Market Timing – Legend Or Myth?
‘The great enemy of the truth is very often not the lie, deliberate, contrived and dishonest, but the myth, persistent, persuasive and unrealistic.’
John F. Kennedy
The terms legend and myth sound similar but have quite distinct definitions. A legend is presumed to have some basis in historical fact and tends to mention real people or events. Historical fact morphs into a legend when the truth has been exaggerated to the point that real people or events have taken on a romanticized, ‘larger than life’ quality. In contrast, a myth is a type of symbolic storytelling that has no historical basis.
So, which category does market timing fall into?
‘People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game.’
Peter Lynch is legendary in the investment community for managing the world’s best-performing mutual fund from 1977 to 1990 – his legend is steeped in historical fact. Following his retirement, Lynch conducted a study relating, which he often referred to in interviews and public engagements, relating to the futility of market timing. His analysis covered a 30-year period from 1965 to 1995 and took the examples of three imaginary investors.
The first was the ‘unluckiest investor imaginable’, committing $1000 at the peak of the market in each of the years. The second enjoyed perfect market timing, investing $1000 at the lowest market level each year. Meanwhile, the third was a purely arbitrary investor, injecting $1000 into the market on 1 January each year.
Lynch discovered that the overall results were remarkably similar, with investor A achieving a compound annual return of 10.6%, investor B 11.7%, and Investor C 11.0%. He concluded the study by observing that investors “spend an unbelievable amount of mental energy trying to pick what the market’s going to do, what time of the year to buy it. It’s just not worth it.” 1
Lynch is not the only legend of the investment arena to refute the potential value of market timing. When asked how he had made his fortune, Baron Nathan Rothschild, one of the most famous investors in history, replied, “I never invest at the bottom, and I always sell too soon”. While this sounds self-deprecating, Rothschild was stating that he never attempted to time the market; he bought stocks when they were cheap but not washed out, and sold before valuations got too stretched.
As such, market timing is not a legend because there is no example of a successful market timer to base the legend on. Market timing falls into JFK’s descriptions of a myth; it is persistently talked about and a persuasive argument, but successful execution is completely unrealistic.
Even greater emphasis on diversification…
Nominal returns have edged into significantly lower territory in the years following Lynch’s study, but a raft of subsequent academic research continues to refute the validity of market timing: picking market peaks and troughs is far more an art than a science. All too often, selling takes place after the initial leg down, and repurchase orders are executed long after the early stages of the rebound, leading to a dilution of returns at the top and bottom of the market.
Investors often fret about buying too early or too late
However, the frequency of bear markets and the extent of the slumps have increased in the last 40 years. Examples include ‘Black Monday’ in 1987, the first Gulf War of 1990, the monetary policy shock of 1994, the Asian Crisis of 1997, the bursting of the tech bubble in 2000, the second Gulf War of 2002/03, the subprime crisis of 2007, the GFC of 2008/09, the pandemic of 2020 and this year’s deflation of the ‘everything bubble’. Consequently, the value of ‘time in the market’ is becoming increasingly questionable, and this places even greater emphasis on true diversification.
Given the uncertain outlook, there has arguably never been a better time to extend the boundaries of conventional portfolio construction beyond traditional asset classes. So, it could be an opportune moment to consider the potential of late-stage venture investing.
Already proven but still growing…
‘Growth equity’ is one of the newest segments of the private markets sector, having come to prominence during the last decade (although it has been around as an asset class for considerably longer). ‘Growth equity’ investing is focused on identifying private companies with a proven, growing or dominant market share and positive cash flows.
They are either profitable or approaching profitability and are considered to be in the ‘growth phase’ of their evolution, having established a proven business model and begun penetrating their target market. Since ‘growth’ companies are now remaining in private hands for longer than those operating in other market segments, a larger component of the overall value creation takes place before the company opens to the public.
From an investor’s perspective, the primary objective is to harvest medium-term value creation, and this is reflected in the accepted investment horizon. Short-term profit-taking is, therefore a rarity, not least for liquidity reasons, and this reduces growth equity volatility. There are no successful ‘market timers’ who hope to get out of the market shortly before the occurrence of a substantial crash, with a view to repurchasing the position at a significantly lower price.
Since market timing is an even more futile concept in private markets, there are, theoretically, no ‘bad’ points to initiate an investment in growth equity. However, the macroeconomic backdrop can create particularly attractive entry points when valuations are even more compelling. During periods of economic turbulence or crisis, it can be much harder for private-market growth companies to raise capital even though their business models are not cyclically oriented. This creates a buyers’ market, which extends to the top companies in the universe, as growth equity is discounted in order to attract investors.
In conclusion, public market assets are steeped in uncertainty, with stocks having rallied from autumn lows and now facing the prospects of a potentially imminent recession. Meanwhile, bond markets are being rocked by the possibility of higher-for-longer interest rates as central banks battle unexpectedly persistent inflation. Attempts to time entry and exit points are statistically likely to prove unsuccessful as the concept is a myth, rather than a legend. Seeking greater portfolio diversification is likely to prove more effective, and investors should find growth equity an interesting option, especially in a buyers’ market.
1. Source: ‘Pain and Gain’ Worth Magazine January 1997
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