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A Noble Lie: Why it's OK to sin a little and "market-time"
Thank you so very much for posting the Morningstar Article by Samuel Lee.
The article clearly demonstrates the market wisdom that when prices are extremely low, the likelihood of oversized returns is very high.
The article is basically an uncluttered, focused review of an impressive body of statistical market data sets. That’s great. However, the author’s interpretation of the data is surprisingly and disappointingly incomplete.
Whenever presenting statistical data, it is always a good policy to include some measure of the dispersion in the data to supplement the commonly cited Mean and/or Median statistic. The data’s standard deviation is the usual dispersion measurement. Quoting some average value is simply not enough.
A quick scanning of the 3 graphs displayed in the referenced article plainly shows that the data scatter is rather large for a major portion of the collected data range. Lee failed to even mention this significant observation. Perhaps it works to weaken his main theme.
To illustrate, just concentrate on Figure 1 which presents the correlation of forward 5-year real returns as a function of Shiller’s inverted Cyclically Adjusted Price to Earnings ratio (CAPE). The data set is fundamentally a wide cloud up to an inverted CAPE value of approximately 12 (P/E ratio of about the 8.3 level).
It is not an exactly new concept that if the P/E ratio is so low that a highly profitable opportunity exists to buy into equities with a high likelihood of huge future rewards.
Similar dispersed cloud formations exist within the other two figures. The dispersion aspects within each of these data sets should have been highlighted in the text. It is always a meaningful part when interpreting any statistical data.
The author also tends to overstate the rigidity implied by the Buy-and-Hold market strategy employed by many market participants. Buy-and-Holders never believe that it is a forever pledge. If it were, profits would never be realized.
Most Buy-and-Holders, myself included, just avoid the daily noise created by frantic media coverage and an overly aggressive trading cohort who actively seek quick rewards without hard work. That cohort are the natural experimental subjects for the Behavioral researchers. Overconfidence is a representative characteristic of this group who do a great service in making the marketplace more efficient.
Buy-and-Holders have divergent financial goals that not only depend on their ages and purposes, but also on market dynamics. It is a cardinal sin to characterize that cohort as a single, inflexible mass with a uniform timeframe. Things are never that simple.
Mark, regardless of my reservations, I really enjoyed the referenced piece. I learned from it. I love these big picture, meta-analysis. I truly appreciate your effort in bringing it to my attention. Thank you once again.
I wouldn't be surprised if lots of experts preaching buy and hold are closet market-timers. Academics can be notorious hypocrites. In a 1994 speech at the USC Marshall School of Business, Charlie Munger said, " … one of the greatest economists of the world is a substantial shareholder in Berkshire Hathaway and has been for a long time. His textbook always taught that the stock market was perfectly efficient and that nobody could beat it. But his own money went into Berkshire and made him wealthy."
Indeed, Nobel prize recipient Paul Samuelson invested with Warren Buffett early in his hugely successful, multi-faceted career. He recognized a shrewd and perhaps unique financial wizard and wisely joined his ranks as a long term investor. That’s another piece of evidence that Samuelson was a cut above and beyond most economists. By many measures, he was a brilliant man.
Even a totally efficient market does not mean that all investors will equally share the wealth produced. All it means is that with a large number of participants independently (not acting as a herd) making choices, the likelihood that an efficient closing price will be satisfied. In the end, each day supply and demand are balanced. There will surely be winners and losers as diverse opinions are registered by buying and selling pressures.
In his early years, Samuelson actively sought Alpha (excess returns) with astute investing. Some credit him as the originator of the Hedge fund concept. In the 1970s he recognized Warren Buffett’s singular talent and invested in Berkshire Hathaway.
He acknowledged that “Experience makes me think that a few folk do have an intuitive flair for making money by sensing patterns of momentum”. I see no inconsistency in believing in market efficiency that allows for a distribution of winners and losers.
Samuelson was smart enough to pick a real persistent winning money manager. Buffett’s investment philosophy falls more closely to the buy-and-hold (B&H) side of the investment spectrum as opposed to the day-trader end. Most of Buffett’s success can be allocated to patience, compound interest, extended timeframe, and his actively involved management attributes. Mutual fund buy-and-hold advocates practice three out of four of these characteristics.
Many B&H wizards say that “Timing the market is a fool’s game, whereas time in the market is your greatest natural advantage”.
One of a zillion Buffett quotes (only partially practiced) is that “Our favorite holding period is forever”. One of Paul Samuelson’s equally famous quotes is that “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 (an inflation adjustment is needed here) and go to Las Vegas”.
Given these similar investment philosophies, it is certainly not surprising that Samuelson wisely chose to invest with Buffett.
