Monday, January 25, 2016

Asness et al: "Market Timing Is Back in the Hunt for Investors"

From Institutional Investor, Nov. 11, 2015:

Market timing — considered by many an investing sin — can be a virtue if employed modestly, using a combination of contrarian and trend-following strategies. 
For 15 years we have attributed the following quote to late economist Paul Samuelson, though, admittedly, we can’t find a trace of it now. We remember him saying near the height of the technology bubble of 1999–2000, when stock prices were at astronomical highs, something along the lines of, “Market timing is an investing sin, and for once I recommend that you sin a little.” He meant — if he ever actually said it — that things were so obviously wrong at that time that even a lifelong proselytizer of buy-and-hold would recommend some judicious selling. In attempting to confirm this quote, one of us checked in with Vanguard Group founder Jack Bogle, who could not help us with attribution but admitted to lightening up on stocks himself somewhere near the high. (We can confirm that he did indeed make very prescient and public forecasts of lower than normal expected long-term stock returns at the time.)

If market timing is a sin, then there are times when even the saints can be tempted into sinning a little. We are going to argue that market timing isn’t really a sin except, as for so many things, if done to excess. But the results and logic behind the two simple strategies that govern so much of the investing world — basic value, or contrarian, investing and basic momentum, or trend-following, investing — imply that when it comes to market timing, one should indeed sin a little and do so as a matter of course, not just at extremes.

Today’s high stock prices, and for that matter low bond yields and concomitant low expected future returns (at least in our opinion), naturally bring the timing discussion back to the forefront, leading many investors to wonder if they should get out now. The answer to this question is almost certainly not. “Getting out now” is a very extreme action yet oddly often how people think about market timing (an approach to timing that we will soon label binary, immodest and asymmetric). If, on the other hand, investors wonder whether they should own somewhat fewer stocks and bonds than usual right now — well, that’s a much harder and much more interesting question. Overall, for those who think market timing is infeasible, we give hope. At the other extreme, some observers oversell market timing as easy and reliable. It ain’t.