Trying to predict the future is a waste of time, money and energy not to mention it also happens to be pretty impossible! And last month showed us just how so. US corporate earnings weren’t as bad as everyone thought they’d be and markets started going up, slowly erasing their losses over the past few months. But if I’m honest with you, this recent stock market rally kinda came out of nowhere and fund managers totally got slapped in the face by a dose of reality! The reality that you cannot time markets and no one (not even the smartest guys) can tell you with any sort of certainty what markets will do, and when.
According to Bank of America, only 28% of active fund managers (aka the fellas charging us the big buck to beat the market) focused on the big stocks managed to beat their (Russell 1000) benchmark. Oops. Not a good piece of advertising! Oh, and this was all styles of funds btw. Growth and value. Made no difference. Less than one-third were able to beat the market. Ha!
Last month was a record. One that will most likely go down in history as one of the very best months for US stocks. Though as we know, when the US market goes up, Europe follows suit. No complaints here! Anyway, last month the S&P 500 enjoyed a 9% rally while the Nasdaq soared more than 17%!
What’s really going on here?
Back to the fund managers. What happened to the 72% that simply couldn’t beat the market? Was it fear that got the better of them or are we missing something here?
From what it looks like, fund managers (with their overweight cash bellies) think the worst is yet to come. And if history’s any guide to go by, bear market rallies can be rather spectacular. But they’re just that, rallies in the midst of a bear market. Gains that were captured during that time will fade and turn into bigger and bigger losses as the bear chews its way through markets.
Whatever happens to the markets, July taught us a fundamental lesson. It showed us how markets literally do as they please, with zero warning, no rhyme or reason. July showed us that markets are truly un-timeable (my new word) and anyone who tried to time them got badly burned. Or they missed out on chunky gains.
The giveaway
If there’s anything that would give us a hint as to whether or not we’re in a bear market rally after all it is if meme (aka trash) stocks are headed for the moon once more! And they most definitely are. Case in point: Bed Bath and Beyond went up 64% as soon as the market opened yesterday. AMC? Forgot that guy? It was up 75% during the last 6 trading sessions alone! Wild stuff indeed.
Every bear market between 1901 and 2015 enjoyed at least one 5% rally. Rallies of 10% or more were found in 60% of the 21 bear markets during that time period. It’s no surprise then that the worst bear markets had the biggest bear market rallies. Post-1929, the Dow went up 48% between mid-Nov and mid-April of 1930. From there on out, it went to fall by 86% only to eventually hit rock bottom in 1932.
A more recent example (and by recent I mean in this century!), was the dotcom bust which saw the Nasdaq stage 8 market rallies all of which were at least 18%! This also included 4 gains of >30% and one with a crazy 56%. With hindsight, we know what came next: the biggest tech bust. And these gains soon found themselves in a pile of losses.
July’s lessons for all of us
Fund managers are paid to look after their clients’ money. And if they think the worst is yet to come, they won’t be so quick to act. My guess is this is precisely what happened in July. They were super sceptics which meant they didn’t wanna be holding all that many stocks. This time, they preferred to shovel clients’ money down sofas rather than risk it out in the open.
But there’s a lesson in it for us, the individual investor. And that is you just can’t time the markets. No one knows what’s gonna happen tomorrow let alone next year. No one knew July would be this good cuz if we did, we’d have all been prepared! Which is why putting your money into the stock market on an ad-hoc, whenever-you-feel-like-it basis is bad and can get you into all sorts of trouble.
For starters: we risk being caught on the sidelines. Being stuck with all that cash and failing to put it work for ourselves. Instead, we let it collect virtual dust and keep the seat warm. That’s not what your cash is there for! It’s there to make us more money. And that ain’t gonna happen by being stuck inside a bank. Paying it 0.1% to be there!
Remember, if you’re investing across asset class, geography, sector and so on, you’re getting the real deal: the only free lunch in finance! So don’t worry about the rest. The future is unpredictable and that’s the beauty of it. (Read here why you should learn to embrace uncertainty). By dollar-cost averaging your way through this, you’ll get to the other side. I know I’ll certainly be doing that. It’ll keep my money & I sane! After all, literally anything can happen in the market and (bringing me onto lesson numero duex) I don’t wanna miss out on gains.
If you’re out of the market, you have no chance of making money from its best days. The days that don’t happen every day. Sure, you won’t be losing anything (not unless you count 10% inflation!) but you also won’t enjoy the gains that come about from being investing. If you choose to burrow your cash away till ‘things get better’ you’ll forever be waiting because there will never be a perfect time to invest.
You can’t plan when things will reverse (for better or worse) and while it’s true that you can’t time the bottom, you most definitely cannot time the top, either. So be in the market 24/7, 365 days a year and you’ll get yourself a nice average of prices, with some sunny days and a few (hopefully not too many) nasty ones. But miss out on the best days and it will be so much harder for your portfolio to make up for that.
Once again, Mr Market has humbled us. And we have taken the humbling. I hope! Read here how investing, in general, is one of the most humbling pursuits out there and why you should be embracing it.
Cheerio!
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.
Knead Your Dough 
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