes a willingness to try.

"Lousy timing!"
The sooner one begins, the greater the returns.

"Too time consuming!"
The amount of time required is largely proportional to the level of return desired.  Significant gains can still be achieved with a relatively small investment of time.

"Doesn't work for me!"
We are all different, but others like you have already learned to be successful.

"It's too much like gambling!"
While investing is like gambling in that the law of probabilities is involved, the odds are stacked against the gambler, whereas they favour the informed investor.

"If it is that easy, then why isn't everyone doing it?"
We only need to figure out what works for us.  Let others do their own thing.  Without them, there would be no market.

"You are not a professional, why would I listen to you?"
Neither have I any conflicts of interest.  I cannot advise people what they should do, but, I can share what I have learned over almost 20 years in the stock market.

Any other reasons I have missed?

Opportunities Created In The Markets

When The Market Gets It Wrong

Let's talk about another common misconception regarding timing the market.  I am referring to the belief  that market timers always have to know what the market is going to do.  In reality, timing the market means taking advantage of the periods of time when the market misprices assets, times when others get it wrong.  I know, in the past, the academics have said this couldn't happen, but I am not alone in saying it happens all of the time.  The price of an ounce of gold dropped around one hundred dollars the other day.  Since gold is, well, gold, are they telling me the value of the U.S. dollar, which gold is priced in, changed so much that the price of gold should correct by that amount?  It doesn't take a rocket scientist to see the price of gold was relatively overbought, meaning, relative to what people have been willing to pay for gold in the past, the price was, temporarily, too high.

Playing The Odds
Note that I said temporarily.  I don't necessarily know what the price of gold should be all of the time, but when it reaches extreme overbought or oversold conditions, the odds are it is going to revert to a point where it is less so.  As it does, it will usually begin a new trend.  If the previous trend was up, then it normally begins a new downward trend.  If it was down, then the opposite is likely.

All In
With a "buy and hold" approach to investing, we have to commit to putting all of our money in the market all of the time.  Since people using such an approach don't believe there is any method for determining the extent to which assets are mispriced, their approach is to average into the market over time.  Consistency and regularity are the key.  Their belief is that there is no pattern to the markets.  So, how is it they perversely expect markets will consistently trend higher over time(?!).  Sorry, I digress. 

Market Extremes
In the so-called timing of the markets method,  I don't necessarily care about the direction of the markets.  If gold is extremely overbought, it can correct lower, no matter what the market is doing.  As far as the price of gold goes, I don't care what it is doing most of the time, I only care when it gets extremely overbought, or oversold.  The same goes for the markets.  I don't have to know what the market is doing every day, until it gets to one extreme, or the other.  Of course, the one exception would be when a reversal is followed shortly thereafter by another reversal.  If a return to the original direction of the trend creates a situation where I start to lose money, I exit the position.  I feel no compulsion to be fully invested all of the time, I simply wait for another opportunity.

Up, Down or Sideways
During long periods of time, the market can trend sideways, rather than making new highs or new lows.  There can be significant periods of time when the market is going nowhere, or going in the opposite direction of the longer trend.  I don't need to be fully invested while this is happening.

On The Lookout
Yes, others would say, but that means you have to be watching the market all of the time.  To, that I ask, your point is what?  Whenever I have money in the markets, I should be watching.  Why would I go away and ignore what is happening to my hard-earned savings?  To those who say they don't have time, I would argue it takes all of 10 minutes to check.  If I use what I call the Basic Timing Model which uses the 200-day moving average as a buy and sell signal, there is little I need to do for most of the year.  The prices of market indexes normally cross their 200-day moving averages only once or twice a year!   

Why Pay More?
To use a shopping metaphor, timing the market is like purchasing items only when they are really, really, on sale, or selling them when they are highly over-priced.  The rest of the time I can prepare my shopping list and check what constitutes a regular price.  The regular prices don't interest me, so until I spot a really great sale, I don't need to feel like I should be spending all of the money I have available.

How often do you check what the markets are doing?

A New Risk Paradigm

Risk-free?

Click Here To Play The Video

In this interview with Ann Rutledge, she states that the financial concepts she studied at the University of Chicago were predicated on the notion of a risk-free rate.  With the Standard and Poors downgrade of U.S. debt, that notion becomes, in her words, a myth.

