Trying to outfox The Fox

We have always advised strenuously against stock-market timing. And the longer we work at investments, the more convinced we become that no one has much of an edge at timing.

“Fool me once, shame on you; fool me twice, shame on me.” Don’t try to outsmart the market.

It’s true, of course, some portfolio managers establish long records of superior performance. But few consistently beat their benchmark indexes. And few perform in the top half of their categories as often as seven years out of 10.

Nonetheless, the musings of a former star small-cap manager and investment legend in the US, Ralph Wanger, tells us some interesting facts about the investment management business. Mr. Wanger managed the Acorn Fund from 1970 until 2003, when he was presented with Morningstar’s first Fund Manager Lifetime Achievement Award.

In his 1997 book, A Zebra in Lion Country: Ralph Wanger’s Investment Survival Guide, Mr. Wanger relates: “Constantly watching [the companies his fund owns], tracking the economy, the market, the Fed, the dollar, consumer polls and the reams of commentary we get from Wall Street strategists, not to mention engaging in shop talk with friends in the industry, we’d be brain dead if we didn’t develop some kind of opinion about where things are headed.”

Biases will come out

And while Mr. Wanger proclaimed a distaste for market timing whenever the press came calling, he did admit that “when making buy and sell decisions, my bias will come out”.

And then he made an even more remarkable admission: “I will tell you this: if I’d done no such tinkering, I’d have been better off. Sometimes I’m right and sometimes I’m wrong. All in all, my calls are useless.” Of course, Mr. Wanger should have said investors in his fund would be better off.

You cannot do much about the tendency of portfolio managers to trade in an attempt to outsmart the market. But you can avoid doing it yourself.

On the other hand, the fact remains, as prices fall, risk—at least from a valuation standpoint—often declines. So when you have new money, look for opportunities to buy low.

Peter Lynch of Fidelity fame once counselled that you hold a portfolio of about six to eight carefully chosen funds. When you have new money, add it to the fund with the worst short-term record. You could also follow a similar strategy with individual securities.

Some advisers go further. Once a year, they recommend rebalancing your portfolio. Sell part of your holdings that have gone up and buy more of those that have declined in value. Bring your portfolio back to the same relative weightings it had a year earlier.

This is an edited version of an article that was originally published for subscribers in the March 1, 2019, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

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