I am about to question one of the sacred beliefs of market pundits. It is my belief that market level isn’t very important to our investing success. What? Does that make sense?
First, let’s look at how accurate market predictions tend to be. Reading about the topic leads me to believe the prediction success rate is somewhere between 25 and 50 per cent. Yep. Less than half of predictions turn out correctly, so when reading predictions it’s best to have a coin handy to help determine which ones will be accurate.
My annual newsletter predictions for 2016 and 2017 turned out to be much more accurate than the experts, even though I realize prediction futility. My most accurate annual prediction has been that most predictions will be wrong. My two-year record on other factors has been pretty good too, but that’s likely luck.
The great news is you don’t have to be able to predict short term market direction to make great returns in it. For the past century, the market has had an average annual return of 10 per cent, which is likely to continue.
Therefore, my simple thought process:
1. If nobody can consistently predict changes in market direction and,
2. The market returns on average 10 per cent per year, then…
Why would we not always stay fully invested? I have always been fully invested, letting dividends accumulate and buying extra stock with them, often after a dip. I don’t try to predict when dips might occur, but take advantage when they do. Being fully invested has earned me almost 12 per cent annually for 25 years. It also saves me the sport of constantly second guessing previous decisions, leading to higher and more stress free returns.
It is my premise there is always value, somewhere in the market. When overall market levels are high there are more over-valued stocks than under-valued ones. When markets are low there are more under-valued than over-valued, but there are always some of each.
Let me illustrate. From 1995 to 1999 the market was in the grips of the dot.com speculative era. The U.S. market became distorted with speculative stocks appreciating astronomically, while real companies making real profits languished. The US S&P 500 index was up: 37.5 per cent, 22.9 per cent, 33.3 per cent, 28.6 per cent and 21.0 per cent from 1995 to 1999. This ushered in the 2000-02 bear market and dot.com crash.
In 2000 the U.S. market was down 9.1 per cent and the Canadian market was up 9.3 per cent. My RRSP, a combination of CAD and USD, was up 18.1 per cent. In 2001, the U.S. market was down 11.8 per cent and the TSX was down 15.1 per cent, yet my RRSP was up 4.2 per cent. The next year, the U.S. market was down 22.1 per cent while the TSX was down 13.7 per cent. My RRSP succumbed to the bear, but only fell a very modest 3.4 per cent.
How did I do better than the market? The market was over-taken by speculators. I am an investor, not a speculator. I found real companies making real money that were undervalued. The internet was in its infancy so I relied on the evening news and morning newspaper stock charts. When the evening news headlined that NORTEL (the most infamous Canadian speculative company) was down and the U.S. Nasdaq was down, it normally meant I had a good day. When speculators got tired of losing money, they would switch back to real companies, which would go up.
It is my contention that overall market level has little to do with investor’s success. The newswires are constantly talking about the bull market, and how high stocks are. The U.S. market has done well; the Canadian market has not. While market levels may be a bit high there are still areas of value. When you have a good course it’s best to stay the course.