Weekly Update

The Difference Between TimingCube and Traditional Investing


Published April 14, 2023



Here at TimingCube, we begin by acknowledging that investing is a difficult endeavor emotionally; that human beings are mostly built to FLEE RISK and EMBRACE CERTAINTY. To be a successful investor, we are told, you must buy when others are fleeing and get comfortable with uncertainty – in other words, act completely opposite to what most human beings are hard-wired to do. We are told that the inherent volatility of the stock market is an OPPORTUNITY for you to buy low and sell high.

At TimingCube, we deal with this dichotomy between the design of human emotions and having to act seemingly against that emotional design by building quantitative models to REMOVE EMOTION from investing. By removing the emotion, we can use the model to give us more certainty and less exposure to risk, putting us in cash when markets are acting up and volatility is high. That pursuit of SAFE INVESTING is what we strive for.

This preamble is offered to tee up the following good description of the more typical approach to investing, a buy-and-hold approach. By describing the stock market’s history of volatility and return, the buy-and-hold camp seeks to remove emotion by making us more rationally comfortable with market risk. If we can only wait long enough and step back far enough, the stock market’s volatility doesn’t look so bad, and we will have good returns. That is the selling point of the buy-and-hold camp. Take a look:

“The only reason we get returns over the long run is because we occasionally experience losses in the short run. Volatility is the price you pay to participate in the game; sometimes stocks go up and other times they go down. This is a feature of the stock market, not a bug.

Since 1980, the S&P 500 has averaged an intra-year drop of 14.3% (intra-year drops shown as red dots in chart below).

Annual returns and intra-year declines

But that is just the average across the last 43 years, not telling us the frequency of different drawdowns. After all, a 5% of 10% correction is a very different psychological experience than say a 15% or 20% drawdown. This chart from Ben Carlson shows how often the U.S. stock market has experienced the following losses:

Stock market losses: 1928-2021

This tells us we should expect a double-digit correction at some point during a calendar year roughly two-thirds of the time.

Using a slightly different approach, the Capital Group quantified how often we experience different levels of drawdowns; their data suggests we will experience a double-digit drawdown about once per year.

S&P 500 index: 1948-2017

Watching your portfolio decrease in value is never fun, but market pullbacks are more common than we think. Volatility can take a psychological toll on investors and increase the possibility of making a mistake. And, the deeper the market selloff becomes, the longer it takes on average for portfolios to recover – even more frustrating.”

In short, markets are routinely volatile and investors just need to hold on, weather the storms, and rewards will follow. Isn’t it better to avoid the storms altogether and STILL get the returns? At TimingCube, we think it is!


Market Update

Investors focused this week on fresh inflation data along with big bank earnings. The bank earnings would be the first reports coming after last month’s collapse of Silicon Valley Bank and the residual fallout. Stocks added +1% after Monday and Tuesday’s trade with cyclical companies performing well on some decent earnings reports from flooring maker Mohawk and appliance supplier Whirlpool, a company often seen as a gauge of global growth prospects. Wednesday’s consumer price report showed inflation continuing to slow, albeit remaining at higher-than-desired levels. Stocks rose immediately after the report but sold down later in the day as minutes from the last Federal Reserve meeting supported one more interest rate hike. The S&P 500 gave back -0.4%. But another inflation report came out Thursday, this time on prices paid by producers. The report showed a surprising -0.5% decline in prices as supply catches up with demand and prices are now dipping. The news was far better than expected and stocks took flight rising +2% on the growth-oriented Nasdaq. But as has been the case much of this year, the one-day rally found little to no follow-on buying. Friday brought powerful earnings by the big banks leading shares of JP Morgan to fly +7%. Nevertheless, the banks issued cautious commentary about the outlook and investors lost the momentum they had Thursday. Stocks slipped back but pared the drawdown late in the day to contain the dip to -0.2%.

Another choppy week left the S&P 500 (SPY) higher by +0.80% while the Nasdaq 100 (QQQ) was flat at +0.16%. Smallcap stocks (IWM) rose +1.51% but remain the only major domestic index still below their long-term 200-day moving average.

Warm wishes and until next week.