Popular wisdom from the likes of Warren Buffett, Jack Bogle, and Burton Malkiel (author of A Random Walk Down Wall Street) states that it's near-impossible to consistently time the market, so why even try? Just buy and hold for the long term, and collect your dividend cheque every six months. Marcus Padley, Director of Marcus Today, disagrees.

"You can't just sit in the market long-term, which is what everybody wants you to do. You have to time it." 

Marcus points out, that the average annual capital return over the last 75 years, after inflation, taxes, and costs is close to zero. In this week’s episode of The Rules of Investing, he explains his process for getting the timing right, why he thinks the housing market is close to the bottom, and his top candidates to surprise to the upside this reporting season.

Content and links discussed

Time stamps and discussion topics

  • 1:51  - Why he decided to start Marcus Today
  • 5:21 - Some surprising lessons from managing retail clients
  • 7:28 - The case for timing stocks and markets
  • 14:02 - Technical vs fundamental analysis, or technical AND fundamental analysis?
  • 17:21 - Flow analysis: what is it and why should we care?
  • 21:32 – Upcoming earnings season: potential winners and losers
  • 27:07 – Is the housing market close to finding a bottom?
  • 31:48 – Brexit: is the UK investable at the moment? 
  • 37:40 – Marcus answers our three favourite questions

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Adrian Q

With respect to Marcus, i think i'll side with Buffett and Bogle. Any source for this comment that long term real returns are zero or even slightly negative? I look at vanguard"s long term chart from july 88 to june 18, us shares 10.6%, aus shares 9.1%, cpi 2.8%. Further, the evidence is that professional active managers on average do not add value net of fees (eg: Spiva). Yes market timing and stock selection can work but you need to have axreal edge and be quite a bit better than the average. For most people, it is best not to try.

Ben McCaw

Why strip the dividend out of the long term return? Considering the Aust. market is relatively high yielding, and the benefits of franking why on earth would anybody who knows what they are talking about reference a price only return when analysing long term returns.

Patrick Poke

Hi Adrian, my write up only contained a condensed version of what Marcus said. In the full interview he explains that he's talking about over the last 75 years. Also it's important to note that we're talking about capital returns here, not total returns. He's also talking about post-trading costs and taxes.

Adrian Q

Thank you for the clarification Patrick. Nonetheless most of the commentary I hear just state "returns", I don't hear the words capital returns in reference to the 75 year period. Some minutes later when looking at more recent periods since the GFC, Marcus did later clarify those particular numbers were excluding dividends. I fully agree with Ben McCaw, why would one talk about capital only? The whole industry reports total return. Look at any managed fund fact sheet. If you are going to say "returns" and then make the inference that no money is being made after fees, taxes, etc, then that is incorrect because we are pocketing the dividends, which are significant, and they are money. Correct? It's not my intention to specifically pick on this here, but I can't help but take issue with it in this week of the RC findings, I kind of expected a bit more caution if advising strategies which are not supported by evidence, and then using unclear half-facts to support this. I use the word advising there, but actually it's more like an instruction if one says "you have to time it". Again, i don't believe there is any evidence to support this. The opposite actually, in my opinion, it is against the general interest of clients to attempt to time markets. Patrick you have acknowledged that this is the general consensus yourself when you asked the question. Every one is fully entitled to their opinion and I respect that. But at the same time it is desireable to be clear about what's viewpoint versus fact-based, especially if going on to suggest people "have to" perform a certain strategy, against the prevailing wisdom. I also heard someone saying just the other day: "People have got to somehow get their head around finance, ... [We can't] hold everybody's hands like a little baby because they don't understand."

Ruhul Amin

I am sorry but I did use that newsletter before and the result was poor. I will totally side with Buffett and all the other top investors who have a proven history. What Mr. Marcus fails to mention is the total annual return since inception of this newsletter. Then compare that return with the return of S&P 500 (over the same period). My investment in BERKSHIRE (BRK-B) has performed well (when compared with anything else that I have tried) and I didn't have to lift a finger. He should provide us with more solid data, steps and proven history.

Charles Dalziell

Timing is great if you don't pay tax. Fund managers are never interested in the tax consequences because performance is measured pre-tax. Assuming I buy at the bottom and brilliantly sell at the top then the Government will take a big chunk of my gain anyway. Buffett believes in deferring that liability as long as possible (hopefully forever) Does Marcus understand compounding? Ignoring dividends is laughable. Marcus clearly thinks like a trader (and stockbroker) and not an investor. Trade trade trade.

Dean Morris

Good interview Patrick, well done.

Patrick Poke

Adrian & Ben - Thanks for your comments, it's always good to get different points of view on a topic (that's what makes a market). We don't expect everyone to agree with everything that our contributors say, our goal is to present interesting and diverse views, and a lot of our audience do like to hear Marcus' perspective.

Peter Ralph

Interesting. Hamish Douglass released a video today that expressed a view totally at odds with Marcus re long term holds. That's not a criticism. Divergent views are what makes a market.

Kaycee Green

Great interview Patrick, thank you. I agree with all the comments because it’s a matter of investment style. I trade for my income... so buying low and selling high is my main focus... dividends are an added bonus. I often make 1,000 % plus return per annum on a trade, so I agree with everything Marcus said ... however I also agree with Adrian, Ruhul, Ben and Charles because you’re long-term investors (and maybe have full-time jobs) so capital growth plus dividend income and tax implications are very important. I think Marcus was just hoping to add an extra level of knowledge for long-term investors.

