I don’t write all this stuff here in the Switzer Super Report, in our Switzer Daily website and on my TV show to end up being used for newspaper to wrap up fish and chips! Yeah, I know this is an anachronistic metaphor, as I now write and broadcast electronically and the fish n’ chip story relates back to when it was all newspapers for business and finance. And it was when fish and chips were wrapped in newspaper, not plastic bags!
But my point is clear: I don’t write and broadcast to fill time and space. I’m in it for education, for insights and for helping you (and me) make money.
Back to the future
These thoughts came to me after receiving an email from an academic (who’ll remain nameless), who is a subscriber. Let’s call him The Prof because he is a Professor of Economics and I respect that achievement.
This is what his current email said: “One thing of which you might not be aware is the strong negative relationship that has been found between the sentiment of “pros and experts” and the subsequent performance of the market. Indeed, it is one of the numerous contrarian signals used by many technical analysts.”
That’s a great insight. I am in the insight collection business, though being right is a higher priority.
This followed my pointing out that there was a big divergence between what the expert newsletter gurus were predicting and what moms and pops surveys of the market were saying in the US.
But wait there’s more. Below the current email was one The Prof sent me on 13 September, 2012, which went like this: “One thing that is evident is that I read what you write! Further, I envy you to the extent that you seem to be a person who sees good in everything and everyone. However, I am compelled to comment on your rather colourful article on the likely advent of QE3, where you see good in Obama (an obviously wonderful but ineffective person) and Bernanke (who is running Greenspan a close race in being the worst head of the Fed).
“Of course, we do not know where we would have been without QE1 and QE2 but what they did was use most of the Fed’s firepower with no improvement in the economy and with a stock market that has not moved in five years (nor this millennium). I would back those who say that QE1 and QE2 were ineffective over your rose-coloured assessment.”
“You are right about animal spirits and the positive decision about QE3 will cause a jump in the market largely driven by scribes telling the market what a good thing that it is…”
The rest of the email was missing but you get the gist of what The Prof was saying. I think his anti-Fed views then have been trumped by what’s happened on the stock market since 13 September.
The brighter picture
Let’s have a look at them and make some conclusions. Here they are:
- The closing level on the S&P 500 was 1459.99 and as I write, it’s now 2081.9, a 42% gain, leaving out dividends.
- For the Aussie market, our S&P/ASX 200 index has gone from 4339.4 to 5960.7. That’s a 37% gain. If we threw in dividends and franking credits (and we were conservative) then the gain would be over 50% for 31 months!
- That’s an annualized return of 19.3%!
So if my optimism and my support for Obama’s interventionist policies and the Fed’s QEs that helped avoid a Great Depression re-run has also had the payoff of a 50% improvement in the index that we all benchmark off, then I say thank God for my positivity.
I’d also add (and I want The Prof to know this) that I don’t like everyone and I’m not always positive. I think the unions need to get real about penalty rates. I think international companies are having a lend of us, with their profit-shifting to low tax regimes. I hate the plethora of negativity, spread by a lot of my colleagues in the media. I know many of them are doing it for front page headlines with their by-lines and ultimately to be used, if not for fish and chip wrapping, then to make baby disposable nappies more acceptable in the kitchen tidy!
It’s all in the timing
I keep saying that one day I’ll turn negative. I hope for you and me I get the timing right. I do buy stocks that I’d be happy to ride a crash with and that I’d be happy to buy more of when their prices slump. But I did come across some interesting research this week from the team at Perennial Value.
They have created a LIC, which has derivatives connected to it to reduce the impact of a big sell-off, called Wealth Defender Equities while attempting to beat the index on the upside.
What John Murray, the MD, and his team have shown is that if you invested $1,000 for 30 years between 1982 and 2012 and you’d simply stayed in the market, you made $22,972 or 11% per annum. If you had perfect timing, your $1,000 went to $262,370 or a return of 20.4% per annum. But if you got out three months earlier, your $1,000 rose to $86,613 or 16% a year. If you got out three months later, your nest egg ends up at $90,804 or a 16.2% return!
So getting out late before a crash can be OK but it does mean you have to be able to work out the difference between a crash and a correction. That’s another difficult part of my job description and your task as a DIY fund manager.
This chart shows there were some signals before the big crash of 2008 and there was a window after the first leg down in November 2007, where you could’ve got out with a smaller loss.
On November 1, 2007 the S&P/ASX 200 index had its highest close of 6828.7 and by November 23 it was at 6330.2, which was a 7% slide. You could have easily stayed in thinking this was another correction. By January 22, the index was at 5186.8 and you might have lost 24% and that’s when you should have cut your losses, with hindsight or could you have hung in there?
Well, if you were really smart or courageous, you could’ve waited until April 28, 2008 when the index went to 5602.7, where your loss was only 17.9%.
In fact, if you could’ve hung in there until 19 May, the index went to 5949.40 and your loss was only 12.8%. If you missed this, it was all downhill from there until 6 March 2009, when the index stopped falling at 3145.50. That was a 53% loss of portfolio value, if your stocks match the index but it could’ve been worse!
That 24% loss by late January would’ve made you sick when you saw the 12.8% loss by May but after that, the 53% loss certainly made the 24% loss look positively loveable.
Someone has got to do it
Timing the market is hard. You’re often out on the best days and in on the worst. Trying to work out whether a crash is a correction or not can be very expensive.
That’s a part of my brief to help you. My preference is to be out early and pocket my profit. Even doing that can be costly, as this bull market, because of the unusually low interest rates, could be a long one.
I know there are some crazy things going on with economies and interest rates but it has powered markets up and I couldn’t afford to be wrong on what stocks could do for the right economic reasons. Many ‘gurus’ have done this and people have lost money, which I can say has not been the case with my calls since March 2009.
Being as right as I can be is my difficult brief, but hell, someone has to do it!
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