Weekly Update

Model-driven investing

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Published August 26, 2016


Anyone who has experienced the loss from an investment can tell you that the emotional pain from that loss not only stings, it lingers. Studies show that our emotional response to loss far exceeds the joy experienced when our investments provide a positive return.

Chart 1: The dramatic impact of losses on our emotions
The dramatic impact of losses on our emotions

For many who have experienced the out sized pain of loss, there is fear of repeating that unpleasant feeling. As a result, we can remain on the sidelines when the investment opportunities are the greatest, waiting for some magical time when uncertainty vanishes and markets appear very, very safe. Of course, students of investing know that those periods of seemingly benevolent calm are often the calms before another storm as shown in the cycle of investor emotions below:

Chart 2: The roller coaster of investor emotions
The rollercoaster of investor emotions

The “buy low, sell high” axiom is represented in the boxes above, where the maximum financial gain occurs during the point when risk FEELS the greatest. The point of maximum financial risk exhibits when investors are feeling most happy. Thus, to be a successful “buy low, sell high” investor requires us to go against our emotions, something which few investors can perform.

Exacerbating the feeling of despondence shown in the graphic above is that to get to that low point in emotion, investors have been beaten down. Reviewing the steps leading to the 2008 market crash, there were a series of mini-crashes – e.g. market pullbacks, corrections – leading up to the penultimate drop. Then, another series of setbacks afterward before stocks finally broke free and charged higher. How would you know whether one of those mini-crashes was actually the final crash? You never do!

Making matters even worse, on the way up investors become conditioned to “buy the dips” as every modest drop in price brings out investors who missed the earlier rise in the markets. This is where we are right now in stocks. Even over the past two weeks, we’ve seen one day declines which were almost entirely erased the following day or two and new money rushed in to “buy the dip”. This happens a few times and investors become confident it will keep happening. As a demonstration of this behavior, even seasoned pros stepped in to buy bank stocks in the earlier stages of the financial crisis as those stocks were hammered. But they were too early, way too early. Stocks kept falling, taking their funds down with them – see legendary mutual fund manager Bill Miller as one notable example. Now, to be fair, many fund managers are in a predicament as they MUST remain near fully invested. So, many of them have far less flexibility than most of us do.

So, the buying the dips works while the market moves higher, giving investors increasing confidence that they will be rewarded for continuing to do so. It works until it doesn’t. We don’t recognize the first time that buying the dips has stopped working. We keep after it, thinking it will turn around and the “normal” market, the one we’ve become accustomed to, will surely return. But it doesn’t. The market has shifted from bull to bear without any proclamations, or notifications in our mailbox. What used to work simply stops working. This realization gives was to the investor panic which actually serves to accelerate the end of the bear market. In other words, once investors realize that a bear is upon them, that bear is preparing to leave. Investors are seeing the signs too late.

That series of market moves explains how TimingCube has avoided every major market crash. The major crash comes after markets have already become weak. The average investor hasn’t recognized the weakness. But our Models have. They have already moved us safely to cash, or even short to take advantage of the market weakness. Our Models have no emotional component to them. They don’t get caught up in whether “buying the dips” works or has run its course. They simply weigh the evidence the market is giving and make a determination of what the market’s trend truly is. Our Models take the damaging and counter-productive emotional part of investing OUT of the equation, leaving us not to wonder whether we are buying at the bottom, or buying at the top. The current rally and bullish period will someday come to an end. By taking the emotion out of investing, we don’t have to guess. We are ready for that to happen, whenever it comes.

A word about us.

We recognize that there are many, many websites out there that purport to offer great services. And some of those sites might be less than completely honest and upfront in their dealings. TimingCube has been publishing our website since July 2001. As such, we are one of the oldest investment websites of our kind around, having served thousands of subscribers in that time. Our service has been tracked for years by multiple 3rd party services, one of the very few market timing services to have such a long-term record. We feel our long tenure in providing our service and success in doing so speaks to the support and products we offer to our subscribers. We wouldn’t still be around if we didn’t maintain a solid operation that delivers what our customers are looking for. We make every effort to deal in an honest and straight-forward manner with our subscribers and those just “kicking the tires”. Naturally, people are different and not everybody finds our service to be what they are looking for. That’s to be expected. We state the terms of subscription very clearly and abide by those terms. We do our best to be very responsive and appreciate that it can be difficult to keep up with multiple subscriptions, if that’s what you have. We provide flexibility in extreme cases but with an eye toward being fair to ALL of our subscribers and potential subscribers. Well into our second decade providing investment information and unique investment solutions, we are honored by your commitment to our efforts, always appreciate your feedback, and do everything we can to be as transparent and clear as possible (without revealing the “secret” sauce of our Models, of course!). Keep enjoying the wealth-building benefits of TimingCube, and certainly feel free to continue sending new subscribers our way. Everyone deserves the opportunity to find out firsthand how easy and worry-free investing can be!

Market Update

Stocks have found themselves trapped in their tightest trading range in 40 years (that’s right 40!) as market participants await word from the Fed’s summer meeting in Wyoming, weighing that against recent earnings reports. The earnings reports were generally received as positive along side recent economic data that has also skewed positive. It’s only a matter of time before the Fed begins lifting rates with more purpose … but when and at what rate are the questions on the minds of investors these days. Markets moved little Monday though an acquisition of biotech firm Medivation sparked that sector to a strong day.
Home sales and retailers posted good news Tuesday though stocks collectively only managed a +0.2% reward. That slight gain was washed away Wednesday amidst concerns expressed by lawmakers and the American Medical Association that Mylan’s new EpiPen device is excessively priced. The slump in biotech shares led to a generally negative tone and a -0.5% result for the broad market. Thursday was another sleepy trading effort with low-end retailers posting weak earnings while tech shares did relatively well on acquisition rumors surrounding software maker Salesforce.com. Friday brought the anticipated comments from the Fed gathering. Stocks initially rallied on the news before retreating in the afternoon after one of the Fed participants noted that stronger economic data could produce two rate hikes this year (the market seems set on one rate hike in December). Still, the downdraft was modest leaving the weekly tally only a touch negative.

Warm wishes and until next week.