Brent Arends: you can beat the market with smart timing

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Brent Arends: you can beat the market with smart timing

Post by Browser » Mon Nov 04, 2013 12:25 pm

According to conventional wisdom, any attempt to time the market is fundamentally flawed. Stock markets follow a ‘random walk’, they say. But is the idea correct?

The simple answer: No.

Yes, most people who try to time the market end up screwing it up — they buy and sell at the wrong times — but that does not mean the idea is flawed.

On the contrary, historically, “smart” timing, based on market fundamentals, has been one of the soundest ways to beat the market and produce above-average investment returns over the long term.

What is smart timing? Simple: It is long-term timing, and it is based on following a few solid valuation metrics.

The CAPE would have gotten you into stocks too early in the mid-1970s, and out again too early in the mid-1990s. But overall someone who had used the Shiller PE to guide their investment allocation to stocks over many decades would have beaten the market.
I wonder how many decades it takes? And, by the way, where is the data? I think PE10 is important but Arends is in way over his head with this argument, IMO.
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Re: Brent Arends: you can beat the market with smart timing

Post by Mel Lindauer » Mon Nov 04, 2013 12:33 pm

Since he's got it all figured out, perhaps he should start a fund and make a fortune for himself and others. Or at least use his market-timing method to make his own fortune so he can quit working.

There's an old saying that the Market-Timing Hall of Fame is an empty room.
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Re: Brent Arends: you can beat the market with smart timing

Post by Fallible » Mon Nov 04, 2013 12:55 pm

Browser wrote:
According to conventional wisdom, any attempt to time the market is fundamentally flawed. Stock markets follow a ‘random walk’, they say. But is the idea correct?

The simple answer: No.

Yes, most people who try to time the market end up screwing it up — they buy and sell at the wrong times — but that does not mean the idea is flawed.

On the contrary, historically, “smart” timing, based on market fundamentals, has been one of the soundest ways to beat the market and produce above-average investment returns over the long term.

What is smart timing? Simple: It is long-term timing, and it is based on following a few solid valuation metrics.

The CAPE would have gotten you into stocks too early in the mid-1970s, and out again too early in the mid-1990s. But overall someone who had used the Shiller PE to guide their investment allocation to stocks over many decades would have beaten the market.
I wonder how many decades it takes? And, by the way, where is the data? I think PE10 is important but Arends is in way over his head with this argument, IMO.
Do you have the whole article? I'd like to know more about his difference between market timing and "smart" timing for the "long term."
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Re: Brent Arends: you can beat the market with smart timing

Post by tludwig23 » Mon Nov 04, 2013 1:00 pm

I think that one could argue that Bogleheads are doing long-term valuation-based market timing--by rebalancing.
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Re: Brent Arends: you can beat the market with smart timing

Post by Fallible » Mon Nov 04, 2013 1:22 pm

Thanks. Here's the part that answers my question about his definition of "smart" timing for the long term vs. the short-term market timing that we know is wrong.

"What is smart timing? Simple: It is long-term timing, and it is based on following a few solid valuation metrics.

"It is not about trying to trade short-term. It is not about selling stocks on Wednesday and planning to buy them back on the following Monday. It is not about obscure market technicals like “head and shoulders” formations or Bollinger bands.

"It is about cutting your exposure to stocks when the market is expensive in relation to fundamentals, and keeping your exposure down—if need be, for years—until the market becomes much cheaper. It then involves increasing your exposure, and keeping it high, again for years if necessary."
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Re: Brent Arends: you can beat the market with smart timing

Post by nisiprius » Mon Nov 04, 2013 2:25 pm

It's circular reasoning and hindsight. Let's try this with lotteries:

a) Winning the lottery pays off far better than buying and holding index funds.
b) Mrs. Edna Mulvihill of St. Agatha, Winnemac won the lottery yesterday. When interviewed, she said "I used Magpie's Dream/10 Lottery Book."
c) Ergo, Magpie's Dream/10 Lottery Book works.

Image

Now, it's obvious that IF you could successfully time the market you could do quite a bit better than by buying and holding index funds. Why, $10,000 invested in the stock market in 1926, buy-and-hold, only grew to a paltry $20 million by 2010. Simply by staying out of the stock market during years with negative returns, that same $10,000 grew to a sweet billion. Now, I ask you, even if you can't time the market perfectly, isn't it worth taking a shot at it for a chance of getting even some of that $980,000,000 extra?

Some big flaws in Mr. Arend's column is that, first, he doesn't quote a Brent Arends column from the 1920s laying out the system, in a well-defined testable way. Or even a Brent Arend's column from the 1950s. Or the 1990s. This is all "If you had done back then what I am telling you now that you should have done back then, you would have..." "Of all sad words of tongue or pen, the saddest are these: it might have been."

Second, the column title says "You really can time the stock market," but the column doesn't deliver on that promise. What the column says is "OK, some will say. I understand that if I invest in the stock market at the wrong time I may fare very poorly for a decade. But what help is that knowledge? It would only be useful if I were able to work out in advance when those wrong times were. The good news? You probably can."

So, shouldn't the column have been entitled "You probably can time the stock market" instead of "You really can time the stock market?"

Third, argumentum ad oculum. He shows a picture. Then he says "You can see the results in the chart near the top of this article. These results are not random. They are nothing like random. The waves are as clear as — well, as clear as a big wave at Sunset Beach." Why should we think they aren't random? Because he says they aren't.

