Buttonwood

Why you should ignore the siren call of market timing

Few manage to profitably outwit the herd



Here is a sage piece of investment advice you might not usually find in any tip-sheet, newsletter or “thoughtful” weekly column on capital markets. 

It comes from Will Rogers, a popular entertainer and wit of interwar America, via the writings of Paul Samuelson, a Nobel prizewinning economist and wit of post-war America. Are you ready? 

Here it is. 

You should buy stocks when they are going to go up. 

When they are going to go down, you should sell them.

Nice work if you can get it, quipped Samuelson. 

It is a shame only a few can. 

Yet the idea of timing the market—all ups, no downs—remains a seductive one. 

Anyone who invests in equities has at one time or another fancied they can sell at the top and buy again at the bottom, thus enjoying the return from stocks while avoiding the risks. 

It seems simple. If stocks are dear and investors look heedless, you should get out of the market. When it falls back, as it surely must, fill your boots.

There is a lot of this thinking around just now. The cyclically adjusted price-earnings (cape) ratio, a measure of value constructed by Robert Shiller of Yale University, has rarely been higher. 

The combination of social media and low-cost trading apps aimed at small investors is behind a lot of herding into faddish stocks, a signifier of toppy markets. 

In such circumstances it is tempting to try to outwit the herd. But market timing is harder than it looks. Few have the skill, temperament or the focus to do it profitably.



Stock prices are noisy. 

The axiom used to be they are a random walk: their current levels tell us nothing about where they are going. A less purist view has since emerged. 

This says the earnings yield—the inverse of the cape—is a decent guide to the expected returns on equities in the longer run. 

Put simply, high stock prices now mean lower returns in future. At today’s cape, expected returns are well below the long-run average, just as they were in the late 1920s and the late 1990s (see chart).

The sharp-eyed will notice that whenever stock prices have gone up a lot faster than earnings, they tend to fall back again. 

But would-be market timers could not have known precisely when to sell. It is never obvious that the cape is close to a peak or trough. 

Studies of timing guided by valuation metrics such as the cape show disappointing results compared with just buying and holding stocks for the duration. A big problem is selling too early. 

As Samuelson, who wrote a lot about the perils of timing, once put it: “Anything can be carried on to twice where it has already reached.” 

When the market does crater, it is not so easy to act. 

It takes nerve to buy when everyone is selling. 

Delay seems wise. Prices could always fall again. 

The fate of many a market-timer is to buy stocks back at higher prices than those at which they sold.

Despite today’s low expected returns, shares still have some appeal, because of the paucity of returns on offer in other asset markets. 

In the late 1990s, when the cape soared above 40, the yield on inflation-protected Treasuries was close to 4%. 

Today it is -1% on the ten-year bond. 

If low real rates are the main prop for share prices, then any attempt to time the stockmarket is in essence a bet on the bond market—and, in turn, on how inflation evolves, and how central banks react to it. 

Good luck with getting those calls right. 

The forces behind the decades-long decline in real interest rates and quiescent inflation are not well understood even by people who have spent a lot of time thinking about them.

It is hard for most investors to make judgments about whether, when and how quickly these secular trends will go into reverse. Yes, there is something screwy about negative real bond yields. 

In America they are a novelty. But in Europe and Japan they have lasted for far longer than many people thought possible. 

Agnosticism about their future path is probably the best policy.

It would be lovely to have ups without downs. But investment rewards generally come with risks. 

The advice from market-timing sceptics like Samuelson is of the mom-and-apple-pie kind. 

Sell down your stockholdings to the sleeping point, where you can rest easy at night. 

Spread your bets widely across stocks and geographies—stockmarkets outside America have lower cape ratios and higher expected returns. And remember, timing is a snare. 

If there were reliable trading signals, everyone would follow them. 

And then there would be no one to sell to at the top and no one to buy from at the bottom.

Competence is Joe Biden’s best strategy

Democrats have to prove that government can work — and Republicans are determined to prove the opposite

Martin Wolf

                                                                                                                                   © James Ferguson


Will President Joe Biden succeed? Like many others, at home and abroad, I desperately hope so. But first we need to agree on what “success” means. It means, above all, restoring order to his country’s politics. 

That requires making the present direction of the Republican party politically untenable. Without that, hope of restoring democratic stability at home and a leading role for the US in the world may be in vain.

