Keep INVESTING Simple and Safe (KISS)
****Investment Philosophy, Strategy and various Valuation Methods****
The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.
With growing talk of a possible second economic turndown, investors would have to have teflon-coated nerves not to consider the prospect with trepidation. Investing long-term and riding out the ups and downs is one thing, but do we really want to put ourselves through all that anxiety again?
It's bordering on financial heresy, but there is growing interest and debate in strategies that allow investors to capture the best of market performance, without being totally hammered by the worst.
Yes, we've all heard that it's time in the market rather than market timing that matters. And there is plenty of research around to show that investors who ride out the storms typically do much better than those who panic and sell at the bottom of the market. Unfortunately, most investors pick the wrong time to sell and miss out on the market rebound, as well as crystallising losses.
But fund managers can be terrible hypocrites. While they encourage you to invest for the long term, most active fund managers buy and sell stocks as if they're playing pass the parcel. It is not uncommon for managers of share funds to turn over 100 per cent or more of their portfolio in a single year.
Super funds have also increasingly been embracing strategies such as ''dynamic'' and ''strategic'' asset allocation - both high-falutin' terms for a bit of old-fashioned market timing. The funds won't make a big call such as completely selling out of the sharemarket (they'd probably generate a collapse if they did), but an increasing number are prepared to ''tilt'' portfolios away from sectors that they see as overvalued and towards those more likely to outperform - in their consultants' humble opinion, at any rate. And most investors think that's exactly what they should be doing.
The problem is that ''market timing'' has traditionally been the province of traders and snake oil salespeople promising ways to get rich quick. If it was as easy as claimed, we'd all be doing it.
So it was with mixed emotions that I agreed to a chat with the former NSW Treasury secretary, Percy Allan, about his latest business venture.
Given his background, Allan is no fool. But he freely admits to being spooked by the global financial crisis and selling out of his stocks. Yes, he says, he knew that markets could go down and he knew the best advice was to sit tight. But faced with big losses - including the total loss of value of some portfolio stocks - he got out anyway.
The problem was that having got out of the market, he had to decide when to get back in, and that was a tougher call. Left to his own devices, he says, he would have been too scared to make the move, so he started researching strategies for taking the extremes out of investing. The result is Market Timing, a venture with the former head of Standard & Poor's Asia-Pacific sovereign risk group and a former deputy secretary of the South Australian Department of Treasury and Finance, Alan Tregilgas, and a leading dispute resolution specialist, Bob Gaussen.
The company uses seven technical indicators to gauge the trend of the market and to identify signals to buy and sell. It's like share-trading on valium. There is no stock-picking and no fundamental analysis of stock value. The company recommends investors buy exchange-traded funds over the market index or listed investment companies, and even the ''active'' strategy trades only five to eight times a year. There's a conservative strategy with three to four signals a year, and an ultra-conservative strategy that comes up with only one or two trading signals each year. It's not about second-guessing every market movement but avoiding the worst of the major downturns.
Allan says back-testing over the past 25 years has shown the strategy outperformed ''buy and hold'' by 1.5 to 3 percentage points, although this doesn't include trading costs, tax or dividends. Rather than a get rich quick program, he views it as a risk management tool - a way to avoid the worst of the market falls while capturing much of the upside. The back-testing has shown much lower volatility than the overall index, which would be enough for Allan - even if there was no performance advantage.
Of course, no system is foolproof and any form of market timing carries the risk of false signals - or being whip-sawed, as it's known in the jargon. This is what happens when the signals say one thing and the market heads off in the other direction. Allan says he switched from the active strategy to the conservative because he found he didn't have the stomach to risk being whip-sawed several times a year - even though he knows that over the long term, the active strategy is likely to perform better.
For investors with a genuine buy-and-hold strategy, the extra trading and tax costs may also outweigh any benefits.
It also must be said that Australian active fund managers have often outperformed the market. This is different to the US, where market timing and trend-following are more widely used and accepted.
Nevertheless, Allan says, Market Timing is attracting interest from ex-traders who have been burnt and people hurt by the financial crisis too scared to go back into the market.
Doubtless on Monday my inbox will be chockers with outraged comments from fund managers and financial advisers who believe market timing is for cowboys.
But Allan was not alone in his response to the financial crisis, and professional investors as well as small investors have been asking whether there isn't a better way to manage risk in the sharemarket.