I saw this cloud the other day. Random? This is nothing like random. Really, the only question is who this is: Calvin Coolidge, or Isadora Duncan?
Image

Finally, the past. Now, it's one thing when one is looking at some single, obvious, more-or-less chosen-in-advance measurement, like "the total return of the U.S. stock market." Even there, there are serious issues about projecting past behavior into the future, but at least we are talking today about the same sorts of things people were talking about in 1964, when CRSP was founded. It's completely different when you ask about results from "all the possible different kinds of systems and measurements one could possibly make," because if you are simultaneously exploring thousands of things, some of them are going to pay off by chance alone.

Things that systematically worked back to 1926 and then suddenly quit working are not rare. A good example would be the "size effect" as it was originally formulated in 1981. Another good example would be the "Presidential year curse," for 140 years every President elected in a year ending in 0 died in office.
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Re: Brent Arends: you can beat the market with smart timing

Post by Browser » Mon Nov 04, 2013 2:57 pm

Sorry about not providing the link, but see it's already done.
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Re: Brent Arends: you can beat the market with smart timing

Post by VictoriaF » Mon Nov 04, 2013 3:00 pm

nisiprius wrote: I saw this cloud the other day. Random? This is nothing like random. Really, the only question is who this is: Calvin Coolidge, or Isadora Duncan?
Image.
It's a Galapagos turtle.

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Re: Brent Arends: you can beat the market with smart timing

Post by livesoft » Mon Nov 04, 2013 3:04 pm

The article didn't really help anyone with market timing. If I read the article correctly, it stated that if one invests when the market is low, then one will make more money than when one invests when the market high, but that one still makes a lot of money when the market is high. There was no mention of what to do when one didn't have their money in the market.

For example, if one was invested in the stock market made 1% per year on average when the market was high, there was no mention of where to put one's money in that case. I don't see much of a difference between making 1% in equities and 1% in a CD ... it is still 1%. Yes, the risk profiles are different, but there is also risk being out of the market in case something happens.
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Re: Brent Arends: you can beat the market with smart timing

Post by FafnerMorell » Mon Nov 04, 2013 3:14 pm

Sounds like the usual "Buy low, sell high, repeat as necessary".

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Re: Brent Arends: you can beat the market with smart timing

Post by nisiprius » Mon Nov 04, 2013 3:17 pm

Whoops, meant to include a chart, which I've now included, in this post, showing the benefit of market timing. Grow $10,000 to $1 billion instead of just $10 million.
VictoriaF wrote:
nisiprius wrote: I saw this cloud the other day. Random? This is nothing like random.
It's a Galapagos turtle. Victoria
Or a captcha. I can make out the 8 and the J.
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Re: Brent Arends: you can beat the market with smart timing

Post by dad2000 » Mon Nov 04, 2013 3:32 pm

It seems to me that the conclusion of the article is in conflict with the headline:

"investors should be exercising a great degree of caution... things can take years to play out... The market can go up a long way before it comes back down - if it does."

Talk about talking in circles...

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A look at the record.

Post by Taylor Larimore » Mon Nov 04, 2013 4:14 pm

Bogleheads:

Mr Arends wrote: "You can beat the market with smart timing."

Whenever I hear about a successful (?) market-timer, I often look at their record. This is what Brent Arends recommended in 2007:

HEADLINE: TREASURIES A BAD BET NOW. Mr. Arends specifically warns against VUSTX (Vanguard Long-Term Treasury fund).

So what happened?

In 2008 (1-year later), VUSTX gained +22.51%; Vanguard 500 Index Fund (VFINX) plunged -37.02%.

Stay the course.

Best wishes
Taylor
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Re: A look at the record.

Post by nisiprius » Mon Nov 04, 2013 5:36 pm

Taylor Larimore wrote:Bogleheads:

Mr Arends wrote: "You can beat the market with smart timing."

Whenever I hear about a successful (?) market-timer, I often look at their record. This is what Brent Arends recommended in 2007:

HEADLINE: TREASURIES A BAD BET NOW. Mr. Arends specifically warns against VUSTX (Vanguard Long-Term Treasury fund).

So what happened?

In 2008 (1-year later), VUSTX gained +22.51%; Vanguard 500 Index Fund (VFINX) plunged -37.02%.

Stay the course.

Best wishes
Taylor
Beautiful! And I see Arends said
"The only reason you'd buy the mainstream Treasuries instead would be if you thought consumer inflation over the next 10 years will work out as less than the difference between the two yields. In other words, 2.3% a year or less. Yet that's what legions of investors are doing....

Only four times -- in 1998 and 1999, 2001, and 2003 -- did inflation come in under 2.3%. And over this entire halcyon period for consumer prices, inflation averaged 2.6% a year....

Those fixed interest payments get a lot less valuable when inflation destroys the real value of the coupons, and while competing interest rates at the bank go through the roof.
10/2007, CPI-U = 208.936. 9/2013, CPI-U = 234.149. 12.07% increase over 71 months = 1.94%/year. "Predictions are difficult, especially about the future."
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Re: Brent Arends: you can beat the market with smart timing

Post by Browser » Mon Nov 04, 2013 6:06 pm

So, the guy occasionally gets it wrong..... :oops:
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Re: Brent Arends: you can beat the market with smart timing

Post by InvestorNewb » Mon Nov 04, 2013 6:17 pm

This reminds me of people who come up with "systems" to win the lottery. They claim you can win the lottery with their system, but they've never been able to pull it off themselves. :?
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Re: Brent Arends: you can beat the market with smart timing

Post by grayfox » Mon Nov 04, 2013 6:40 pm

Most financial economists now believe that there is a certain amount of predictability in the stock market. They believe that discount rates or expected returns vary over time. One guy was just award the Nobel Prize for his work that showed that higher valuation forecasts lower returns, and vive versa.