In his heart-lifting inaugural address last week, so different from the rantings over “American carnage” of his predecessor, Mr Biden declared: “We have learnt again that democracy is precious. Democracy is fragile. And at this hour, my friends, democracy has prevailed.” He was right, on all points.

Yet “this hour” is not forever. The forces that brought Donald Trump to power have not vanished. As Princeton University’s Jan-Werner Müller, an expert on populism, remarks, “Populists cleverer than Trump smother democracy slowly through legal and constitutional machinations.” 

Mr Trump may be gone. Trumpism is not. As the Indian writer Kapil Komireddi has noted, the fusion of big business with bigotry is potent. The US wealthy have certainly prospered. (See charts.)

In the Roman empire, it was said that all roads lead to Rome. This time, they have to lead from it. 

If the US is not restored to political health, it can do little. The triumph of deceit, incompetence, unpredictability, indifference and xenophobia under Mr Trump has damaged trust in the US among its allies and respect for it among its opponents.


These will not be restored by Mr Biden’s fine words or even such welcome actions as the return to the World Health Organization and Paris climate accord. 

They will be restored by palpable success at home. 

Barack Obama was followed by Mr Trump. The next transition might be to someone worse.

As now-confirmed Treasury secretary, Janet Yellen, told Congress a few days ago, “With interest rates at historic lows, the smartest thing we can do is act big”. The administration’s “American rescue plan”, which proposes spending of $1.9tn (around 9 per cent of gross domestic product), is a sensible start. 

It should, if agreed by Congress, strengthen confidence and support recovery. But will anything like this be passed? 

Having rediscovered the fiscal rectitude they abandoned in passing Mr Trump’s tax cuts in 2017, the Republicans will surely fight hard to prevent it.


Yet, as Ezra Klein of the New York Times notes, to succeed the administration needs visible success, sufficient to avoid defeat in the 2022 congressional elections from an already fragile position. 

The Democrats have to show that government can work, against opposition from a party determined to prove the opposite. Making government fail is the Republican strategy. They will not abandon it.

Timing is everything in politics, much of it luck. Mr Biden may be a lucky leader. Although the economic damage to the US from Covid-19 was far from exceptional, the death rate and the hit to employment have been among the worst. 

But the combination of vaccination with stimulus might generate a vigorous recovery this year and next.


Where does the rest of the world fit into this drama? It is a bystander. 

The Peterson Institute for International Economics has produced a valuable set of essays on what a competent US administration could do for the world, and vice versa. 

These make clear — notably those by Maurice Obstfeld, former chief economist of the IMF, and Lawrence Summers, former US Treasury secretary — what active US engagement, particularly in the needed global programme of recovery from the Covid crisis, might mean for the world and the US. 

But good and desirable though such engagement will be, it cannot answer questions about the US’s future role in the world, because that depends on what happens at home.


The next few years may give answers to some huge questions. 

Will the US be engaged, indifferent or hostile? 

Can it restore a trusting relationship with its allies? 

Will it forge a durable relationship with China, which balances the need to compete with the requirement to co-operate, while avoiding severer conflict? 

Will it play a leading role in dealing with the challenges of the global environment and poverty?

The answer to all these questions will ultimately depend on the biggest question of all: is the US going to return to being a stable democracy? 

Mr Biden hopes it can be. But if the Republican party is unable to return to being a normal conservative party, remaining, instead, suffused with the lies and fantasies of rightwing populism, the prospects are grim.


Many of the underlying racial, social and cultural resentments will remain, as will the political over-representation of the right. But the needed shift can still occur, provided the Biden administration proves rather quickly that competent government by people who believe in it can deliver. 

It must show Ronald Reagan’s famous statement that “the nine most terrifying words in the English language are: I’m from the government, and I’m here to help” is wrong. 

Trust in sound and decent democratic governance is not freedom’s enemy, but among its most important guarantees.


Who, apart from the administration, can help make this shift work? 

The answer above all is business and the wealthy. 

They have been given clear warning of the dangers of marrying pursuit of their interests to the rightwing populism now consuming the Republican party. 

If they have any decency, they will stop. 

This is not a game. 

Mr Biden may be a last chance for US democracy.

The Real Force Driving the GameStop Revolution

Individual traders banded together this past week to move markets like never before. But the buildup to this remarkable moment has been happening for decades.

