There was an article on the Livewire website this week quoting a recent Kerr Neilson presentation, the billionaire fund manager at Platinum Asset Management. There were lots of good takeaways but the comment that interested me was this quote:
“Here’s the problem we face as fund managers. If you go out too early (sell the market), let’s say by six months, you could leave 14% on the table. If you leave late (sell too late), you might only be down 10% within six months. So what you do? We as fund managers are institutionally bound to play the game until the last second. Keep that in mind when you’re relying on the experts”
I’m not sure Kerr Neilson speaks for everyone. A lot of those massive cap fund managers running billions of dollars just aren’t interested in the market going up or down, just their performance relative to the market. They don’t have to time the market peaks and troughs and many have their hands tied by mandates that prevent them running up any significant level of cash anyway. It’s only the fund managers that care about actual performance, who care about their clients' money, who are trying to perform rather than outperform, that have the ability to hold significant cash levels (100% in my case), that would ever think about selling at the top or buying at the bottom.
So how do you time the top?
I was recently asked whether we can expect a Santa Claus rally in the market, the traditional run-up in the market in December. I don’t know, I’m just in the media so people think I do. But the answer to the question is clear. You don’t need to guess. If you, like me, are watching the market every day, it is a risk management system in itself. If you adopt a high level of vigilance you can afford to take more risk and run with the market for longer because you are turning your screens on every morning.
If you do that then you will get the feeling that the market is topping out way earlier than all the pious Warren Buffett following investors that rely on motherhood statements about long-term investing and set and forget. One day you will simply wake up to a market selling off significantly and you will make some decisions. You don’t need to predict anything unpredictable in this game if you are highly engaged. That in itself is your risk management system. Turning the screens on.
Plus some of the best bits in the market are when it goes exponential in the years ahead of a correction, which is what we are arguably doing now. It’s no good selling now just because the market is up. You want to sell because the market is going down.
On top of that let me repeat my old line that you don’t need to call “the market”, far better you manage each stock position as a separate “battle” and close positions out on a stock by stock basis than try and do it for all stocks at the same moment. Take it stock by stock and you will negate the need to decide on the whole market once, a decision that very few mortal investors are ever capable of making until they are in a mental hole, usually at the bottom of the market, not the top. Do this and by the time you hear the anchor at CNBC talk about a market correction, you will find that you have miraculously already sold almost everything on a stock by stock basis anyway.
Wait for the fear to become mainstream and you will be selling far too late. So as Kerr Neilson says, play the game until the last second.
Of course, the flip side is this: if some of the big professional fund managers are trying to time the market to the second, then when the moment comes to sell, the sell-off will be that much more savage because the big money is also in there trying to trade or time the top or turn. All the more reason to follow the charts and sell when you see others selling, because the likelihood is they are far bigger than you are and will take a lot longer to sell than you will.
Marcus Padley is the author of the Marcus Today stock market newsletter. To sign up for a 14-day free trial please click here.
If your screens were on during brexit or the trump election and you sold a large chunk of your shares while everyone else was, that wouldn’t have worked too well? Buy and hold is a better percentage play for most, including the pros. Several fund managers have been calling the top for a year or more already and holding large cash weights. Not to mention all the retirees who switched their Super to cash or conservative after the GFC, realised losses and have missed the recovery over the next 8 years. You not only have to exit at the top, you have to know when to re-enter and actually do it. I suggest most (not all) people who attempt all of this will do worse than just staying in...
A very important point you made right here: "trying to perform, rather than outperform". We need more fund managers like this, and from personal experience I can say that they are out there, but they require some digging to find. Out of interest Marcus, what levels of cash are you holding in your SMAs at this very moment (considering you note that you can be 100% cash)?. A great article, and the link to Kerr's video is a worthwhile watch, thanks for that.
I don't know Adam, that's actually the same quote I was reacting to in my earlier comment ... "It’s only the fund managers that care about actual performance, who care about their clients' money, who are trying to perform rather than outperform, that have the ability to hold significant cash levels (100% in my case), that would ever think about selling at the top or buying at the bottom." That assertion seems rather harsh. It's a very valid perspective to remain fully invested. The vast weight of evidence shows market timing does not improve performance. Furthermore the suggestion given here to "turn on your screens each morning" is (in my humble opinion) one of the worst things to do. It's a good way to over trade and/or develop and anxiety problem, but not particularly helpful to your long-term returns. Anyway, I don't really want to lock horns, just trying to put the other view that many long-term investors want their fund managers to be fully invested. I guess many of those fully invested fund managers do care about their client's money too, considering they are playing the percentages in line with what the research supports regarding market timing over the long-term (and not charging their clients 1+% MER to hold cash).
You made some great points there Adrian. What is so great about investing is that there are so many ways to do it, and you can tailor strategies to suit your clients. Market timing may or may not improve returns, but it can help to alleviate the stress in tanking market. Remember the behavioral finance piece that people feel pain twice as much as they feel joy. So I see performance as more than raw numbers against peers, an index or a neighbor's portfolio. Performance to me as a CFP investing my clients money is also about meeting client expectations, their cashflow and other financial needs on a regular basis. Benchmarking against an index or being fully invested is irrelevant to my clients or their needs. I think we need to get past the idea that we are paying someone 1%pa to be fully invested. I am happy to pay someone more than 1%pa to use their skill and judgement if the net outcome suits my clients needs.
Thanks Adam, yes there are many valid ways to invest and I appreciate absolute /real return funds can meet client needs too. Just to clarify when I say I want my fund manager to be fully invested, this sits within an overall portfolio asset allocation. So I’m holding my own defensive assets. I’m also assessing my psychological tolerance for tanking markets in deciding what weighting of defensive assets is appropriate for me. If and when markets tank I will be gradually (and mechanically) buying to rebalance. This is a traditional approach and fund managers who time the market are not so compatible with it as they shift the asset allocation away from desired target. Anyway i don’t mind if people want to market time, screen watch, or pay high management fees. Again, all the evidence I’ve seen says these tend to detract from long-term returns, but each to their own. I just find the statement that only fund managers who try to pick tops and bottoms care about their clients money is a tad absurd... I’m yet to read a PDS that says “our investment strategy is to call tops and bottoms and we do it by relentlessly watching our screens” :)