Something like 40% of 10-year return and 2/3's of 20-year return are explained by Shiller's valuation model.

So is there any way to use this to improve investing results? I would say yes.

For example, anyone that made an investment in the S&P in Dec-1999 when the Shiller PE was 44.20 and earnings yield was 2.26% was making a bad choice. They could have invested in a 100% guaranteed 4% real return 30-year TIPS bond.

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Re: Brent Arends: you can beat the market with smart timing

Post by Clearly_Irrational » Mon Nov 04, 2013 6:56 pm

grayfox wrote:For example, anyone that made an investment in the S&P in Dec-1999 when the Shiller PE was 44.20 and earnings yield was 2.26% was making a bad choice. They could have invested in a 100% guaranteed 4% real return 30-year TIPS bond.
That seems like a reasonable use of the data to me.

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Re: Brent Arends: you can beat the market with smart timing

Post by ourbrooks » Mon Nov 04, 2013 7:44 pm

If I recall correctly, Wade Pfau did a study on market timing using PE10. His timing algorithm was that you got into the market as long as PE10 was less than its long term average and got out when it went above. Turns out that, indeed, the algorithm beat "buy and hold" by a percentage point or two.

The only problem is, you could be out for years or decades. Now is obviously a time to be out, but there's no guarantee whatsoever that there'll ever be a time to get back in; the long term average might, in fact, be increasing. The amount of self discipline required makes "buy and hold" look really easy.

It'd be very interesting to find out what exact algorithm Brend Arends had in mind.

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Re: Brent Arends: you can beat the market with smart timing

Post by Browser » Mon Nov 04, 2013 8:10 pm

From Wade Pfau's paper : "Long-term investors and valuation-based asset allocation".
First, he found that valuation timing improved risk-adjusted returns, not absolute returns, as have most studies on the subject. So Arends is dead wrong when he claims that you can "beat the market" with long-term valuation timing. Second, he says all the things that Arends either doesn't understand himself or left out because he wants to deliberately mislead. I've underlined some of these points in this quote from the Pfau article:
This article provides favorable evidence based on the historical record for long-term
conservative investors to obtain improved risk-adjusted returns using valuation-based asset
allocation strategies. However, it is still important to emphasize a variety of caveats about these
findings. First, since index funds did not exist until the 1970s, it would have been very costly to
replicate these strategies in the earlier historical period
. This criticism applies to many studies
using historical financial market returns, but it is especially relevant here since the historical
transaction costs to replicate a valuation-based strategy would have been high. The question
remains as to whether it was these costs or the accompanying taxes that prevented investors from
using valuation-based strategies in the past. The answer is likely no, since implementing these
strategies requires strong nerves to maintain a contrarian strategy that may only pay off in the
long term
. Another caveat relates to the fact that all risk measures considered here are ex post in
nature. In hindsight, matters worked out fine for the valuation-based strategies, but historically it
might have been quite unnerving to increase stock allocations after significant market drops, such
as the call to increase the stock allocation at the start of 2009. As well, an important risk of
valuation-based strategies is that the consequences of behavioral mistakes (abandoning the
strategy to either increase stock allocations near a peak or reduce stock allocations near a trough)

will be amplified due to the mistake being made from a more unfortunate initial level. Finally, as
always, past performance does not guarantee future performance.
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Re: Brent Arends: you can beat the market with smart timing

Post by telemark » Mon Nov 04, 2013 8:56 pm

livesoft wrote:The article didn't really help anyone with market timing. If I read the article correctly, it stated that if one invests when the market is low, then one will make more money than when one invests when the market high, but that one still makes a lot of money when the market is high. There was no mention of what to do when one didn't have their money in the market.

For example, if one was invested in the stock market made 1% per year on average when the market was high, there was no mention of where to put one's money in that case. I don't see much of a difference between making 1% in equities and 1% in a CD ... it is still 1%. Yes, the risk profiles are different, but there is also risk being out of the market in case something happens.
Indeed. And in the periods where the stock market lost in real terms due to inflation, sitting in cash would have done far worse.

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Re: Brent Arends: you can beat the market with smart timing

Post by iceport » Tue Nov 05, 2013 2:04 am

I actually enjoy reading Brett Arends' pieces. However, practically without exception, the only value his writing offers is entertainment. It's a good diversion to see how misguided his advice can be. (The sad part is, some people probably think he makes sense.)

Here's one part of this particular piece that had me chuckling:
Arends wrote:The go-with-the-flow crowd pretends that these long periods of poor performance are basically costless. “Just sit there and wait,” they say, “and the next bull market will come along in due course. Don’t try to time these things.” But that’s deeply disingenuous. While you are earning nothing in stocks, you are missing out on gains in bonds or other assets.
What's "deeply ingenuous" is the crackpot implication that it's an either/or proposition, that there's no such thing as diversification. Arends "pretends" that the "go-with-the-flow crowd" doesn't also advocate broad diversification -- across both stocks and bonds.

Such a shame: so large an audience, but so much disservice to his readers...

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Re: A look at the record.

Post by Noobvestor » Tue Nov 05, 2013 2:14 am

Taylor Larimore wrote:Bogleheads:

Mr Arends wrote: "You can beat the market with smart timing."

Whenever I hear about a successful (?) market-timer, I often look at their record. This is what Brent Arends recommended in 2007:

HEADLINE: TREASURIES A BAD BET NOW. Mr. Arends specifically warns against VUSTX (Vanguard Long-Term Treasury fund).

