The Matrix

I had an email from a financial adviser. It said:

“If you can show me that market timing has produced superior results compared to something as simplistic as buy and hold over a 10 plus year time frame I’ll be shocked and very impressed. Should you have such results you might also wish to share them with Professor Burton Malkiel from Princeton who wrote the book “A Random Walk on Wall Street”. One of his many astute points was that no-one gets market timing right consistently. But I’ll be happy to be proven wrong!”

My reply:

The finance industry is a Matrix, and like the Matrix, everyone who enters the Matrix is brainwashed with a lie, lies, lies that preserve the existence of the Matrix.

The main lie is that you will improve your standard of living by investing in a diversified portfolio of asset classes over the long term by doing nothing.

That lie includes selling stock market mantras like these:

1. The market always goes up.
2. Buy and hold.
3. Invest for the long term.
4. Diversification, diversification, diversification.
5. Do it the Warren Buffett Way.
6. Invest in businesses not stocks.
7. You can’t time the market. It's about time in the market, not timing the market.
8. If you aren’t willing to own a stock for ten years don’t think about owning it for ten minutes.
9. Our favourite holding period is forever.
10. The stock market is a voting machine in the short term and a weighing machine in the long term.

 

If you think any of these stock market idioms are true, then you too are in the Matrix. If you are holding 5-20 managed funds through a financial adviser then you are in the Matrix. And if you actively tell people any of the above and believe you are informed and clever and are passing on wisdom, then you are not only in the Matrix, you are working for it.

Let me explain.

With an average annual return of just 5.64%, and inflation of 4.7% over the last 75 years, all the stock market is giving you is 1% plus dividends, less dealing costs, tax, financial planner fees, fund manager fees and the index fudge. Basically, a real return that averages somewhere around zero or negative.

To make financial progress (and avoid life-changing financial disasters) you have to do better than “all investments” and “all the time”. And the stock market, if we're going to bring it back to equities, is not about all stocks all the time. It's about which stocks and when. And the industry is not going to help you with that.

No financial adviser wants their clients ringing up asking "Do we buy now?", "Do we sell now?", "What stocks do we buy?", "When do we sell?"

That's what brokers do (did). For a financial adviser to do that for more than a few very large clients would be impossible. Most advisers have fifty to one hundred clients, and with all their compliance and paperwork, they simply don't have the time to time stocks or the market. The value of a financial adviser is financial advice, not investment advice. So to provide that as well, they have to rely on the Matrix. 

It's not their fault. Regulation and legislation has killed the financial advice industry's capacity to address investment details. Outside of your annual sit down they cannot be taking calls on BHP. They cannot be a broker and a financial adviser, it is simply not scalable.

Hence The Matrix. A global industry brainwashing that "it'll be alright in the end if you buy 5-20 managed funds and just leave it there".

The GFC (a 54% drop in the Australian equity market that took 11 years to be recovered), accelerated the realisation that if you do not bother to time stocks and the market, you bear the risk that your standard of living could dramatically crater and no one in the Matrix will help you avoid it.

Not only that, if you don't pay attention to timing, you will miss out on those fabulous once in a lifetime opportunities (which happen every ten years) to earn accelerated returns in short periods of time that can dramatically improve your standard of living.

Events like the GFC also taught many retirees that you have to be vigilant, there is no turning off. Seismic market events at the wrong time (when you've retired) are not recoverable. If you are on the edge of your financial envelope, you have to protect yourself, by avoiding catastrophes. The definition of unhappiness is financial expectations not met. 

The Matrix won't help you to avoid catastrophes or exploit opportunities. The Matrix is not set up to protect you from seismic events, and it is not sharp enough to launch in and take advantage of those rare but life-changing sell-down opportunities.

To break the "go nowhere" norm, you have to do what they say is impossible, to time the market, because as any experienced retiree will tell you, "what" you buy and sell is the easy part, "when" you buy and sell is how you protect yourself from risk and take advantage of opportunities.

Timing is everything, and anyone telling you otherwise is selling you a lie, is hiding in mediocrity, is advocating laziness. or, if they are in the finance industry, are simply selling the Matrix that allows them to take a fee for providing you a diversified exposure to too many asset classes and too many stocks that has one major advantage, they can't be sued for suggesting it.

We spend all day every day in the Marcus Today newsletter timing stocks and the market. And in particular, timing the market in our Strategy Portfolio, and it works. Timing the market using ETFs in the Strategy Portfolio has become one of the most valuable, reliable and unique parts of Marcus Today.

This is the performance of the Strategy Portfolio which is addressed on a daily basis in the newsletter. The Strategy Portfolio only invests in Exchange Traded Funds, rarely includes more than five of them and has achieved these returns with a few simple decisions a year. It is low cost, low volatility and low activity investing. When I retire, this is how I will invest my super, by timing the market, using ETFs.

The other huge benefit is the fact that thanks to ETFs we are not married to the Australian market, a collection of crusty old banks and resources. Here's the chart of the NASDAQ over the same time period as the ASX200 chart above. A picture (or a chart in this case) says a thousand words.

There's The Matrix.Then there's Marcus Today.

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Footnote

It staggers me that the slavish Benjamin Graham and Warrren Buffett disciples do all this great work finding the best stocks, then throw up their hands and declare that they can’t time the market. Well if they are truly some of the brightest people in the industry why don’t they at least try? Instead they continue to pedal anachronistic 1950’s lines like don’t buy a company unless you would be happy if they closed the market for ten years. Utter crap because if Professor Malkiel is truly right, we should close the stock market because after costs, with all that risk, it’s not worth investing in it.

Professor Malkiel is simply feeding us what the industry wants us to hear. If you buy into the concept that you can’t time the market you will only ever produce returns in a bull market, you will lose money in a falling market and after costs, you will lose money in the long term. You have to do better than that, and the advice industry has to do better than that. If it can’t, then every financial adviser and broker will retire dissatisfied that they sold a lie the whole of their lives and no-one really benefitted from their services.

And a final word. If you do want to time the market, you will have to do it yourself. The Matrix will not help you.

Although we will!