I confess. I try to time the markets. I’m not supposed to, but I do it anyway. There have been times when it has worked out; there have been times when it hasn’t.
My reasoning for timing the markets was inspired by Howard Marks (Trades, Portfolio). In his book, “The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor,"Â Marks wrote:
“Remember your goal in investing isn’t to earn average returns; you want to do better than average. Thus your thinking has to be better than that of others – both more powerful and at a higher level. Since others may be smart, well informed and highly computerized, you must find an edge they don’t have. You must think of something they haven’t thought of, see things they miss or bring insight they don’t possess. You have to react differently and behave differently. In short, being right may be a necessary condition for investment success, but it won’t be sufficient. You must be more right than others which by definition means your thinking has to be different.”
Marks doesn’t encourage market timing, but my interpretation of that passage is that if you do what everyone else does, then you’re going to get the same results. I find that reasoning to be more convincing than the dogma of traditional investing orthodoxy that dictates that investors should blindly dollar cost average. Let me be clear. I’m not trying to convince anyone to time the market. Passive investors probably should dollar cost average. It’s for each individual to decide.
In a past post, I discussed how Marks’ memo “On the Couch” influenced me to be more aggressive after the market swooned at the start of the year. At the time, there were fears that China was going to take us into a global recession. Oil prices plummeted along with the market swoon. Marks hypothesized that the plunge in oil prices would be stimulative to the global economy and that it would be a good time to put money to work.
Now, Marks has recently released another memo, “Go Figure!” He describes the same surprise many people felt at the election results. He partially muses about political implications and also financial implications. Here are some of the passages related to investing.
“Thus two key observations can be made based on last week’s developments:
- “First, no one really knows what events are going to transpire.
- “And second, no one knows what the market’s reaction to those events will be.
“These observations reinforce my belief that it’s a mistake to base investment decisions on macro forecasts. But you knew that.”
- “(Donald) Trump’s campaign promises have included tax reform, reduced income tax rates on corporations and big earners, some form of tax holiday to enable corporations to bring in profits stranded abroad, a reduction of business regulation (Carl Icahn (Trades, Portfolio) tells me this will be huge), a big infrastructure program ($1 trillion announced), an end to bank bashing, less pressure on pharmaceutical and health care companies to cut prices and an end to the estate tax. That’s quite a pro-business agenda.”
- “At the bottom line – if everything works as promised – there will be massive fiscal stimulus; big increases in GDP growth, corporate profits and jobs; higher inflation than otherwise would have been the case; a big increase in the national debt; and more of everything for everybody.”
“And there are negatives:
- “Trump’s express disdain for Janet Yellen and the resulting possibility that Fed independence will be reduced.
- “His stance on international trade pacts (an area in which a president has unusually broad power to take unilateral action), his threat of imposing import duties on goods made in China and Mexico and the resulting possibility of trade wars.
- “The possibility that this plus his unconventional positions on things such as climate change and defense treaties bode ill for international relations in general.”
Finally on the subject of the market outlook, I’ll pass on some observations from Stanley Druckenmiller (Trades, Portfolio) – the owner of one of the best investment records in history and certainly not someone congenitally biased to optimism (or anything else).
Druckenmiller told CNBC Thursday he's "quite, quite optimistic" about the U.S. economy following Trump's election.
"I sold all my gold on the night of the election," the founder and former chairman of Duquesne Capital said in a “Squawk Box” interview.
He said he's betting on growth by shorting bonds globally, and he likes stocks that respond to growth. He also likes prospects for the dollar, especially against the euro.
This rosier outlook is in sharp contrast to what Druckenmiller said at the Sohn Investment Conference in New York in May. At the time, he told attendees they should sell their stock holdings. He also said gold was his "largest currency allocation."
Despite Druckenmiller's past negativity, he said Thursday, "It's as hopeful as I've been in a long time." He added, "I would not be surprised if we're not looking at the peak of the divisiveness."
"[But] I hope economic policy is deferred to Mike Pence and Paul Ryan," he said, referring to the vice president-elect and the speaker of the House. He pointed out he did not support Hillary Clinton. (Druckenmiller supported John Kasich for the Republican nomination and said he is philosophically in favor of Ryan's economic policies.)”
Parting thoughts
A lot of investors are optimistic about the president-elect’s pro-growth agenda and presumably that’s why the markets have rallied. Policy promises are one thing, but it all depends on execution. For instance, it still hasn’t been determined how the new administration plans to spend on infrastructure. I sure hope it doesn’t build a wall. If Trump is in favor of keeping out criminals, that’s perfectly sensible but building a wall doesn’t strike me as the best use of resources especially when many (if not most) illegals enter the country in a manner that would circumvent the wall.
Spending money on dilapidated roads and bridges that would help commuters spend less time in traffic and speed up delivery times of commodities/consumer goods seems like the better option. The point is the market has rallied on expectation, but the actual work still needs to be done.
Druckenmiller’s interview is below; in it he discussed his reasons for optimism. Druckenmiller is a top-down investor who relies on macroeconomic forecasting. His most famous trade was when he shorted the British pound in 1992 while working for George Soros (Trades, Portfolio). They bet that it was unsustainable for Britain to hold a fixed exchange rate against the German deutsche mark. That trade purportedly made Soros $1 billion.
Start a free seven-day trial of Premium Membership to GuruFocus.