So what happened?

In 2008 (1-year later), VUSTX gained +22.51%; Vanguard 500 Index Fund (VFINX) plunged -37.02%.

Stay the course.

Best wishes
Taylor
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Re: Brent Arends: you can beat the market with smart timing

Post by Yipee-Ki-O » Tue Nov 05, 2013 2:25 am

ourbrooks wrote:If I recall correctly, Wade Pfau did a study on market timing using PE10. His timing algorithm was that you got into the market as long as PE10 was less than its long term average and got out when it went above. Turns out that, indeed, the algorithm beat "buy and hold" by a percentage point or two.

The only problem is, you could be out for years or decades. Now is obviously a time to be out, but there's no guarantee whatsoever that there'll ever be a time to get back in; the long term average might, in fact, be increasing. The amount of self discipline required makes "buy and hold" look really easy.

It'd be very interesting to find out what exact algorithm Brend Arends had in mind.
I think you bring up a very good point, it's not that using a PE10-based market timing strategy "can't work," it's just that there are no guarantees that the optimal switch points which were determined by looking back in time at the historical data will remain the same in the future. And as you mention, from a behavioral standpoint it would be very difficult for the average investor to stick with such a strategy over long-term. Also, Wade's study looked at large-cap stocks exclusively for the equity position, results cannot necessarily be extrapolated to a diversified portfolio.

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Re: Brent Arends: you can beat the market with smart timing

Post by Park » Tue Nov 05, 2013 5:49 am

If one uses PE10 to determine allocation to national stock markets, is that market timing or value investing?

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Re: Brent Arends: you can beat the market with smart timing

Post by hillman » Tue Nov 05, 2013 5:53 am

Mel Lindauer wrote:There's an old saying that the Market-Timing Hall of Fame is an empty room.
with a revolving door.

Another saying that I really like, which I picked up here, is "to beat the market, you have to be right twice."

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Re: Brent Arends: you can beat the market with smart timing

Post by JoMoney » Tue Nov 05, 2013 5:53 am

I don't doubt that using some valuation strategy will give you a better "risk adjusted return".
So will just about any percentage weighting and random trading or re-balancing of stocks and "less risky" asset.
What would make a difference is if you could improve total return. I don't think there has been any reliable formula to do this. If you back test, I'm sure you can find some optimal formula to make it work for some particular point in past history. When I've seen these types of formulas before, they tend to be based on some back-tested idea that only fits a relative time period. When they expand to stretch across multiple time periods, the benefit usually either disappears or shrinks to such an insignificant amount that it's not something I would be willing to bet will remain relevant for whatever time period I'm looking at in the future. Often they don't account for other transaction costs, or if the the investor would have even been able to make the trade to begin with (i.e. trades being reversed due to abnormally chaotic markets, circuit breakers tripping, historical records showing prices at close of day that have a huge difference from the intra-day trading prices, formulas based off of "average" price over a month not a real strike price, etc...)
If there was a formula that worked and became well known, you can be certain the benefit would soon disappear. Sometimes people don't account for the market reacting with us, we are the market, when we change so does it.

Most timing formulas just don't make sens to me. I don't sell something because I hope someone else will sell it back to me at a lower price. If I sell, it will be because I don't want it anymore, or because I found some other item so much more attractive that I don't care if I ever get to buy back whatever I originally owned I'd be just as happy with whatever I replaced it with regardless.
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Re: Brent Arends: you can beat the market with smart timing

Post by IlliniDave » Tue Nov 05, 2013 6:02 am

If by "smart" he means prescient, then sure, it can work. But prescience is a bit elusive, I believe. It wouldn't shock me if there's some benefit in paying attention to valuations and making modest adjustments to one's AA when conditions reach historic extremes (but being substantially invested in the market at all times) compared to rigidly staying the course with a hard AA. But it's far from certain.

I'm far more skeptical that one can wade fully in and out over time, attempting to participate in the market only when it goes up, and expect the success over the long haul a continuously invested investor could achieve over the same time frame. The markets are full of surprises, and although we tend to remember the bad ones more crisply, there are probably more good surprises than bad for those with reasonably grounded expectations.
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Re: Brent Arends: you can beat the market with smart timing

Post by nisiprius » Tue Nov 05, 2013 6:13 am

JoMoney wrote:I don't doubt that using some valuation strategy will give you a better "risk adjusted return".
So will just about any percentage weighting and random trading or re-balancing of stocks and "less risky" asset.
What would make a difference is if you could improve total return. I don't think there has been any reliable formula to do this.
Except there is, or there should be. This is one of the things I completely fail to understand, and seems like a habit of intentional obfuscation on the part of the investment industry.

If you can improve risk-adjusted return, then you can improve return. In the purest case, take the portfolio with the higher risk-adjusted return, and use leverage. This assumes of course that you can find someone who will lend to you at the same interest rate as the riskless asset, but never mind, it's a thought experiment. In real life you would just up your equity allocation. If portfolio A has higher risk-adjusted return than B, then if you lever up portfolio A to have the same risk as B, it will have higher return. It's as simple as that.

Yet hardly anyone ever does this. It is always comparing apples and oranges, throwing around mixed packages of numbers. Pointing out that mutual fund X has beaten the index without mention that it has higher standard deviation than the index. Or pointing to a dividend stock portfolio--or a timing strategy--that didn't increase returns, and saying "but it lowered risk."

