Last week we posted the first part of an interview I gave to another blog site, GoBankingRates.com. Here is a transcription of the second part of that interview.
4. With the recent recession and market downturn, many investors have been trying to spot the “bottom” and time the market. What are your thoughts on this strategy? Are there advantages or disadvantages you can discuss?
The biggest disadvantage to market timing is that very few people succeed at trying to buy market bottoms. Quite obviously, the advantage to the few who do succeed is that they buy at the best possible price.
In our investment management work we do very little of what I would characterize as “trading”. We did, however, successfully buy four short-term bottoms between 2004 and 2008, in each instance with prices severely oversold. We were otherwise light in equity holdings, and we succeeded in boosting returns for the year in each of those instances. We anticipated that a similar profitable opportunity existed in March 2009, but we never identified a point at which we saw risk and potential reward properly balanced. Clearly the potential to add to portfolio return existed, but we missed it. An integral part of our investment philosophy is that we would always rather miss an opportunity than suffer a significant loss. While there will always be more opportunities, you will be ill-equipped to take advantage of them if you lose significant amounts of capital.
I strongly suggest that investors would spend their time far more profitably learning about the history of market valuations than trying to time market bottoms. Learning to recognize historically attractive valuations will provide a sound foundation on which to build a successful investment strategy.
5. Do you have any advice for investors looking to develop their own strategy?
As mentioned in the prior response, the single most valuable tool in an investor’s arsenal is an understanding of what represents good value. One would certainly benefit from a thorough understanding of the fundamental investment principles espoused by such fathers of value investing as Benjamin Graham and David Dodd. An essential complement to that understanding is a comprehensive knowledge on a macro level of what has represented attractive valuation levels for the overall equity market for a century or more. Those levels are measured by such ratios as price-to-earnings, dividends, book value, sales and cash flow.
Just as we practice in our own investment approach, we likewise urge all investors to remain flexible. Invest when and where you find value, but don’t be afraid to retreat to safe cash equivalents when value is absent.
Beware of the herding instinct. Almost all of us feel more comfortable when we believe what most others believe. At extremes of both positive and negative sentiment, however, securities prices have a strong tendency to reverse course. The vast majority of investors are wrong at every major market turn. Find a data source to identify such extremes.
Benjamin Graham titled his outstanding book The Intelligent Investor. Becoming an intelligent investor is certainly not easy. It takes years of work. Recognize, however, that if you try to invest without putting in that effort, you will be at a distinct disadvantage competing against those who have done the work. The investment world has no minor leagues in which you can hone your skills against less developed competitors.
In your ongoing education, I encourage you to find sources of guidance that don’t try to justify their own investment outlook. Attempt to gather data that both confirm and challenge your own expectations. Find data sources that evaluate pros and cons in both the economy and the markets.
If you don’t have both the time and the interest to do a thorough job of economic and market research, hire an investment advisor who evaluates data as you want them evaluated. Don’t simply select a manager based on past performance. Make sure the manager’s philosophy and investment process are in synch with your risk tolerance and comfort levels. In an environment like ours today, make sure also that the manager fully appreciates the broad spectrum of possible economic and securities market outcomes.
Tom Feeney is the chief investment officer for Marathon Asset Management Co, a registered investment advisor with the Securities and Exchange Commission, and for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more by either of the firms, you are invited to email your interest to Tom@missiontrust.com or call (520) 529-2900 to speak with one of the Portfolio Coordinators.