By Jason Zweig

PHOTO ILLUSTRATION BY SEAN MCCABE; PHOTOS: ISTOCK(9); ASSOCIATED PRESS; ZUMA PRESS(2); BLOOMBERG 



This was the week when a bunch of amateur traders made Wall Street’s finest look like idiots.

From Jan. 25 through Jan. 29, a ragtag army of individuals sent shares in GameStop Corp. GME 67.87% up 500%, and sent many others skyrocketing too. 

In three days, many of these stocks gained more than most do in a decade. The hedge funds on the other side of these bets lost billions.

This movement is the culmination of nearly five decades of the democratization of markets set off by none other than the late founder of Vanguard Group, Jack Bogle.


For all the hyperventilating over this week’s financial revolution, though, investors should regard it as the latest phase in a long evolution—and unlikely to disrupt markets overall.

Still, this is a remarkable moment. 

It’s as if a bunch of couch potatoes watching a Los Angeles Lakers basketball game on TV belted down their beer and nachos, barged onto the court—and proceeded to block LeBron James’s shots and mercilessly dunk on Anthony Davis.

Amateur investors have always had advantages over professionals: They can invest for the long run and ignore the short term, since they can’t get fired for underperformance and don’t have clients who give them money (or take it away) at the worst time.

Now, however, amateur traders are asserting their advantages, too. 

They can communicate instantaneously, band together by the thousands—millions, perhaps—and buy or sell commission-free.

Thousands of members of WallStreetBets, a forum at the online community reddit.com, have been leading the swarm of amateur individual traders buying stocks that hedge funds and other institutional investors were betting against.

It’s as if a bunch of couch potatoes watching a Lakers game on TV barged onto the court and dunked on LeBron.

Moving in sync and en masse, such traders can drive a stock way up or down even if each trader commits only a few dollars. 

Professionals, on the other hand, are legally restricted from colluding and incur much higher brokerage costs.

These new mobs of amateur traders resemble swarms of animals that often coalesce in the wild. 

You may have seen videos of an immense school of fish flashing in unison through the sea or a murmuration of starlings forming a vast swirling vortex in the sky.

These swarms shift direction in swift, coordinated bursts to find prey and evade predators.

But it’s simplistic to think of this trading movement as a frontal assault on Wall Street’s elite by Joe Schmo and Jane Doe.

The caricature of this new breed of fast-moving trader is a 19-year-old living in mom’s basement. Locked down and bored by the pandemic, with fewer sporting events to bet on and stimulus checks (or “stimmies”) burning a hole in his pocket, he gets his kicks trading stocks. 

Often, he buys and sells options, which can produce even bigger, faster gains.

There’s some truth to that stereotype. 

The WallStreetBets culture can be rude and crude, seeking short-term thrills with no regard for risk. 

Yet some of its leaders are highly sophisticated, and not everyone piling into stocks this week belongs to WallStreetBets.

Sean Mattingly is a 35-year-old semiconductor engineer in the Portland, Ore., area. He favors a simple, diversified portfolio of low-cost index funds that he almost never trades.

On Jan. 25, Mr. Mattingly was on Bogleheads.org, one of his favorite websites, which advocates long-term investing. There, Mr. Mattingly stumbled on a reference to GameStop’s wild price moves.

Cautious as he is, Mr. Mattingly likes to reserve up to 5% of his portfolio for what he calls funny money. After visiting WallStreetBets, he thought, “Wow, this might be fun. 

I’ll take a chance and see what happens.”

He bought “less than 20” shares of GameStop at about $110 on Jan. 26. Mr. Mattingly says it “absolutely has been fun” owning GameStop, which went as high as $483 this week. 

But, he says, “it has also been really fun to be—without expecting to—part of what is becoming a movement.” (He says he sold at $400 a share on the morning of Jan. 29 and it “felt great.”)

That movement is Mr. Bogle’s monster love-child. 

It’s the culmination of 45 years of relentless decline in the cost of investing that kicked off when the late Vanguard founder launched the first index mutual fund in 1975. 

Stock funds used to carry commissions of up to 8% and annual expenses as high as 2%; now you can buy index funds at zero commission and with expenses under 0.05% annually.

Decades ago, small investors might pay as much as 5% to trade a stock. A stockbroker was a 9-to-5 guy in a paneled office who picked your pocket on every trade. Nowadays, your stockbroker is in your pocket, as apps on your phone let you trade stocks at zero commissions, anytime you want.