The gold standard should be holding risk constant, and the reason is that you, as an investor, have some risk tolerance, and it is what it is, and if you want the highest returns, you want to approach but not exceed that risk tolerance. That is to say, you would like to be exactly at your risk tolerance, and you want to make your choice among portfolios that all match that risk tolerance--all have the same risk.
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Re: Brent Arends: you can beat the market with smart timing

Post by DaleMaley » Tue Nov 05, 2013 6:39 am

InvestorNewb wrote:This reminds me of people who come up with "systems" to win the lottery. They claim you can win the lottery with their system, but they've never been able to pull it off themselves. :?
Back around 2006, I attended a financial planning conference in Chicago. At lunch, you got a free box lunch, but you had to listen to somebody make a pitch while you ate lunch. This guy explained he had it all figured out. Since each of the industrial segments of the S&P 500 react differently during the boom and bust times, just get in and out of each segment to match the business cycle.

I got to thinking while I was listening to him......if you have this all figured out, then why aren't you rich......and not be in the basement of a big hotel giving away box lunches and making sales presentations?
Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. – Warren Buffett

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Re: Brent Arends: you can beat the market with smart timing

Post by JoMoney » Tue Nov 05, 2013 6:47 am

nisiprius wrote: ...
If you can improve risk-adjusted return, then you can improve return. In the purest case, take the portfolio with the higher risk-adjusted return, and use leverage. This assumes of course that you can find someone who will lend to you at the same interest rate as the riskless asset, but never mind, it's a thought experiment. In real life you would just up your equity allocation. If portfolio A has higher risk-adjusted return than B, then if you lever up portfolio A to have the same risk as B, it will have higher return. It's as simple as that.
If I thought I could get a fixed rate of interest that would hold for long enough that I was certain to profit on the spread between the loan and some other asset, I would do it without any care about volatility... but most of the borrowing I've seen just adds additional risks. I don't want to get a 1.5% margin loan to buy long-term bonds that pay 3% then have interest rates go up giving me risk of a margin call (because the market marked down my long-term asset) and I lose even more. Even if I can hold off a margin-call, the floating rate short-term margin loan may go up exceeding whatever I was gaining on the spread between short term and long term rates. Banks get in trouble with this and they're supposed to be the experts at it with super low rates to borrow short and lend long. Yield curves get inverted, stocks have huge fluctuations over short time periods. Those kinds of risks from debt worry me a lot more than short-term price volatility.
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Re: Brent Arends: you can beat the market with smart timing

Post by nisiprius » Tue Nov 05, 2013 6:59 am

JoMoney wrote:
nisiprius wrote: ...
If you can improve risk-adjusted return, then you can improve return. In the purest case, take the portfolio with the higher risk-adjusted return, and use leverage. This assumes of course that you can find someone who will lend to you at the same interest rate as the riskless asset, but never mind, it's a thought experiment. In real life you would just up your equity allocation. If portfolio A has higher risk-adjusted return than B, then if you lever up portfolio A to have the same risk as B, it will have higher return. It's as simple as that.
If I thought I could get a fixed rate of interest that would hold for long enough that I was certain to profit on the spread between the loan and some other asset, I would do it without any care about volatility... but most of the borrowing I've seen just adds additional risks. I don't want to get a 1.5% margin loan to buy long-term bonds that pay 3% then have interest rates go up giving me risk of a margin call (because the market marked down my long-term asset) and I lose even more. Even if I can hold off a margin-call, the floating rate short-term margin loan may go up exceeding whatever I was gaining on the spread between short term and long term rates. Banks get in trouble with this and they're supposed to be the experts at it with super low borrowing rates. Yield curves get inverted, stocks have huge fluctuations over short time periods. Those kinds of risks from debt worry me a lot more than short-term price volatility.
The point is that in real life there are other, slightly less pure ways to increase both risk and return at the same time. So if there is any robustness to a claim of a "better risk-adjusted return" it should be possible to convert that to "same risk, better return," even if you couldn't quite get as good a return as you could get by leveraging with a Treasury-bill-interest-rate loan.

In my opinion, that's the phonus-balonus in 92.73% of all investment superiority claims. There's no robustness to them. The supposed improvement is just some chance fluctuation, and it goes away like a will-o'-the-wisp if you implement it in even a slightly different way from the way that was presented. Now in real life, if you buy a 1.28-gallon low-flush toilet it will use less water than a 3.5-gallon toilet, even if you pick the wrong brand, and even if it doesn't use exactly 1.28 gallons. Not so in investing. People are trying to sell you a toilet on the basis of its having a 1.27-gallon flush instead of a 1.28-gallon flush.
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Re: Brent Arends: you can beat the market with smart timing

Post by Browser » Tue Nov 05, 2013 9:58 am

If you can improve risk-adjusted return, then you can improve return. In the purest case, take the portfolio with the higher risk-adjusted return, and use leverage. This assumes of course that you can find someone who will lend to you at the same interest rate as the riskless asset, but never mind, it's a thought experiment. In real life you would just up your equity allocation. If portfolio A has higher risk-adjusted return than B, then if you lever up portfolio A to have the same risk as B, it will have higher return. It's as simple as that.
Yes, of course. You don't have to use "leverage", unless your frame of reference is "the market", aka 100% in stocks, which is what Arends is talking about when he says you can "beat the market". He's talking about absolute returns, so he's wrong sans leverage. If your frame of reference is, say, a 60/40 portfolio allocation, then a timing strategy that produces higher risk-adjusted stock returns should allow you to increase your stock allocation; e.g., to 70/30, and generate a higher absolute portfolio return with the same risk-adjusted return as 60/40. It would be tricky in real life to figure out what the new allocation policy should be, because you're also tinkering with the role of asset weights in the portion of the portfolio return due to diversification effects.

