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Paul Dykewicz
Paul Dykewicz
Articles (2) 

Buffett, Bogle and Siegel Miss Out by Not Using Market-Directional Investing, Portfolio Manager Says

There is a good alternative to Warren Buffett's buy-and-hold strategy by investing bullishly when the market is rising and bearishly when it is falling

January 14, 2018

Warren Buffett (Trades, Portfolio), John Bogle, Jeremy Siegel and many major financial companies are wrong about favoring buy-and-hold investing rather than basing their decisions on the market’s direction, said Mike Turner, founder of Turner Trends Tools and president and chief portfolio manager of Turner Capital Investments, LLC.

Turner’s rationale for letting the market’s direction dictate when to buy and sell investments is based on his assumption that investors want to profit in bull markets and guard against big losses in bear markets. In contrast, a traditional buy-and-hold strategy assumes that the market will recover from bearish downturns because they have done so in the past, but Turner warned that it leaves investors at risk for “significant losses” that can take years to recoup.

By sidestepping the worst of market reversals when the trend no longer is an investor’s friend, Turner said losses can be cut substantively and the time required to recover from the setback is reduced. To that end, Turner devised an investment model based purely on math that postulates an investor can get into a bullish market relatively soon after a market bottom and get out of the market shortly after a market top. An investor also can short the market once a bear market trend has been mathematically identified, he added.

With extensive back-testing, Turner said his methodology achieves results and is not predicated on human interpretation of market events or the ever-changing price of SPDR S&P 500 ETF (SPY). He favors the use of algorithms to guide his preferred “market-directional investing” that assume:

  • Entry and exit prices are not adjusted or impacted by trade volume, availability of shares or time of the trade; and
  • A trade that is triggered due to an opening, closing, high or low can be executed for the number of shares desired at those prices.

For investors who have a long-term investment horizon, a buy-and-hold strategy may seem fine. Indeed, some of the world’s most celebrated investors agree and invest that way.

“Logically and mathematically, buy and hold is a winner’s game” and “trading is a loser’s game,” Vanguard founder John Bogle once said. Another proponent of long-term “buy and hold” investing is Jeremy Siegel, a fan of dividend-paying stocks and a finance professor at the University of Pennsylvania’s Wharton School.

A third prominent advocate of this approach is Warren Buffett, who arguably is the foremost portfolio manager alive. In fact, Buffett won a $1 million bet for a girls’ charity by beating the 2.2% average return of a basket of hedge funds that failed to match the 7.1% compounded annual returns[PD1] over a 10-year period of the S&P 500 stock index fund preferred by the so-called “Oracle of Omaha.”

Bogle, Siegel and Buffett are far from alone in their preference for buy-and-hold investing. But Turner said buy-and-hold advocates tend to regard those who do not follow their strategy as market timers.

This traditional categorization is one of the underlying reasons many investors are talked into buy-and-hold investing, which arguably is “one of the riskiest” investment strategies, Turner said.

Rather, Turner said he prefers market-directional investing, which he considers a superior alternative to buy-and-hold investing and market timing. He defines them as follows:

  • Buy-and-hold investing involves buying high value, fundamentally strong equities and keeping them for long periods of time, while ignoring the vagaries of the stock market or the interim price fluctuations of the equities. For this methodology to work successfully, an investor must not need the money and needs to ignore massive losses in bear markets.
  • Market timing is the strategy of attempting to predict the future direction of the market, typically through technical indicators or economic data. Investors switch among stocks, exchange-traded funds (ETFs) and mutual funds to profit from the changes in the market outlook, not an asset, based on technical or fundamental analysis.
  • Market-directional investing hinges on an assumption the market or any equity will remain on its present trend until it ends. The key to knowing when to be in the market or out of the market is constantly to measure the market trend and react appropriately when the trend changes. The strategy is aimed at investing bullishly in bull markets, going to cash in transition markets and becoming bearish in bear markets.

Below is a performance-analysis chart that shows market-directional-investing of the S&P 500 via the SPY and the Dow Jones Industrial Average (DJIA). The chart assumes the investment strategy changed from bull to neutral to bear and vice versa, after the market had topped or bottomed. The investment bias never changed until after the market had changed direction. The years analyzed are 1929-2017:

The bottom line is the DJIA is overlaid with a line showing the “Turner Band,” which indicates when to be bullish, neutral or bearish. This band represents the 200-day moving average of the DJIA, plus and minus one standard deviation of normal volatility of the Dow. This “Turner Band” provides a clear indication of when to be bullish (above the band); move to cash (inside the band); or short the market (below the band).

Most buy-and-hold advocates decry moving in and out of the market as nothing more than whip-saw action. Yet Turner shows that, by using his Turner Band, whip-saws are avoided, significant losses are avoided; thus capturing upside profit in both bull and bear cycles. The blue line represents the total return when the strategy is 100% invested in the DJIA, is trading above the Turner Band and is in cash at other times. With the market-directional approach, there are no major losses incurred due to bear markets and/or bear market corrections.

The strategy goes to cash when the market falls into or below the Turner Band. This results in a gain of nearly 12,000%, compared to a gain of nearly 7,000% using a buy-and-hold strategy. Plus, market-directional investing removed the risk of all major market crashes, including the seven times the market plunged by more than 50% between 1929 and 2017.

The green line on top in the chart above shows the results when the investment strategy is 100% long, the DJIA is trading above the Turner Band; 100% cash when the DJIA is trading inside the Turner Band; and 100% short when the DJIA is below the Turner Band. This results in a gain of nearly 300% better than the buy-and-hold strategy favored by Buffett, Bogle and Siegel.

