The WSJ reviews this idea today; They make some subtle distinctions about the idea of timing:
“A study from New York University’s Stern School of Business suggests market-timing can work for some mutual-fund managers. The best stock-pickers during economic expansions also show some market-timing ability in recessions, the study found.
But academic research raises doubts that the typical fund manager can successfully time the market over the long haul . . .” (emphasis added)
That is a new slant on timing; we’ve evolved from “You cannot time the market” to “most find managers cannot time the market” — a subtle but important distinction. However, the Journal goes awry with this statement:
There are a couple of reasons why the deck is stacked against market-timers, Mr. Ekholm says. Market-timing requires more trading, and transaction costs hurt performance. What’s more, while a manager may relatively easily dig up some unique information that gives him an edge in selecting an individual stock, it’s difficult to get such superior information about the overall market.
That paragraph is mostly wrong because:
1. “Superior Information” is a misnomer. In 2005, there were lots of people discussing Housing, Derivatives, Credit. What often occurs at key turning points is that widely understood — but heavily doubted — information about the market gets ignored.
I prefer to call this Variant Perception; To take advantage of it, you need some methodology/model (call it a belief system if you like) that you have enough confidence in you can rely on it in order to buck the crowd
2. Think about this in terms of Capital Preservation strategies versus pure market timing. The potential losses (i.e. 2008) versus the modest costs/taxes of a major negative event are vastly asymmetrical;
3. In terms of pure Timing, the secret isn’t finding superior dope; rather, it is understanding what to do with existing information at key turning points. Various timing metrics will reach extremes, and trading off of that information requires a rare skill set.
You may have different views on both timing and cap preservation, but these have worked well for me . . .
Attention Allocation over the Business Cycle
Marcin T. Kacperczyk (NYU, NBER) Stijn Van Nieuwerburgh (NYU, NBER, CEPR) Laura Veldkamp, (NYU, NBER)
September 22, 2009
More Mutual Funds ‘Time’ Market
WSJ, NOVEMBER 12, 2009
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