I've often thought of using a long-cycle approach to using PE10 to determine equity allocation, just as Arends suggests. But the reason I know it wouldn't work in real life is that it is too susceptible to Nisi's "behavioral mistakes". Just imagine yourself back in 1997-2000 when stocks were enjoying huge gains week-after-week. PE10 hit 25 back in January, 1997. Is that when you would have gotten out? And could you have stayed out for the next 3 years when everybody else was getting rich? In hindsight, sure. We all knew it was a bubble right? And now that PE10 is back at 25 is now the time to get out and stay out? We'll know when we can see now in the rearview mirror.
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Re: Brent Arends: you can beat the market with smart timing

Post by WhyNotUs » Tue Nov 05, 2013 10:33 am

I thought this comment from the article was interesting:

"If you had invested when the CAPE was between 5 and 10, you’d have earned on average 13% a year.
On the other hand, if you had invested when the CAPE was over 20 you would have earned just 5% a year, and if you had invested when it was over 25 you would have lost money, after accounting for inflation."

This is apparently based on the forward five years annualized.

Seems consistent with Buffett's general maxim to be fearful when others are greedy and greedy when others are fearful. As the author points out, if one sold at 25 in the 1990's, then they would have missed much of the market and been out of equities for a long time-- from about December 1995 (when it broke 25) to October 2008 when it dipped below 20. Not sure that kind of advice is helpful.

He may have written this article because the PE10 is just shy of 25 at this time. Seems like there is some tendency to "return to a trough" over some period of time, but like the author I do not see with any clarity how one could use that with any reasonable chance of success.
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Re: Brent Arends: you can beat the market with smart timing

Post by SP-diceman » Tue Nov 05, 2013 10:44 am

A few key statistics can help average-Joe investors buy low, sell high
The “average-Joe” probably doesn’t have $100,000
“saved” for retirement.

He may want to work on saving vs. smart timing.
:D

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Re: Brent Arends: you can beat the market with smart timing

Post by Browser » Tue Nov 05, 2013 10:49 am

On a year-by-year basis the last time PE10 got closest to 5 was in 1982 (7.39). The time before that was 1933(8.73), and the time before that was 1921 (5.12). These were excellent times to pile into stocks and never sell (except when PE10 hit 25 or so). The only one of those fortunate times that was available in my lifetime was 1982. Unfortunately, I didn't have any money to invest in stocks back then; and besides the economy was in such a mess and stocks were so loathed that I wouldn't have invested even if I had been able. Now that I'm wise to this PE10 strategy and have some bucks, I can't wait for PE10 to dip back into the single digits as soon as possible so I can pile in. But, if it doesn't happen soon, and if stocks don't rebound swiftly after it does, I'm going to be dead before I can reap the rewards of my patience. DAM!
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Re: A look at the record.

Post by rustymutt » Tue Nov 05, 2013 10:52 am

Taylor Larimore wrote:Bogleheads:

Mr Arends wrote: "You can beat the market with smart timing."

Whenever I hear about a successful (?) market-timer, I often look at their record. This is what Brent Arends recommended in 2007:

HEADLINE: TREASURIES A BAD BET NOW. Mr. Arends specifically warns against VUSTX (Vanguard Long-Term Treasury fund).

So what happened?

In 2008 (1-year later), VUSTX gained +22.51%; Vanguard 500 Index Fund (VFINX) plunged -37.02%.

Stay the course.

Best wishes
Taylor
Plus one.
Thank you Taylor for your sound advise on this matter. Mr Arends "IMO" tends to be a little Rascal. Overly stating facts, without supporting documentation, showing that he did this successfully himself over many years.
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Re: Brent Arends: you can beat the market with smart timing

Post by Browser » Tue Nov 05, 2013 10:56 am

If I were really an investing genius, as Arends pretends to be, I would have long ago become a billionaire and would have little interest in writing lame investing columns.
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Re: Brent Arends: you can beat the market with smart timing

Post by grayfox » Tue Nov 05, 2013 11:25 am

Browser wrote:
I've often thought of using a long-cycle approach to using PE10 to determine equity allocation, just as Arends suggests. But the reason I know it wouldn't work in real life is that it is too susceptible to Nisi's "behavioral mistakes". Just imagine yourself back in 1997-2000 when stocks were enjoying huge gains week-after-week. PE10 hit 25 back in January, 1997. Is that when you would have gotten out? And could you have stayed out for the next 3 years when everybody else was getting rich? In hindsight, sure. We all knew it was a bubble right? And now that PE10 is back at 25 is now the time to get out and stay out? We'll know when we can see now in the rearview mirror.
Most of the negative arguments against the usefulness of P/E10 use this same straw man. i.e. that you have to "get out" when P/E10 goes above some magic upper bound and then get back in when P/E10 is below some magic lower bound. I am not singling you out, because many set up this straw man to knock down.

The reality is 1) that it is a continuum and 2) you have alternative investments.

For example, suppose back in the 1990s you made $50,000 per year and saved 20%, or $10,000, which you invested on January 1 of every year. Retirement is far off like in 2030. Let's say that you accept Shiller's ideas that E10/P is a reasonable for the center of the distribution of possible real outcomes of the S&P500 which you can invest in using Vanguard VFINX.

Every year, you are trying to decide what would be a good place to invest that years $10,000 savings for 20 or 30 or 40 years.

