Covid-19 Diary Number 9 (July 31, 2020)

heap of money on white surface

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Frequently in these posts, I have warned against market timing.  Though timing buy-and-sell decisions of individual stocks can have merit, timing such decisions in anticipation of moves in the overall market is simply too dangerous and is as likely to produce failure as it is success. By contrast, buying and holding a portfolio of stocks for the long term puts history and probabilities on your side.  The timing temptation is nonetheless ever-present and is especially intense in times like now, when the pandemic has birthed extreme market volatility.  So this might be a good time to explain exactly what an investor is doing when he or she decides to time market moves.

 The ultimate theoretical commentary on this subject comes from Prof. Burton Malkiel’s A Random Walk Down Wall Street. In this book, first published in 1973 and the latest edition in 2019, he argues that most investors continually digest the endless flow of information coming from the economy, politics, and specific bits of business news, and use this information to assess existing stock prices and whether to buy or sell.  But these continual price adjustments, the professor demonstrated, happen almost instantaneously; and because no one can know the next bit of news, the market appears to move in a random pattern from day to day, even moment to moment (hence the title of his book).  Whatever you see in the news, Malkiel demonstrated, the market has already digested and adjusted stock prices.  There is no way to get ahead of the process.

Much of the financial community agrees with Malkiel, though these practical men and women hesitate to describe the market’s reality in quite the definitive way he does in his theoretical exposition.  Sometimes, they say, some people can anticipate market moves, and not all moves are entirely random.  To make the point, Wall Street tells a joke at the professor’s expense: If you are walking down the street and see a five-dollar bill on the pavement, the good professor will tell you that it really isn’t there, that someone else has already picked it up.  The Wall Street crowd claims that sometimes the five-dollar bill really is on the pavement – meaning you can sometimes have a sense of the market’s next move.  Still, most practitioners understand Malkiel’s point and warn that timing efforts are always fraught.  To see why, consider how market timers implicitly claim to possess one of two nearly impossible abilities:

  1. The timer effectively claims to know the news before the fact. If this timer sees good news coming, he or she buys in anticipation of the market’s coming upward price adjustment.  If that timer anticipates bad news, he or she sells in order to re-buy at lower prices when the market gets the news and adjusts prices downward.  This market timer is acting on the assumption that he or she can see the future – a most dubious claim.
  2. The market timer may not claim an ability to see the future but effectively asserts that the mass of investors operating in the market have collectively misjudged the meaning of the available news and accordingly have priced stocks incorrectly. If this timer thinks that pricing is too low, he or she buys in anticipation that the market “will come to its senses” and adjust prices upward, regardless of the continuing flow of news.  If the timer thinks pricing too high, he or she sells in anticipation of the opposite adjustment.  Here, too, is a dangerous arrogance that the market timer knows better than anyone else where pricing should be.

Such insights – whether on the future or on appropriate pricing – come rarely and are as likely to be wrong as correct.  Acting on market timing is always dangerous.  Sometimes, however, investors show such irrational enthusiasm, or such unlikely despair, that the claims behind an investor’s timing decision do not look as outrageous as they otherwise might.  In such rare cases, timing may have a place, but even so, investors should not kid themselves about the risk involved.

COVID-19 Diary Number 8 (July 14, 2020)


It seems that many people have begun to see the market rally as an opportunity to get out whole, or nearly so, after the frightening losses of late March. They despaired three months ago when stock prices went off a cliff, and now that prices have regained much of the lost ground, they wonder if they should get out while the getting is good. They don’t have reason to forecast another plunge in values; they just want to avoid the pain of another March experience.

Such anxiety is understandable.  March’s stock price retreat was unnerving and no one wants to go through that again.  But before selling out, investors should consider two things:

  1. Do they have an immediate need for the money? If they do, then the recent price recovery is a wonderful opportunity for them to get out of stocks –– not because prices have risen, but because (as readers of these blogs should know well), they should not have been in stocks in the first place.  Equities are only for those who have no need for the money for at least five years.
  2. If they do not need the money now or for the foreseeable future, they should consider the investment alternatives. There are five choices, none particularly attractive compared with stocks.  Though some might offer less volatility than stocks, the cost to the investor is lower potential returns:

–Cash is one option.  Cash deposits and certificates of deposit (CDs), unlike stocks, offer assurances that you will get your money back no matter when you want it. But these “cash vehicles” pay extremely low returns.  Deposits — whether at commercial banks, savings banks, credit unions, or money market mutual funds — all pay less than one percent a year.  CDs pay a little more, but you must tie up the money for at least a year to get that higher rate of interest –– and you will pay a penalty if you take it out early.  This post will give you more detail.  In all cases, the returns on deposits are less than the rate of inflation.  The cost of living, in other words, is rising faster than what the investor can makes on deposits of any kind.  The real buying power of what you invest in these instruments will decline, even though the dollar amounts you get back will rise. 

–Quality bonds offer yields above the rate of inflation, but only slightly.  That might have an appeal, but the yields are still low.  What is more, the odds are good going forward that the yields will rise, which means that the bonds you buy today will lose value tomorrow.  For an explanation, see this post.

–You can get a higher rate of return if you are willing to invest in the issues of companies that are less credit-worthy.  But when you invest in these so-called junk bonds, you risk fluctuating prices or even the outright bankruptcy of the issuer, which makes this alternative as volatile and emotionally fraught as stocks.

–You could turn to commodities — precious metals, industrial metals, foods, etc.  If the economy does well, these prices will rise, as will stock prices.  But as with stocks, there is a significant downside on commodity prices should economic prospects deteriorate.

–You might take your investment funds overseas. Stocks and bonds in other developed markets — Europe, Japan, Australia, Taiwan — have all the same potentials and risks as those in the United States, so they hardly offer a haven for those wanting to flee volatility.  They do have a place in a portfolio, as explained in this post but they are not a hiding place for the frightened.  Emerging markets, as explained in this same post, have appealing long-term characteristics, but are actually more volatile than U.S. stocks.

If you want to be “cute” and take the risk, you might take some money out of equities and sit on it in the expectation that some future disappointment will bring a stock price retreat, and then you might redeploy that money effectively. I described this strategy here.  “Cute” is the best way to describe it, because it violates the basic principle that stocks are for the long term, and no investor, no matter how clever or well informed, can time market swings.