Charles, I agree that the article was entertaining; I merely wish it was more balanced, especially when addressing statistics data and when assessing the flexibility that B&Hers really do practice.
Comments
Thank you so very much for posting the Morningstar Article by Samuel Lee.
The article clearly demonstrates the market wisdom that when prices are extremely low, the likelihood of oversized returns is very high.
The article is basically an uncluttered, focused review of an impressive body of statistical market data sets. That’s great. However, the author’s interpretation of the data is surprisingly and disappointingly incomplete.
Whenever presenting statistical data, it is always a good policy to include some measure of the dispersion in the data to supplement the commonly cited Mean and/or Median statistic. The data’s standard deviation is the usual dispersion measurement. Quoting some average value is simply not enough.
A quick scanning of the 3 graphs displayed in the referenced article plainly shows that the data scatter is rather large for a major portion of the collected data range. Lee failed to even mention this significant observation. Perhaps it works to weaken his main theme.
To illustrate, just concentrate on Figure 1 which presents the correlation of forward 5-year real returns as a function of Shiller’s inverted Cyclically Adjusted Price to Earnings ratio (CAPE). The data set is fundamentally a wide cloud up to an inverted CAPE value of approximately 12 (P/E ratio of about the 8.3 level).
It is not an exactly new concept that if the P/E ratio is so low that a highly profitable opportunity exists to buy into equities with a high likelihood of huge future rewards.
Similar dispersed cloud formations exist within the other two figures. The dispersion aspects within each of these data sets should have been highlighted in the text. It is always a meaningful part when interpreting any statistical data.
The author also tends to overstate the rigidity implied by the Buy-and-Hold market strategy employed by many market participants. Buy-and-Holders never believe that it is a forever pledge. If it were, profits would never be realized.
Most Buy-and-Holders, myself included, just avoid the daily noise created by frantic media coverage and an overly aggressive trading cohort who actively seek quick rewards without hard work. That cohort are the natural experimental subjects for the Behavioral researchers. Overconfidence is a representative characteristic of this group who do a great service in making the marketplace more efficient.
Buy-and-Holders have divergent financial goals that not only depend on their ages and purposes, but also on market dynamics. It is a cardinal sin to characterize that cohort as a single, inflexible mass with a uniform timeframe. Things are never that simple.
Mark, regardless of my reservations, I really enjoyed the referenced piece. I learned from it. I love these big picture, meta-analysis. I truly appreciate your effort in bringing it to my attention. Thank you once again.
Best Wishes and Happy New Year.
Hi Charles,
Indeed, Nobel prize recipient Paul Samuelson invested with Warren Buffett early in his hugely successful, multi-faceted career. He recognized a shrewd and perhaps unique financial wizard and wisely joined his ranks as a long term investor. That’s another piece of evidence that Samuelson was a cut above and beyond most economists. By many measures, he was a brilliant man.
Even a totally efficient market does not mean that all investors will equally share the wealth produced. All it means is that with a large number of participants independently (not acting as a herd) making choices, the likelihood that an efficient closing price will be satisfied. In the end, each day supply and demand are balanced. There will surely be winners and losers as diverse opinions are registered by buying and selling pressures.
In his early years, Samuelson actively sought Alpha (excess returns) with astute investing. Some credit him as the originator of the Hedge fund concept. In the 1970s he recognized Warren Buffett’s singular talent and invested in Berkshire Hathaway.
He acknowledged that “Experience makes me think that a few folk do have an intuitive flair for making money by sensing patterns of momentum”. I see no inconsistency in believing in market efficiency that allows for a distribution of winners and losers.
Samuelson was smart enough to pick a real persistent winning money manager. Buffett’s investment philosophy falls more closely to the buy-and-hold (B&H) side of the investment spectrum as opposed to the day-trader end. Most of Buffett’s success can be allocated to patience, compound interest, extended timeframe, and his actively involved management attributes. Mutual fund buy-and-hold advocates practice three out of four of these characteristics.
Many B&H wizards say that “Timing the market is a fool’s game, whereas time in the market is your greatest natural advantage”.
One of a zillion Buffett quotes (only partially practiced) is that “Our favorite holding period is forever”. One of Paul Samuelson’s equally famous quotes is that “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 (an inflation adjustment is needed here) and go to Las Vegas”.
Given these similar investment philosophies, it is certainly not surprising that Samuelson wisely chose to invest with Buffett.
Charles, I agree that the article was entertaining; I merely wish it was more balanced, especially when addressing statistics data and when assessing the flexibility that B&Hers really do practice.
Best Wishes and Happy New Year.