Adrian Q

Indeed Patrick, different views are always welcome and not everyone needs to agree. However I would've thought your contributors need to take special care if they are going to start telling people how they should be managing their money. Especially if they are prominent industry figures and are selling/managing financial products under an AFSL. One might want to get their facts clear/accurate and ensure there is evidence to support any recommended strategies as being in the best interest of any potential client, or a listener who may go and act on the advice. I continue to struggle with those 4 minutes on market timing (from the 7:00 mark) in these respects, and this has been emphasised as the catchline of the entire podcast. The real/net long term returns of the ASX are well and truly positive (not zero or slightly negative as stated). Therefore people should not feel compelled to time markets or else "you're going to go nowhere" and worse still... be left wondering why everyone else is "flying around in BMW's and Teslas" (FOMO anyone?). I've said my piece and will make this my last comment here... I politely invite Marcus to re-listen to these 4 minutes in case he may want to correct or clarify any of it. For your listeners, it may serve you better to believe Bogle, Buffett, et al on this particular topic - Market timing usually detracts from returns rather than enhancing them. If you're going to give it a shot, please seek to understand first what makes you special to succeed where the majority fail. Otherwise you can take comfort in the conventional wisdom, e.g. You *can* just sit in the market long-term, which is *not* what everybody wants you to do. You do *not* have to time it.

Umberto Mancinelli

Great thoughts! I can really appreciate the fact that markets are a two-way thing and investors who just rely on either fundamentals or technical are selling themselves short (haha). Interview Could have been made even better with at least some commentary about the UFC :-) Maybe next time...

Rob McGovern

It takes a brave person to Question Buffett and co, but the world is changing, everything needs Q'ing and I have also Questioned the tought about time in the mkt versus timing the mkt. if you're picking a stock for it's position and futrue, why not pick an overall mkt and it's direction.

Marcus Padley

A reply to the zero returns contention: Even with the dividends the real return from the stock market is significantly lower than an index would suggest. Lets say the long term return on the All Ords is around 6% plus dividends of 4% - that makes a generous 10% - take off a conservative inflation rate of 4% over the long term (its higher) - then you are working on 6% compound - go through a financial planner (1% - used to be 2% - and even if you don't use a financial planner you will still have your own costs of time spent managing your investments). Then you or they buy managed funds (1.5% - used to be 2%) - now you are playing with a 3.5% real return. Then pay any of the following - a spread on buying managed funds, commission on trades, the index fudge (survivorship) that eat into the 3.5% and you are getting close to a zero sum game. Compounding is the eighth wonder of the world - but not if you don''t compound, retirees don't, they spend it. If you are entitled to but lose the cash refund of franking credits then things get even worse. All the averages you hear quoted are from product selling institutions using an index that doesn't have management costs, dealing costs, that perfectly compounds dividends, that perfectly gets rid of and acquires the index constituents as they change, that has no employees, offices, water-coolers or heating bills. All this renders an index return an utter fantasy, which is why most fund managers underperform after real costs - not because they are useless as the marketing of zero-value add passive funds projects. Hopefully you begin to understand how you have to do better than invest in the average in the long term. The 'fantastic' (fantasy) returns on indices over-inflate reality which is why they are used ad nauseam to sell financial products. They are trying to give you the impression there is a party going on and it is easy to take advantage off it by buying their products. But the real return will be significantly less than the headline index return. If you are a passive investor then OK, but do not believe the 9.1%, understand that the next ten years will deliver ten completely unrelated returns each year and the average is a statistic not an expectation, and cut your costs to the bone or you'll go nowhere. For the rest of us we will get on with picking better quality stocks, avoiding rubbish stocks and timing the market. If an adviser or a fund manager doesn't bother to do that they are an administrator only, and should be paid accordingly. Meanwhile there are some fantastic engaged individuals in the advice and funds management industry that live and die on their performance, love what they do and succeed at it. I'd prefer to invest in them than some benign index that relies on a lie to sell itself. Just saying...

Adrian Q

Hi Marcus, thanks for taking the time to reply. Yes let's use this 6% real return as an assumption. Fees on passive index funds are 0.2-0.3% including tracking errors and all the things you mentioned. Go and look on Vanguard, SPDR, iShares, etc websites for proof. That makes 5.75% p.a. (pre-tax). Well and truly positive. The index return is no fantasy I assure you there is over $40bn now in ETF's just in Oz. No doubt it's possible to market time and do better. On average though if you market time, performance chase, etc - studies show you will do worse by 1-3%, so the average person will just turn their 5.75% into 3.75% p.a. A good deal closer to zero. As for that last bit you wrote, I don't know what lie you are referring to but traditional indices were founded by Jack Bogle and please just have a read of the tributes flowing in for him last month. I don't think they need to sell themselves hardly at all, most investors are finally waking up to the facts and voting with their feet. Index managers have always been highly transparent and evidence-based in my experience. I've found the lies, false promises, vague explanations, etc are more likely to come from active managers, but I do invest in them also, I just choose very carefully. Anyway, you drew me back again but this one will really be the last comment from me. Best wishes to all with their investing. Do your research carefully and don't believe everything you hear.