Crystal Balll2

Much Ado about Nothing

Crystal Balll2

As we noted in our review of the third quarter, the market essentially shrugged off the government shutdown that began on midnight of September 30th. The far bigger issue appeared to be the looming October 17th deadline for raising the debt ceiling limit. There were a lot of apocalyptic articles and interviews such as this one, and several people asked us what defensive moves we would make in our portfolios. Our answer, of course, was that we would ride it out, as we have with all the past political crises. As of today, 10/16/2013, this crisis appears to have been resolved, with both the House and Senate approving a resolution to keep the government open and raise the debt ceiling limit, at least until January 15th.

Here is a summary of how it played out:

                               S&P 500 Index Level                   10-Year Treasury Yield

9/30/2013               1,681.55                                           2.62%

10/7/2013               1,655.45 (Low Point)                        2.63%

10/16/2013             1,721.54                                           2.67%             

If an investor had attempted to time the market by selling on September 30th and buying back on October 16th, he would have missed a gain of 2.4% and he would have had to pay the taxes and transaction costs associated with the trades. Of course, in the middle of this period (October 7th) he would have felt vindicated for missing the 1.6% loss. Needless to say, he would have had to buy back in to capture the subsequent 4.0% gain. Therein lies the problem with market-timing—to profit from it, you have to be right twice, and pretty much nobody can do that. The lack of movement of the yield on the 10-year Treasury shows that the bond market was not anticipating a default on government debt, implying that individual investors had no real reason to assume it was going to happen.

IFA’s views on time picking (or market-timing) are fully delineated in Step 4 of the 12-Step Recovery Program for Active Investors. To summarize, to be a successful market timer, you need to be correct in at least 70% of your calls, and the so-called market gurus are correct in 50% of their forecasts, exactly what we would expect from chance alone. We will close with the words of one of our favorite authors, Charles Ellis, who said, “Market timing is a wicked idea. Don’t try it—ever.”