October 21st, 2011

I Stick by Market Timing

I don’t usually quote another blog verbatim but I thought this one was timely and relevant. After issuing an “all-cash” warning on August 11 after the market closed at 1172.63. Afterward, the market got stuck in a 3-month trading range fluctuating between a low of 1099.23 and Tuesday’s 1225.38. With positive vibrations from Europe and quarterly earnings reports here, some claim that the market has today successfully escaped the trading range. New doubt is now cast on the ability of investors to successfully time the market and the value of doing so.

The blogger and Director, Portfolio Manager at Sitka Pacific Capital Management, LLC of Seattle Washington, JJ Abodeely, makes the following quote 1952 about alcohol by one Noah S. “Soggy” Sweat, Jr. as his own. Sweat was a judge, law professor, and state representative in the U.S. state of Mississippi, and became notable for his 1952 speech on the floor of the Mississippi state legislature concerning whiskey, which is considered a classic example of political doublespeak. Reportedly the speech took Sweat 2½ months to write:

My friends, I had not intended to discuss this controversial subject at this particular time. However, I want you to know that I do not shun controversy. On the contrary, I will take a stand on any issue at any time, regardless of how fraught with controversy it might be. You have asked me how I feel about whiskey. All right, here is how I feel about whiskey: If when you say whiskey you mean the devil’s brew, the poison scourge, the bloody monster, that defiles innocence, dethrones reason, destroys the home, creates misery and poverty, yea, literally takes the bread from the mouths of little children; if you mean the evil drink that topples the Christian man and woman from the pinnacle of righteous, gracious living into the bottomless pit of degradation, and despair, and shame and helplessness, and hopelessness, then certainly I am against it.

But, if when you say whiskey you mean the oil of conversation, the philosophic wine, the ale that is consumed when good fellows get together, that puts a song in their hearts and laughter on their lips, and the warm glow of contentment in their eyes; if you mean Christmas cheer; if you mean the stimulating drink that puts the spring in the old gentleman’s step on a frosty, crispy morning; if you mean the drink which enables a man to magnify his joy, and his happiness, and to forget, if only for a little while, life’s great tragedies, and heartaches, and sorrows; if you mean that drink, the sale of which pours into our treasuries untold millions of dollars, which are used to provide tender care for our little crippled children, our blind, our deaf, our dumb, our pitiful aged and infirm; to build highways and hospitals and schools, then certainly I am for it.

This is my stand. I will not retreat from it. I will not compromise.”

JJ’s updated version:

My friends, I had not intended to discuss this controversial subject at this particular time. However, I want you to know that I do not shun controversy. On the contrary, I will take a stand on any issue at any time, regardless of how fraught with controversy it might be. You have asked me how I feel about market timing. All right, here is how I feel about market timing: If when you say market timing you mean the loser’s game, the fool’s errand, the speculator’s effort that separates savers from their capital, turns investors into gamblers, lines the greedy pockets of brokers, strategists, and newsletter writers, challenges the irrefutable logic of efficient markets, yea, literally plunders the wealth from widows and retirees; if you mean the evil action that disrupts the well counseled man and woman from the pinnacle of appropriate strategic asset allocation, balanced objectives, long-term orientation into the bottomless pit of fear, and greed, and meaningless noise, high expenses, and tax inefficiency, and short-termism, then certainly I am against it.

But, if when you say market timing, you mean assessing fundamental value compared to price, favoring undervalued assets while avoiding overvalued ones, always demanding a margin of safety and being in cash when none exists; if you mean being opportunistic and forward looking, buying low and selling high; if you mean the activity which saves investors from catastrophic and permanent losses of capital, achieving positive absolute returns, the endeavor that avoids following the herd up the mountain of excess and over the cliff of despair, favoring instead consistent compounding of modest returns, and the ability to sleep well at night; if you mean that undertaking which has provided capital as the gasoline for the engines of economic growth and prosperity, protected purchasing power and met future liabilities, funded robust retirements, sustainable wealth transfer, and philanthropic endowments, then certainly I am for it.

This is my stand. I will not retreat from it. I will not compromise.”

I couldn’t agree with you more, JJ (and “Soggy”). Even with the market’s spectacular run since the October 3 low of 1099, I still believe that the risks since August have been sufficiently palpable to have warranted moving everything into cash. The consensus may be that the risks have diminished sufficiently to put some cash back to work.

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