tag:blogger.com,1999:blog-8152901575140311047.post7083691116325114314..comments2024-03-28T12:49:46.624-04:00Comments on Musings on Markets: Macro and Market TimersAswath Damodaranhttp://www.blogger.com/profile/12021594649672906878noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-8152901575140311047.post-74405481099928495622009-06-15T18:22:14.655-04:002009-06-15T18:22:14.655-04:00Sorry for being verbose.
1) But, my point is tha...Sorry for being verbose. <br /><br />1) But, my point is that it doesn't have to be stock selection vs market timing. Attention to market risk is an important aspect of investing when having a stock selection strategy as well. In fact, stock selection would many a times implicitly factor in market/macro calls - for eg; rotating into consumer staples from consumer discretionary when suspecting a recession - would you call that a stock selection strategy or a market/macro call?<br /><br />I'm contesting the point of pitting one against the other. <br /><br />2) Note also that I'm not equating market timing to only cases of being spectacularly right with catching tops and bottoms which as you say is much more equivalent to buying lottery tickets. I'm arguing for recognition by investors of regimes when market risk is high and tweaking their investments accordingly. That is the definition of market timing/calls that I am using. You would not expect stock selection success to enable you to catch tops and bottoms of individual stocks so why define market timing success by whether someone exactly catches the market top/bottom or not?<br /><br />2) The anecdotes were to discount the importance of being > 50% right in the number of calls (whether its judging stock selection or market calls). They were not to suggest that market timing is a better strategy. <br /><br />3) For evidence I would not look at asset allocation funds and market strategists where the agents do not have skin in the game and are paid by fees only - that would exclude mutual funds and equity research analysts where the incentive to deviate from relative performance to the market is absent.<br /><br />4) Saying that stock selection is a better/easier strategy than market timing is more a statement on market properties than on the strategies themselves - that markets trend upwards over the long term and market risk is low for a majority of the time so that in the long term differentiation is the only game to play. <br /><br />Well, if the market properties change over the long term - if I was in Japan and the Nikkei recently made 20 year lows it is not obvious to me that stock selection was the better and easier strategy during that fairly long term period. Again, I'm not saying that it was easy to catch the tops/bottoms in the Nikkei but it may have been easy to dial down/up portfolio risk based on market cycles.vshhttps://www.blogger.com/profile/06771040126727717916noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-10788973990576269492009-06-15T15:56:37.935-04:002009-06-15T15:56:37.935-04:00There is nothing here that I would contest. Of cou...There is nothing here that I would contest. Of course, you can make more money with good market timing than you could with good stock selection. You can also make more money with the right lottery ticket than you could working at a regular job. The question is both one of probability and the facts. The facts, I am afraid, are against you. Notwithstanding all the anecdotal evidence you can come up with for great market timing, the reality is that market timing when practiced has been a miserable failure. From asset allocation funds to market strategists, the evidence is overwhelming.Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-58079665081372498632009-06-14T11:35:27.071-04:002009-06-14T11:35:27.071-04:001) There are regimes where market risk has overwhe...1) There are regimes where market risk has overwhelmingly large impact on individual stock returns. Stock picking was a pretty ineffective enterprise last year and market timing was unnecessary from 2003 to 2007. The two need not be mutually exclusive as you suggest - awareness of which regime we are in helps followers of both disciplines. The regimes can be pretty easily detected using market barometers like VIX, credit market index spreads, economic indicators, etc.<br /><br />Alternatively, investors can rely on stock pickers that factor out market risk by shorting weak stocks. <br /><br />2) Your article overweights the importance of being >50% right. One can outperform by making < 50% correct picks if the winners outperform the losers by some distance. This applies to both stock picking (an Apple over the last decade will make most stock portfolios look good) and market timing (someone who got 2003 to 2007 wrong but last year right by a larger margin would have still done well). On the flip side, someone who is 60% correct with his stock picks may not outperform if he has a C/GM in his portfolio among his 40% losers. He would be a better than average stock picker but so what? <br /><br />Portfolio performance, correlations, max drawdowns, etc are additional measures to look at.<br /> <br />Similarly on market calls, one doesn't need to be gloriously correct on timing and magnitude to outperform. But, awareness of market risk is key to atleast be able to take a prudent and cautious stance. There is too much anxiety of being left out of market moves and too much yield chasing that makes this difficult.. thanks to "Bubbles" Ben.<br /><br />3) "great market timers, i.e., investors" - we should distinguish between market timers who would be better categorized as traders than investors.<br /><br />4) "Market timers and macro forecasters often make recommendations that are not just difficult to convert into action but also impossible to put to the test" - Right, because many times it requires trading skills - risk/money management to allow for failures until the trader gets the timing right. Many a times, it also requires going against government actions. Hence, my previous point about clearly distinguishing between trading and investing. As we all know the goals/desires of trading are quite different from those of investing. Hedge Funds/Actively managed funds address this difference for the common investor. One doesn't have to act on the market calls himself.<br /><br />Instead of your 3 point checklist, one should just look at the performance of the person in question - and if they are not actively managing money (like say your colleague Roubini) then it would be prudent to listen to their arguments but not necessarily to their market timing calls. There is a difference between the economy and the markets and then there are various distortions like due to government intervention.vshhttps://www.blogger.com/profile/06771040126727717916noreply@blogger.com