In 1990 you look and see P/E10=17.05 so E10/P = 5.9%. Fine, you put the $10,000 into VFINX.
In 1991 P/E10 =15.61, E10/P = 6.4% again $10,000 into VFINX
1992 E10/P = 5.0% $10,000 into VFINX
this continues 1993, 94, 95, ...

But then you get to 1999, P/E10=40.58, E10/P=2.4 and you look and 30-year TIPS are 3-7/8%. So in 1999, $10,000 into TIPS.
Again in 2000. P/E10=43.77, E10/P=2.3. Again $10,000 into 4% TIPS

By 2003, P/E10 is back down to 22.89, E10/P = 4.4%. OK, $10,000 into VFINX

There was no need to sell the VFINX investments from 1990, 1991, etc. They were all made a reasonable prices when expected returns were good.

All you did was monitor the expected return of VFINX and compare with alternatives like bonds. As the center of the outcome distribution shifts to the left of the guaranteed return of TIPS, it didn't make sense to invest new money into VFINX.

You are just comparing the risk/expected return of your investment choices and making a choice.
Last edited by grayfox on Tue Nov 05, 2013 11:28 am, edited 2 times in total.

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Re: Brent Arends: you can beat the market with smart timing

Post by Clearly_Irrational » Tue Nov 05, 2013 11:27 am

WhyNotUs wrote:Seems consistent with Buffett's general maxim to be fearful when others are greedy and greedy when others are fearful. As the author points out, if one sold at 25 in the 1990's, then they would have missed much of the market and been out of equities for a long time-- from about December 1995 (when it broke 25) to October 2008 when it dipped below 20. Not sure that kind of advice is helpful.
Well, if you had piled into long term bonds then you would have done quite well on both an absolute and risk-adjusted basis. The tracking error would have been pretty painful though.

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Re: Brent Arends: you can beat the market with smart timing

Post by Clearly_Irrational » Tue Nov 05, 2013 11:32 am

grayfox wrote:All you did was monitor the expected return of VFINX and compare with alternatives like bonds. As the center of the outcome distribution shifts to the left of the guaranteed return of TIPS, it didn't make sense to invest new money into VFINX.

You are just comparing the risk/expected return of your investment choices and making a choice.
So that seems a reasonable strategy if you're in early accumulation phase, but what if your invested portfolio far outweighs your new contributions or if you're in drawdown?

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Re: Brent Arends: you can beat the market with smart timing

Post by Browser » Tue Nov 05, 2013 12:36 pm

grayfox wrote:
Browser wrote:
I've often thought of using a long-cycle approach to using PE10 to determine equity allocation, just as Arends suggests. But the reason I know it wouldn't work in real life is that it is too susceptible to Nisi's "behavioral mistakes". Just imagine yourself back in 1997-2000 when stocks were enjoying huge gains week-after-week. PE10 hit 25 back in January, 1997. Is that when you would have gotten out? And could you have stayed out for the next 3 years when everybody else was getting rich? In hindsight, sure. We all knew it was a bubble right? And now that PE10 is back at 25 is now the time to get out and stay out? We'll know when we can see now in the rearview mirror.
Most of the negative arguments against the usefulness of P/E10 use this same straw man. i.e. that you have to "get out" when P/E10 goes above some magic upper bound and then get back in when P/E10 is below some magic lower bound. I am not singling you out, because many set up this straw man to knock down.

The reality is 1) that it is a continuum and 2) you have alternative investments.

For example, suppose back in the 1990s you made $50,000 per year and saved 20%, or $10,000, which you invested on January 1 of every year. Retirement is far off like in 2030. Let's say that you accept Shiller's ideas that E10/P is a reasonable for the center of the distribution of possible real outcomes of the S&P500 which you can invest in using Vanguard VFINX.

Every year, you are trying to decide what would be a good place to invest that years $10,000 savings for 20 or 30 or 40 years.

In 1990 you look and see P/E10=17.05 so E10/P = 5.9%. Fine, you put the $10,000 into VFINX.
In 1991 P/E10 =15.61, E10/P = 6.4% again $10,000 into VFINX
1992 E10/P = 5.0% $10,000 into VFINX
this continues 1993, 94, 95, ...

But then you get to 1999, P/E10=40.58, E10/P=2.4 and you look and 30-year TIPS are 3-7/8%. So in 1999, $10,000 into TIPS.
Again in 2000. P/E10=43.77, E10/P=2.3. Again $10,000 into 4% TIPS

By 2003, P/E10 is back down to 22.89, E10/P = 4.4%. OK, $10,000 into VFINX

There was no need to sell the VFINX investments from 1990, 1991, etc. They were all made a reasonable prices when expected returns were good.

All you did was monitor the expected return of VFINX and compare with alternatives like bonds. As the center of the outcome distribution shifts to the left of the guaranteed return of TIPS, it didn't make sense to invest new money into VFINX.

You are just comparing the risk/expected return of your investment choices and making a choice.
I agree that it is better to implement valuation-based strategy on a "continuum" basis and not as an all-or-none timing strategy. Your strategy is interesting, but it mainly applies to someone in the accumulation stage. What about others who are closer to the end of accumulation or in decumulation? One thing that you could do is to use valuation to inform rebalancing. If valuations are high then perhaps one should be rebalancing out of stocks more frequently, and vice versa.

Another strategy might be to mentally portion one's portfolio into different rolling "buckets"; for example, five different "sub portfolios". The allocation of each sub-portfolio is informed by PE10 and that allocation is maintained for, say, five years. At the end of that period the allocation is reset based on the value of PE10 at that point.
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Re: Brent Arends: you can beat the market with smart timing

Post by Greenman72 » Tue Nov 05, 2013 12:40 pm

Browser wrote:If I were really an investing genius, as Arends pretends to be, I would have long ago become a billionaire and would have little interest in writing lame investing columns.
Warren Buffett became a billionare long ago and continues to write investing columns.