WallStreetBets is the ultimate stage of this evolution. Thousands of people can amass small trades into giant pools of capital and whip each other into a collective frenzy.

In what neuroscientists call “dynamic coupling,” the brain activations of different people doing the same task converge, firing in sync. 

In such situations, says Princeton University neuroscientist Uri Hasson, “I’m shaping the way you behave and you’re shaping the way I’m behaving. And coordinated behavior across many, many individuals can generate dynamics that are larger than anything they could produce separately.”

That can also make emotions run high. Although short-selling hedge funds are fairly small in the financial ecosystem and their managers are more often mavericks than members of the establishment, the flash mobs have sometimes portrayed them as Goliaths.

And when, on Jan. 28, leading online brokerage firms restricted buy orders for some of this month’s hottest stocks, thousands of small traders took to social media simultaneously to express outrage, demand redress and exhort each other to “HOLD THE LINE,” by not selling their shares.

While the David-versus-Goliath narrative was always overblown, the populist anger against brokerage firms for restricting trading is real—and immediately was mirrored in Washington, where several members of Congress called for investigations into the matter.

This market moment, with its surge in technology-fueled social speculation, is an echo of 1999 and early 2000, when television ads for brokerage firms celebrated moms day-trading in their pajamas and claimed that tow-truck drivers could afford to buy tropical islands.

It’s also reminiscent of 1901, when investors with widespread access to the telegraph and telephone bubbled with enthusiasm over the new century. 

Total trading volume on the New York Stock Exchange doubled from the year before to a then-unheard-of 209 million shares. 

On April 24 that year, two-thirds of all of Union Pacific Corp.’s outstanding shares changed hands. 

Across the NYSE, annual turnover, a measure of how fast stocks trade, hit 319%, a record that wouldn’t be surpassed for roughly another century.

At thousands of so-called bucketshops, individuals gambled on whether stock prices would go up or down without having to buy any stock. 

Taking directional bets as small as $5 or $10, far below the minimum then required by legitimate firms, the bucketshops boomed—even though they were illegal in many states.

“The desire to get rich without labor has prevailed among men at all ages,” wrote the journalist and economist Horace White in 1909, “and will doubtless continue as long as human nature remains unchanged.”

That brings us back to today’s flash-mob traders. Beyond the few stocks that are their favorite playthings, how have they affected the stock market as a whole?

At the SPDR S&P Retail exchange-traded fund, which seeks to own approximately equal amounts of its roughly 100 holdings, GameStop reached 19.9% of total assets on Jan. 27. But such small and specialized funds are only droplets in the roughly $42 trillion ocean of the U.S. stock market.


As of Dec. 31, heavily shorted stocks like AMC Entertainment Holdings Inc., BlackBerry Ltd. , iRobot Corp. , and others lately favored by the flash mob made up only 0.13% of the S&P 500 and only 4% to 5% of leading indexes of small stocks, according to Matarin Capital Management, an investment firm in New York.

By Jan. 27, the most-shorted stocks still accounted for only 0.17% of the S&P 500. 

They did roughly double to 8.6% of the S&P 600 Small-Cap index and 11% of the Russell Microcap index. 

But investors who are well diversified aren’t likely to feel a major impact.

Volatility for the S&P 500 so far in 2021 is up a bit but still ranks almost exactly in the middle of its levels recorded since 1928, according to Distillate Capital Partners LLC., a Chicago-based investment firm. 

Even the S&P 600 index of small stocks, which includes GameStop and several other flash-mob favorites, has fluctuated about one-third less sharply in 2021 than its long-run average.

Taken together, these indicators suggest the flash mobs haven’t had significant effects outside the two- or three-dozen stocks they love to trade the most.

The momentary computer-trading glitch that triggered the “flash crash” of May 6, 2010, was distressing to anyone who traded within a narrow time window but left longer-term investors unscathed. 

Similarly, this latest upheaval will likely have a bigger impact on investors’ attention than on their portfolios.

The financial flash mobs may be a symbol or a symptom of the populist disruption that has swept the world in recent years. 

They aren’t likely to be a cause of it.

COVID-19 and the Doomsday Clock

In 2021, the Doomsday Clock will remain at just 100 seconds to midnight, indicating an alarmingly high level of existential risk to humanity. Although some promising developments could have moved the clock back from the brink, the COVID-19 pandemic showed that we cannot take stability and competent governance for granted.

