Wall Street Journal columnist Brett Arends recently penned another piece on the dangers of blind “buy and hold” investing.
Citing a study by Spanish academic Javier Estrada, Arends makes an argument similar to a recent post on The Big Picture that took great interest in the upside of avoiding the market’s worst days.
The study by Estrada, a finance professor at the IESE Business School at the University of Navarra, seems exhaustive, covering, Arends writes, “nearly a century’s worth of day-to-day moves on Wall Street and 14 other stock markets around the world, from England to Japan to Australia.”
Over an investing period of about 40 years, he calculated, missing the 10 best days would have cost you about half your capital gains. But successfully avoiding the 10 worst days would have had an even bigger positive impact on your portfolio. Someone who avoided the 10 biggest slumps would have ended up with two and a half times the capital gains of someone who simply stayed in all the time.
Arends doesn’t come out in favor of trying to hop in and out of the markets day-to-day but he does argue that these gyrations give added value to dividend-bearing stocks which offer a steady, predictable portion of their total return.
In his last piece on this topic published two weeks ago, he argued for actively betting against the herd.
This time, he also makes the case that it is possible, and maybe prudent, for investors to examine the valuation of the equities markets for signs that it might be a good time to exit.
To keep and eye out for the market getting a little too pricey, Arends recommends Yale Professor Robert Shiller’s “Cyclically-Adjusted Price-to-Earnings Ratio.” (Now also known as “the Shiller PE”). That metric shows that investors should have been out of the stock market in 1929, in the mid-1960s, and 10 years ago, Arends concludes.
(See the index below, drawn from a paper on it by Chris Turner.)
I admire Arends’ probing into the tried-and-true axiom that “you can’t beat the market.” If nothing else it forces us to continuously re-evaluate what we believe and why. But toward the end of his piece I wondered if he’d let himself get a bit florid when he questioned whether people failed to get out of the markets during these downturns, including 1929’s, because of broker’s admonitions that “you can’t time the market”.
While of course any stock broker wants to hang on to every cent he’s managing, how wide-spread was that belief before Burton Malkiel’s 1973 classic A Random Walk Down Wall Street?
