Where Have All the Cowboys Gone?
- Joshua M Brown
- July 22nd, 2013
So you want to ride the rallies and sit out the corrections, repeating again and again until your drawdown-free positive returns pile up to the rafters?
Be my guest, cowboy.
But just know that the list of all-time great market-timers is pitifully short. Given how many professionals and amateurs attempt to sell tops and buy botttoms each year, it’s actually shocking how few have ever demonstrated the documented ability to do so. And if you think the guy selling a service for a couple of bucks a month can do it, well, you’re probably a great client for him. Don’t let me waste any of your time here.
The simple fact is that the complexity of the modern markets is such that reading the technical or economic tea leaves is probably more helpful for risk management or volatility aversion than for anything else.
Because not only is the list of great market timers short, it is also lonely; there have been no new worthy additions to it in more than thirty years.
The end of the era of great market forecasters ended in 1982 when virtually every single technical advisory service and investment newsletter missed the start of the 1982 bull market. The guys running these letters were hardened veterans who’d become accustomed to trading the range of the bear market that had begun some sixteen excruciating years earlier in 1966. They were gold bugs and economic bears and had become, by necessity, hyper-tactical in their buy and sell calls. Most of them had remained adamantly neutral or bearish as stocks rampaged by some 35% between August and November of that year.
Many of the famed timers were even caught short stocks that summer. Or they were still long of gold at its all-time inflation-adjusted peak (which has still not been breached to this day) and being pummeled as the commodity busted out. To the timers, was inconceivable that the Dow would be able to take out the 1,000 mark it had been imprisoned below since the LBJ administration. The idea of a new secular bull market beginning with unemployment so high and monetary policy so screwed up was simply our of the question.
Stop me if any of this sounds familiar…
During the ensuing 18-year bull market between ’82 and 2000, the newsletter guys all but died out and faded away – their credibility in tatters and their services no long needed. And they haven’t reappeared since, in any meaningful way, despite our record these past fifteen years of two separate peak-to-trough drops of 50% for the S&P 500.
Mark Hulbert, America’s foremost authority on newsletter track records and recommendations noted something even more depressing for those who still want to believe – the ability of a market-timer to nail one match-set of top and bottom calls is in no way predictive of whether or not he or she will get the next one right.
From the Wall Street Journal:
Consider the 20 market-timing strategies monitored by the Hulbert Financial Digest with the best records over the market cycle encompassing both the 2000-02 bear market and the subsequent bull market. During the 2007-09 bear market, investors following their market-timing advice lost 26%. That was no better, on average, than any of the other monitored advisers.
In fact, the 20 worst timers from the 2000-07 market cycle actually made money in the subsequent bear market. Their portfolios gained an average of 3.2%, while the average market timer lost 26%.
Let me translate that for you: Cut the bullshit.
It’s astounding how capital and retirement money has been annihilated during this cycle betting with guys who’ve gotten one or two of the last ones right.
For the hell of it, I wanted to talk about the guys who had actually made the big calls consistently in their era. They’re all dead now as are most of the people who would remember them. Very little has been written about these gentlemen except in technical analysis books from the olden days and other arcane resources you find mostly in print and not on the web.
There is one paper, however, that can shed some light on the late greats – written by an all-but forgotten superstar market analyst from the 70′s and 80′s named James Alphier. Richard Russell would probably remember him, as would Art Cashin and maybe some of the Barron’s staff who can still recall the era. Anyway, Alphier took it upon himself to grade the market timers of the early 1980′s and, to do so, he judged them against the big names from previous eras.
What James Alphier found was rather remarkable – with only a handful of exceptions, successful market-timers had only ever been able to make consistent directional calls for an average period of three to five years. Almost none could get past that three to five year threshold with an intact record, regardless of method or market environment. After five years, failure to navigate the next meaningful turn in the tape had become inevitable. Alphier points to the records of Karl Kaiser (1957-1961), John Denninger (1965-1968), Burns and Kirkpatrick (1972-1975) as exemplars of this phenomenon.
But there were some who had made the cut throughout history and were worthy of the moniker Forecasting Giant, Alphier’s nickname for them. The best of these Forecasting Giants had consistently called the markets for thirty years, the least of this exalted group had accurately predicted the tape for twelve consecutive years.
From Alphier’s 1981 paper, here were those Masters of the Tape from days gone by:
…there is a tendency after three to five years of near perfect forecasting for the analyst to make one or more major errors. We will not recount the many painful examples of this in our files. There have been some, however, who have been able to sustain tremendous accuracy over much longer periods.