Same Asset; Different Risk
She thinks that if the U.S. debt is not risk-free, as was previously assumed, then it would be possible to use more than one model to determine asset risk.  If different people use different models with different assumptions, then that means there is no longer only one answer (as assumed for efficient markets theory because the efficient market theory assumes the market is aware of the information used to price an asset, so the price has to be correct since that information is known).

How Real Markets Work
I have always found that logic to be what is called "circular logic" in computer programming, but has been highly followed for many years.  If what Ann is saying is correct, then I take it to mean that different people, using different assumption would be willing to pay different prices for the same asset.  This sounds more like a real market to me.

This means the market does not always get the price correct, that the market is capable of mispricing assets.  This would also mean we can take advantage of situations where the market has mispriced an asset by buying low and selling higher.

Which Leads To...
To me, this is a perfect example of how the academic models, touted and flouted by the financial services industry as proof that "buy and hold" is the only approach that might possibly work, will continue to be disputed by actual experience.  It would prove that timing the market is more than merely being lucky, as they have tried to lead us to believe.

What do you think?  Might the financial services industry use out-dated academic models to support their "buy and hold" position?

Timing The Market



Click to enlarge

The new FCIC report came out yesterday with blame for everyone as to who caused the financial crisis.  Most deny any wrongdoing by saying, "Nobody knew!"  Do they mean to tell me that the actuaries at AIG who are trained in probability analysis figured there was a zero percent probability that the U.S. housing market might correct?  Are they telling me the rating agencies whose job it is to assess the worthiness of a security had no idea products based on mortgages from the U.S. housing market might be less than AAA?

I would have a difficult time proving anyone is that stupid.  Assuming they aren't, then doesn't it go to follow they are not telling us the truth?  Why would they lie to us?  Could it have to do with how they were  being compensated and by how much?  I have read stories of traders who barely understood how to spell the word market (okay, I'm exaggerating) were pulling in multiples of six figure incomes.  Would you lie for a million dollars?  I know some people who would.  I think we all do.

What if I told you some of these people are the same people who are telling us we cannot time the market?  Are you surprised?  Please look at the chart.  This is a very basic chart showing the monthly price ranges of a security that trades on the TSX.  The ticker symbol is XIU.  It is an Exchange Traded Fund (ETF) that derives it value from the Toronto Stock Index.  In other words, as the TSX goes up, so does the ETF by the same percentage.  Likewise when the TSX goes down.

Also shown is the line which, basically represents the 200-day moving average.  Take the average price of the XIU for the last 200 days and draw a dot on the chart.  Take the 200-days one day prior to that and do the same.  And so on.

How do I use that information?  Once a week, I look to see if our price is above, or below the line.  When it has crossed from below, I buy XIU.  When it has crossed from above, I sell XIU.  Doing that from even the peak of the market in the year 2000, and I would likely have more than doubled my return since then, even after paying any commissions.  A little better than that of the "buy and hold" mutual fund owners, wouldn't you say? 

I'm sure I could show that to some children and they would be able to do it for themselves.  Do you really think your financial advisor has never seen this?  Can they really be that dumb?  Of course not.  The reason they don't tell us about it is because they won't make any money if that's all we do.  More importantly, the company they work for will only make a lousy little commission.  Now, we couldn't have that!  Now I'm not saying I will double my money every ten, or so years, but I like the returns a lot better than a "buy and hold" approach.

Still, I can hear the protests.  "But you're not diversified, the TSX isn't always going to do so well, nobody can predict the future", etc., etc., etc.  Do I really think the world is going to stop growing?  Does the world have too much oil, copper, wood, grain, fertilizer, water, that nobody is ever again going to buy anything from a free, democratic, trading country like Canada?  Maybe Australia will fill all the needs!  Come on folks!  I'm not saying we have to put all of our money into the TSX, and even though it may represent only three percent of the companies in the world, it is three percent of the best financial, mining, and energy companies anywhere on this entire planet!

There is no doubt in my mind there will come a time when what Canada has to offer will no longer be so desired.  Until then, why make it more difficult than it needs to be?  Simplify, simplify, simplify.  Look past the elaborate smoke screens and misinformation and marketing ploys.  There are any number of companies who want to mislead us in order to lighten our pockets.  Never mind a million dollars, there are people who will lie for a lot less than a million dollars.  After looking at this chart, do you really mean to tell me there is no timing the market?!?