I'm going to disagree with the sentiment of most of the board. Ben Stein wrote a book about ten years ago called "Yes, You Can Time the Market". He basically said that if you only bought stocks when the market was below its 15 year moving average, you'd accumulate far more wealth than by using simple dollar-cost averaging. He back-tested the model and gives supporting data. Of course, there's no telling whether or not it will work in the future, but the premise is solid.

Two things to note--he only used one asset class (S&P 500) and didn't pick individual stocks. If you were holding small-caps, REITS, bonds, etc. then the analysis would become much different. But the idea is still more or less the same.

EDIT - Ben Stein's book also doesn't mention selling. That is, he's not telling you to sell when the market is high. He's just advocating not buying until the market is low. I don't know if this is in line with what the other author is stating.

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Re: Brent Arends: you can beat the market with smart timing

Post by Browser » Tue Nov 05, 2013 12:56 pm

Greenman72 wrote:
Browser wrote:If I were really an investing genius, as Arends pretends to be, I would have long ago become a billionaire and would have little interest in writing lame investing columns.
Warren Buffett became a billionare long ago and continues to write investing columns.

I'm going to disagree with the sentiment of most of the board. Ben Stein wrote a book about ten years ago called "Yes, You Can Time the Market". He basically said that if you only bought stocks when the market was below its 15 year moving average, you'd accumulate far more wealth than by using simple dollar-cost averaging. He back-tested the model and gives supporting data. Of course, there's no telling whether or not it will work in the future, but the premise is solid.

Two things to note--he only used one asset class (S&P 500) and didn't pick individual stocks. If you were holding small-caps, REITS, bonds, etc. then the analysis would become much different. But the idea is still more or less the same.

EDIT - Ben Stein's book also doesn't mention selling. That is, he's not telling you to sell when the market is high. He's just advocating not buying until the market is low. I don't know if this is in line with what the other author is stating.
Sounds like he's talking about a strategy for investing new money only. If the market is below the 15-year average then buy stocks; otherwise park the money until it is. How would it work in managing a lump-sum portfolio without new money coming in? You have to have a sell strategy too in that case, it seems to me. Otherwise it's just a one-and-done method.
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Re: Brent Arends: you can beat the market with smart timing

Post by DRiP Guy » Tue Nov 05, 2013 12:56 pm

VictoriaF wrote:
nisiprius wrote: I saw this cloud the other day. Random? This is nothing like random. Really, the only question is who this is: Calvin Coolidge, or Isadora Duncan?
Image.
It's a Galapagos turtle.

Victoria
English Springer Spaniel is obviously the only correct answer!

LOL

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Re: Brent Arends: you can beat the market with smart timing

Post by MindBogler » Tue Nov 05, 2013 12:59 pm

The other straw man often used implies that getting out means putting the money under a mattress. The reality is that no one is going to share all the details of a successful market timing system, if it existed, and unfortunately that allows these discussions to devolve into the basic premise of "because I can't conceive of a way, it must not be possible" which is a simple argumentum ad ignorantiam fallacy.

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Re: Brent Arends: you can beat the market with smart timing

Post by WhyNotUs » Tue Nov 05, 2013 1:39 pm

MindBogler wrote:The other straw man often used implies that getting out means putting the money under a mattress. The reality is that no one is going to share all the details of a successful market timing system, if it existed, and unfortunately that allows these discussions to devolve into the basic premise of "because I can't conceive of a way, it must not be possible" which is a simple argumentum ad ignorantiam fallacy.
Not much sense in writing an article claiming that one can time the market if one is unwilling to share all of details of their system, better to keep quiet and keep racking up those big gains. The author seems to be claiming that it can in fact be proven, and as best I can understand his point is to sell somewhere between PE 20-25 (as at 25 he claims no real returns over next 5 years) and buy when things are back under 20. He did not state that as his "system" but rather I am inferring it from his argument. The author does not say what he would do with funds in the interim, which Schiller PE10 records indicate could be a long time.

Rather than a fallacy of unprovability on the part of posters, I think the author has failed to substantiate the claim that he makes in the article with a strategy that one can hold water. The Sweeping Generalization fallacy methinks.
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Re: Brent Arends: you can beat the market with smart timing

Post by MindBogler » Tue Nov 05, 2013 1:57 pm

WhyNotUs wrote:Not much sense in writing an article claiming that one can time the market if one is unwilling to share all of details of their system, better to keep quiet and keep racking up those big gains. The author seems to be claiming that it can in fact be proven, and as best I can understand his point is to sell somewhere between PE 20-25 (as at 25 he claims no real returns over next 5 years) and buy when things are back under 20. He did not state that as his "system" but rather I am inferring it from his argument. The author does not say what he would do with funds in the interim, which Schiller PE10 records indicate could be a long time.

Rather than a fallacy of unprovability on the part of posters, I think the author has failed to substantiate the claim that he makes in the article with a strategy that one can hold water. The Sweeping Generalization fallacy methinks.
I think the article is ridiculous and self-contradictory while offering no substantive plan for a system, only alluding to the fact that such a system could be devised.

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Re: Brent Arends: you can beat the market with smart timing

Post by technovelist » Tue Nov 05, 2013 3:21 pm

The obvious corollary is that if you don't beat the market, your timing wasn't smart! :oops:
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