FORECASTING GIANTS OF THE PAST
1. Major L. L. B. Angas began forecasting the New York and London stock markets after World War I. He was substantially correct in forecasting the booming markets of the 1920′s, the 1929 top, the 1932 low, and other major swings in the stock market during the period ending just before World War II. He also made a series of correct economic forecasts as well during this period of time. After almost three decades of unusual foresight, his analysis became much less accurate.
2. Hamilton Bolton started the “Bank Credit Analyst” in 1949, in part using ideas which had been developed by a now-obscure analyst named Harding. In the early 1930′s Harding developed a theory of tracking the flow of money and credit in the banking system. Between 1949 and Bolton’s death in 1966, his service correctly predicted all of the major bull and bear swings experienced by the stock market with but two exceptions: being bearish in 1951-52 during a basically flat, trading range market, and missing the 1962 collapse. The latter, Bolton correctly maintained, was purely psychological and would be more than completely retraced. In addition, Bolton established beyond question that money and credit flows as measured by statistics provided by the banking system itself had an important effect on the general level of stock prices. Many of his ideas are now widely accepted by stock market analysts and economists. Since 1967, the basic theory has continued to “work” non-randomly, but not nearly with the precision it had before.
3. George Lindsay started in the early 1950′s with an advisory letter, and began issuing detailed annual stock market forecasts in 1958. These were based on his unique theory of “repeating time intervals” which still stands at right angles to all other forms of analysis. These forecasts actually indicated probable dates of significant highs and lows in advance and their likely amplitude! During this time, any person who dared follow these forecasts would not have been caught substantially unaware by any worthwhile market swing. The year 1970 ended a long success streak when the dramatic March-May collapse was very much understated and given less than high probability of occurring. Mr. Lindsay is still practicing and while having made some errors has continued to compile a highly non-random record considering the type of forecasting he does.
4. Edson Gould began writing a market letter more than three decades ago. Up until 1976, he had correctly called all major bull and bear markets, often just a few days from their exact termination. He had no misses during this time period. Since 1976 his constant bullishness has, in fact, been borne out in the broad, unweighted price indices, but not in the Dow Industrials. Nor did he correctly anticipate the steep drops of October 1978, October 1979 or February-March 1980.
5. Paul Dysart - In our opinion, the ultimate crown for sustained accuracy and forecasting acumen must be bestowed upon the late Paul Dysart. Between 1945 and 1967, with only three minor exceptions, Dysart called all major bull and bear markets very close to their extremes. His average error in both points and time was very close to zero. In 1958, 1963 and 1964 Dysart recorded “false” sell signals which he quickly realized were incorrect and took them back. Unlike every other analyst we have labeled as a “forecasting giant”, Dysart also had an ability to select issues for long-term investment. His compact list of recommended stocks over this twenty-two year span had a grossly disproportionate number of exchange-traded issues which racked up multi-hundred percent gains and which genuinely enriched a small but loyal band of subscribers.
Josh here – These five guys have done what almost no one else in market has ever been able to do – consistently call tops and bottoms over a period spanning at least a decade, without having missed any major moves and having had it all documented. As far as I know they’re all dead now and so is James Alphier, the study’s author (gone before his time, in 1990).
There are no market forecasters of the modern age, based on either Hulbert’s research or any of the other studies I’ve seen, worthy of joining this group of luminaries.
As to why there is no newsletter or advisory service that has racked up prescient calls in both the bull and bear markets of post-millennial America, I chalk it up to the self-fulfilling prophecy effect, increased market complexity as well as the quantum leap and democratization of trading tools and analytics. Everyone is looking at the same data and indicators and patterns. Everyone is ready to put on the same historically “high-percentage” trades at the same “key levels.” And markets react to more variables from more sources around the globe than ever before – and much more quickly than they used to. Try cranking out a newsletter at the speed of nano-trading.
It’s not that the timers cannot get the market right…it’s that they’ll be right and right and right and right and then WRONG. And when they become wrong, they’ll likely stay wrong, giving up all the advantages of missing a downturn by missing an equally large rally (or vice versa). You want examples? Got a few hours?
On the bright side – I highly doubt that the great market timers of the 40′s, 50′s or 60′s would fare as well as they did in this day and age, lord knows their methods surely haven’t.
So when I remind you how slim the odds are of your being able to stay on the buckin’ bronco, don’t feel so bad and don’t take it personally.
No one else alive can do this kind of thing either.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.