A common belief bandied about goes something like, if you missed the 10 best days of the market, your returns would have been lowered by “x” dollars. The number is always quite large with the lesson naturally being, “Stay in the stock market. Do not, repeat, do not pull your funds.” As the warning states, “It’s all about time in the markets, not timing the markets.” They want you to buy and hold. Period.
This regular refrain, often by those who sell mutual funds or exchange-traded funds, does have a modicum of truth. But it ignores the flipside of the coin: “If you missed the 10 worst days of the market, your returns would have increased by ‘x’ dollars.”
What gives?
There are many time periods for which calculations can be done. Ben did it for Jan. 1, 2010, to Dec. 31, 2020. That is a pretty good stretch and is recent. Say you start with $10,000. Not counting dividends, you would have ended up with $33,468, if you stayed fully invested in the S&P 500 the whole time. Missing the best 10 days of the market – a no-no, the buy-and-holders say – you would only end up with $27,288. Definitely an appreciable difference. But if one misses the worst 10 days, the result would be $40,008. Lots more money in the pocket, to be sure.
We hate to be cynical, but one should look at who is offering the advice. Naturally, it is worthwhile for funds and brokers that take a percentage to keep your money in-house, because that is how they make a living. When investments are pulled, so goes their golden egg. In addition, if the assets are not later redeployed with the broker, that is even worse, naturally. Talk about vested interest.
The buy-and-holders make a further claim, and it can be a valid one. Frequent trading means higher fees and they will point out that many of those transactions will occur when markets are falling. This is where emotional control and discipline are key. Of course, this is not easy to do, but exceptionally important when investing. “Know thyself” is a good mantra here. There is a huge difference, as most investors know, between full-service brokers and discounters. With most fees at the discounters being under $10 – sometimes even gratis – unless one is a trader on speed, the commissions on the trades should not be much. For patient investors like us, the fees paid are negligible.
There is no question that often the most auspicious days of the market are when it has fallen appreciably. Those who sell under adverse conditions are facing a kind of double jeopardy: selling when prices are down and then missing the major days of a recovery. That is the essence of poor investing.
Of course, in rising markets, many investors let their gains ride and some people even invest more, especially if they are doing dollar cost averaging, when markets are flying high and emotions are exuberant. That is when the red flags should be flying their highest. A key here is to realize that when it comes to timing the market, the trick is to invest more when it is beaten down, or as Baron Rothschild put it, “when there’s blood in the streets.” And less, when the market is doing exceedingly well, like now. Which is our policy at Contra.
When our exposure is reduced in hot markets, it is not carried out helter-skelter. The positions are sold when primary or secondary sell targets are reached. Sometimes, if markets appear too rosy, more money is drawn than would otherwise be the case.
A number of the companies that have been written about in this column were recently sold, all when they were doing very well. These include: Alacer Gold Corp., Alaska Communications, Alpha Pro Tech Ltd. and O2Micro International Ltd. These sales, along with some others, have pared back Benj’s stock holdings substantially. In fact, now in the President’s Portfolio at Contra the Heard, there are the least number of stocks in more than 20 years. Some of that cash is being redeployed in other corporations, but the amount of funds is relatively minor league. Other funds have ended up in boring guaranteed investment certificates, where the rates are lowly, but the money will be there to fight another day.
Thus, in our current strategy to prepare for an approaching downturn, market timing is definitely a tool in our toolbox. Our feeling is that it can lead to much higher returns. Of course, we are contrarians, so odds are you would not have suspected another conclusion.
Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter
Editor’s note: Due to a typo, an earlier version contained an incorrect timeframe for which past market performance was studied.
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