Gro Harlem Brundtland



OSLO – Last January, my fellow Elders Mary Robinson and Ban Ki-moon participated in the unveiling of the Doomsday Clock, the annual indicator of global catastrophic risk published by the Bulletin of the Atomic Scientists. 

In 2020, the clock’s hands moved closer to “midnight” than they have ever been – just 100 seconds away – and they will remain there in 2021.

With an economic rescue plan that is both ambitious and well targeted, US President Joe Biden and his team have demonstrated a clear understanding of the scale and range of action that the current situation requires. 

A broader reconstruction plan can and must come later; but crisis management remains the order of the day.

It is hardly reassuring that we came no closer to midnight this year. The COVID-19 pandemic has served as a stark and deadly demonstration of the precariousness of our way of life. 

We have made remarkable progress on vaccines, and a new US administration brings hope of renewed multilateral cooperation. 

But there is no doubt that the future will be rife with existential threats: new pandemics, the climate crisis, nuclear conflict, and other risks that we cannot ignore.

Post-pandemic political leadership will be a crucial test of the world’s ability to rise to these challenges. 

Too many of our leaders have been found wanting. 

The virus has claimed some two million lives and wrought economic devastation worldwide. 

While mass vaccine rollouts offer some people a glimmer of hope, most of the world’s population will remain unprotected for quite some time.

To be sure, US President Joe Biden’s decision to re-engage with the World Health Organization is a welcome signal of America’s renewed commitment to multilateralism, as is his signing on to the COVAX scheme for equitable vaccine distribution. 

But WHO Director-General Tedros Adhanom Ghebreyesus has warned that unless we do more to ensure that COVID-19 vaccines are produced and distributed according to the principles of universal health coverage (UHC), the result will be a “catastrophic moral failure.”

As a new report by The Elders shows, fully overcoming COVID-19 and equipping ourselves for future health emergencies requires remodeling global public-health policy around three key pillars: preparation for future pandemics; ensuring UHC at national and global levels; and promoting healthier societies through holistic policies and social development.

No part of this agenda is revolutionary or too complicated to deliver quickly and at scale. Some of the countries that have performed well during the pandemic – including Thailand and Vietnam, which have reported barely 100 COVID-19 deaths between them – are already implementing this type of strategy. 

The challenge, as ever, is to back words with action, and to ensure that our efforts are properly funded and designed not to overlook the needs of the poor and marginalized.

Nowhere is this more essential than vaccination policy. The rapid development of not just one but several vaccines in less than a year is an incredible achievement and a triumph of human ingenuity, innovation, and cooperation. 

But it would be unpardonable if these precious vaccines were not equitably distributed around the world. In a pandemic, we cannot hope to recover fully or repair our social fabric unless we affirm and apply the principles of multilateralism and solidarity.

One of the most important lessons from the COVID-19 crisis is that short-termism and nationalism have weakened global health policy. 

It is now clear that national moves toward UHC must go hand in hand with multilateral efforts to strengthen public health systems globally.

To equip these systems for future pandemics, all stakeholders should define pandemic preparedness and response as a “global public good” that necessitates a multilateral approach, with states and global institutions pooling resources, capacity, and expertise. 

Equally important is support (and respect) for the ongoing work of the WHO and other bodies specifically charged with pandemic preparedness, including the Global Preparedness Monitoring Board (which I co-chair) and the Independent Panel for Pandemic Preparedness and Response.

In economic terms, investing in preparedness to strengthen health security offers excellent value for money. 

In the case of the Global Preparedness Monitoring Board, an annual global expenditure of around $5 per person could avert a repeat of the COVID-19 disaster, which has already cost the world economy more than $11 trillion. 

And a similarly high rate of return can be found in UHC reforms, which have been shown to bring countries rapid health, economic, and societal benefits at all income levels.

We must act on the lessons of the COVID-19 crisis to create a new “Bretton Woods moment” of innovation and creativity in the service of global governance. That is the only way to protect our shared planet and its population over the long term.

There is no question that we have the capability to solve the collective challenges we face. But we now need Biden and other global leaders to grasp this opportunity and commit fully to sustained multilateral cooperation. Now, as always, moving the hands of the Doomsday Clock away from midnight is a matter of political will.


Gro Harlem Brundtland, a former prime minister of Norway and director-general of the World Health Organization, is a co-chair of the Global Preparedness Monitoring Board and a member of The Elders.