Timing The Market Requires Two Perfect Calls

October 4, 2022 5 Minute Read

This past year has been one of the most difficult I have faced as both an investment professional and an investor. I suspect it has been difficult for you as well. We just had one of the worst quarters since the financial crisis of 2008-09. The S&P is down 24% for the year and 9.3% for the month of September (Y Charts, 2022). Investor sentiment is the worst I can recall in my 23 years in the industry. It is in these moments that it is the most difficult to stay with your strategy. Everything seems to be telling you (especially the media) to sell it all and wait it out.

Unfortunately, if you sell now, you lock in losses and make it nearly impossible to recover. You also can’t be sure when to get back in. Timing the market requires two perfect calls: when to get out, and when to get back in. The time to get out was sometime late last year, and I suspect the time to get back in is right around the corner, but of course I can’t know that. I can, however, look at the markets and see how others are behaving. All the analysts and pundits (or nearly all) are lowering their estimates for the year and predicting gloom. Fear in the market as measured by the ratio of those seeking protection (put buyers) outweighs those who are bullish (call buyers) by a ratio in the 99^th percentile. (Calhoun, 2022) That means this kind of pessimism is seen only 1% of the time. This makes me think of the famous Warren Buffet quote, “Be fearful when others are greedy and greedy when others are fearful.” (Velasquez, 2022)

To put the above into perspective, I revisited Michael Lewis’ movie Moneyball. Faced with a budget of about ⅓ of the bigger teams and a staff stuck in the past, he decides to hire an analyst away from another team to find a solution. The trailer sets it up here, and he presents his solution and strategy to the scouting staff with less than overwhelming support.

Beane’s conviction is tested every step of the way and even his daughter is worried. His relationship with his daughter is one of the extraordinary points in the movie and only Michael Lewis can do it… think The Blind Side. The most touching point of the movie comes near the end when his daughter plays the song The Show for him.