About the author:

Paul Dykewicz
Paul Dykewicz, www.pauldykewicz.com, is the editorial director of Eagle Financial Publications, editor of StockInvestor.com and DividendInvestor, a columnist for Townhall, Townhall Finance and Seeking Alpha, a commentator and the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by legendary football coach Lou Holtz. Follow him on Twitter @PaulDykewicz. Aside from writing for a number of investment websites, Paul edits investment newsletters, time-sensitive trading alerts and other investment reports. He is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, USA Today and other publications, in addition to having served as business editor of a daily newspaper in Baltimore. Paul received his MBA in finance from Johns Hopkins University, where he was a two-time president of the school's Finance Club. In addition, Paul has a bachelor's degree from the University of Michigan and a master's degree in journalism from Michigan State University. Outside of work, Paul volunteers with a faith-based organization to teach the poor in Southeast Washington, D.C., personal finance skills to lift themselves out of debt.

Rating: 2.3/5 (6 votes)



Michaelfwille - 2 years ago    Report SPAM

I have no interest in attempting to time the market nor do I believe that it is a coincidence that those who do are not among the world's richest people.

Dirt2624 premium member - 2 years ago

Why is Buffett on his list - $100Billion in cash ready to buy when the next bear arrives seems like a nice chunk of change to do some shopping with when intrinsic value rises above price again.

Siegel is of the school that price is always the same as intrinsic value which is about as brain dead as you can get. It must be a great embarassment to the Wharton school he represents - lol.

Bogle is somewhere in the middle - more of a dollar cost averaging meme for index investing.

Paul Dykewicz
Paul Dykewicz - 2 years ago    Report SPAM
Thanks for your comment. Warren Buffett (Trades, Portfolio) is an advocate of buying good companies and holding them as they and their share prices grow. Buffett is not alone in watching and waiting for new opportunities to invest for the long haul when valucations warrant, whether a bear market hits or something worth buying emerging before then.

SeaBud premium member - 2 years ago

Do not confuse timing with opportunity. The Turner band is a reflection of the past. This may, or may not, represent opportunity. Opportunity is defined unrelated to timing. Opportunity is when intrinsic value exceeds price. Intrinsic value has many indicators (book value, FCF/owner earnings, rev growth). Substituting "market direction" for analyzing value makes no sense. If you are going to analyze value, analyze it, not a proxy for it.

Buffett holding cash illustrates a lack of opportunity, not a conclusion as to timing. I gaurantee that if a large opportunity was exposed in this currently richly priced market, Buffett would jump.

There is zero evidence that market timing (especially based on historical quantitative measures) is effective over time. This applies to timing based on "value" or "market direction." Take the transaction costs, lost dividends and tax implications into account and see how the author's model does. He says "there are no major losses due to bear markets" - I consider a 20% or 35% (short term tax on gains) hit on my profits a major loss. Put it this way - where is the actual outperformance of this system rather than charts of historical backdata based on an algorithm tailored to optimize results from said backdata?

Very fancy to call something "market directional" as opposed to discredited "market timing". Despite the label, consider the description: "The key to knowing when to be in the market or out of the market is constantly to measure the market trend and react appropriately when the trend changes. The strategy is aimed at investing bullishly in bull markets, going to cash in transition markets and becoming bearish in bear markets." Nobody bases "market timing" on "time". They all use some valuation proxy to justify timed market entry/exit. This is market timing using a proxy buy/sell signal.

Personally, I prefer to buy anything when it is cheap and sell when it is expensive. That means buying more in bear markets and sitting on more cash in bull markets. That is not timing, but represents opportunity. The most consistent measure of value, in my opinion, is value. If one of my holdings becomes egregiously overvalued with limited further value growth and risk that exceeds tax losses on gains, I sell. That is a high bar.

Stephenbaker - 2 years ago    Report SPAM

With all respect, so-called market directional investing looks as if it can be accomplished by placing a portfolio on auto-pilot. Sounds simple enough in theory, particularly when such a math-based strategy can be contolled by computers. Has Mr. Turner and his prodigy used the strategy with real investiment capital and published their investment results? Surely claims of outperfomance such as those suggested by the charts associated with this post should be accompanied by verified performance results as oppsed to theoretical backdating vs. certain indices. Like some of the prior comments, it seems difficult to differentiate between market timing and market directional investing; both are predictive as to current and upcoming macro trends that may or may not play out. When and if any market timer (or "directional investor") achieves long term results in the same league as Buffett and/or consistent outperformance of the SPY, I'd be interested to learn more.

LwC - 2 years ago    Report SPAM

market directional investing = momentum investing? That's what it looks like to me.

So maybe nothing new here, except maybe the quant aspect, which is a very popular ingredient nowadays with promotors who are raising money.

It might be interesting to note that some studies show “momentum” investing can produce above average results over time, but not particularly better than “value” investing.

Zhu - 2 years ago    Report SPAM

Paul Dykewicz
Paul Dykewicz - 2 years ago    Report SPAM

Attached is a chart that compares Mike Turner's Market-Directional Investment Methodology to Berkshire-Hathaway for past 10 years.

Stephenbaker - 2 years ago    Report SPAM

Paul, as per my earlier comments, there is a significant difference between actual results and a methodology. Methodologies are nice in theory but have you determined whether Mr. Turner followed his so-called methodology with his own (or his investors') investment capital?

LwC - 2 years ago    Report SPAM

Apparently Mr. Turner claims that investors who follow his trading advice can “make gains of 70% annually.”

Hahahaha…yeah, sure.

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