Anthony Bolton, now president of investment at Fidelity International, is among heavyweight investment gurus to have called the bottom of the market in recent days, as he explains in a video interview this week with FTfm. Among others to have done so is Jeremy Grantham, a renowned bear whose call this week to invest in stocks before “rigor mortis sets in” must have been one of the most emailed items in the broking industry this week.
Grantham, who oversees $85bn as chief investment strategist of Grantham Mayo Van Otterloo & Co, which he co-founded, urged investors to start moving money from cash to stocks before “rigor mortis” sets in, reported Bloomberg on Wednesday.
“Typically, those with a lot of cash will miss a very large chunk of the market recovery” because they are paralysed by fear,” he wrote in a March 4 commentary posted on his firm’s website.
Grantham, who was nicknamed “perma bear” by colleagues but last year reversed his decade-long bearish stance on stocks, maintained his view from January that the S&P 500 Index may fall below 600 before rebounding. The benchmark index rose more than 4 per cent on Thursday to 750.74. Based on Grantham’s estimate of fair value, the S&P 500 should be valued at 900, noted Bloomberg.
“Remember that you will never catch the low,” wrote Grantham, predicting that stocks would return 10-13 per cent after inflation in the next seven years.
The FT’s John Authers, meanwhile, observed earlier this week that perhaps the “greatest reason for hope at present is that almost all hope seems to have been lost”:
The latest global sell-off of stocks has been accompanied by commentary that no longer speculates on a rebound but instead tries to work out how much worse things could get…At a more technical level, the weekend brought a welter of research on dividend cuts, which have been severe in recent weeks. Usually, dividends are much less important than earnings when forecasting stock returns. That they have risen to the top of the agenda shows that investors are now considering the very worst.
One reliable sentiment indicator, the weekly survey of the American Association of Individual Investors, had by far the highest “bearish” reading yet, with 70 per cent of respondents describing themselves as bearish. So, in Authers’ view, while extreme negativity doesn’t mean that the market is about to bounce, it does suggest that the market is well into the “revulsion” phase, “when it finds a bottom at which all the worst possible outcomes have been priced into shares”.
Ultimately, however, we can only agree with a Thursday post on the Wall Street Journal’s MarketBeat column entitled “Obsessing about bottoms”, which remarked: “Just about every prognosticator — good, bad or otherwise — has tried his hand at calling the bottom of the stock market, ranging from Warren Buffett to WSJ.com’s Deal Journal to President Obama.”
There are “good reasons” for wanting to correctly peg the market’s nadir — particularly because the potential rewards in buying at the market’s worst levels are very high, it noted:After years of watching stock returns evaporate, investors want to see the market turn, and correctly determining a time to buy also carries the satisfaction that an individual has some measure of control over their portfolio’s destiny.
But, as Nicholas Colas, chief market strategist at BNYConvergEx Group, told MarketBeat, “the idea that investors have any control over the market is illusory”. The problem is that “the market doesn’t care about your call,” he says. Sentiment and technical conditions do play a part in the activity in equities, but if bankruptcies double and economic growth declines further, “oversold conditions” will mean very little.
Continues MarketBeat:
That’s why, according to James Montier, strategist at Societe Generale, the better route for success for an investor is to buy shares when stocks are in the bottom quartile of historic valuations. More often than not, such a move will result in more losses initially — losses that can last from six to nine months as equities finish the process of bottoming-out.
After absorbing more pain, however, buying at those levels will prove prescient — but only after about a year. In the meantime, investors are likely to see more pain. In a market where fund managers are looking to merely stop the bleeding, Mr. Montier says, they may be more worried about career risk as markets continue to slump. “The curse of the value investor is clear,” he writes. “‘We will be too early to sell in a boom, and too early to buy in a bust.’”
Back to Mr Colas:“Once you, an investor, buy into the notion that stocks will not go down any more, you run the strong risk of believing that this conviction will actually matter,” he writes. “If it proves wrong, and we do sell off further, will you be able to think clearly in the face of that sell-off? Will you manage risk correctly? Will you rotate into more defensive sectors? Will you raise cash?”
On the question of bottom fetishes, however, perhaps the best pointers come – again – from Bolton, who wrote in a personal finance column for the FT in January:
The general environment at lows can be uncertain and worrying. It is normally darkest just before dawn and, just as you’re looking into the abyss, feeling that the financial system might collapse or that no-one will ever buy equities again, the market turns. The bad news has by then fully permeated investment thinking and the last seller has sold. Markets hit the bottom not because of the appearance of buyers but when sellers stop selling. They peak when buyers stop buying.
My strong advice for most investors is not to try to time markets. It is difficult to do it consistently well. In my experience, most investors have a positive or negative bias, which makes them good at buying but not selling or vice versa. This can cloud their judgement at turning points.
If you miss even a few of the best days of a bull market, your returns will be considerably eroded and some of these days often occur at the start of a new bull trend. It is better to take at least a three-year view when buying equities and not to attempt to switch in and out.
A bull market tends to climb a wall of worry. At the bottom, it is easy to find reasons not to buy — all the negatives are known. Gradually, as the market recovers, these become less convincing to investors. Remember that bull markets paper over the “cracks” while bear markets expose them.
Bear in mind, too, that the stock market is an excellent discounter of the future. It normally moves on what investors expect to happen in six to 12 months’ time. So, if you wait for the news to get better or worse, you will miss the market’s turning point. Arguments about a rosy future are always most persuasive, and prevalent, at the top — while the outlook always looks bleakest at the bottom. The more widely-held a belief that the existing trend will continue, the less likely that it will.
Related links:
Anthony Bolton calls the bottom of the market (video) – FTfm
Jeremy Grantham urges shift to stocks before ‘rigor mortis’ - Bloomberg
Anthony Bolton: How to spot the market’s turning point – FT
Short View: Silver lining – FT
Obsessing over bottoms – MarketBeat