It’s one of the most common questions we are asked by prospective investors. “Is now a good time to invest?” The answer is rarely a simple yes or no. However, we have created our own framework based on Howard Marks’ book “The Most Important Thing”. From it, we believe the market pendulum has become overly bearish, making it a good time to invest.
Issues with timing the market
It is impossible to consistently and accurately time the market. While some pundits may accurately call it occasionally, no-one gets it right every time. That’s because market peaks and troughs are generally only identifiable after the fact, and the events leading to them are themselves unpredictable.
Critically, the longer your investment horizon the less important timing becomes. For us at Swell, timing matters less than, say, picking high quality companies with sustainable competitive advantages.
But that is not to say timing is irrelevant.
The market pendulum
Warren Buffett’s mentor and the father of value investing Benjamin Graham once said,
“The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap). The intelligent investor is a realist who sells to optimists and buys from pessimists.”
Knowing where the pendulum is may help you decide whether to enter or exit the market. As another legendary investor, Howard Marks said,
“If you don’t follow the pendulum and understand the cycle, then that implies you always invest as much money as aggressively (as possible). That doesn’t make any sense to me. I’ve been around too long to think that a good investment is always equally good, all the time, regardless of the climate.”
Marks encourages “taking the temperature of the market” by monitoring several metrics he describes in his book.
When pessimism’s high, it’s time to buy
AAII historical data suggests bearish sentiment tends to be a contrarian indicator. There is a strong correlation between bearish sentiment and positive returns in subsequent months. In fact, 96% of the time bearish sentiment was more than 2 standard deviations above the mean it was followed by a trend reversal in the next 6 months.
Is it a good time to invest?
So back to the original question, is now a good time to invest? Ultimately the answer depends on your own personal circumstances. However, looking at the temperature of the market, we believe now could be a good time for prospective investors to enter the market.
This is how we determined the temperature gauge for the current US market.
Swell Asset Management Pty Limited ABN 16 168 141 204 is a corporate authorised representative (CAR number 465285) of Hughes Funds Management Pty Limited (ABN 42 167 950 236 AFSL 460572) Suite 10.02 Level 10 Corporate Centre One 2 Corporate Court Bundall Qld 4217. Swell Asset Management is authorised to provide general financial product advice only.
The information in this document is general information only and does not take into account your personal objectives, financial situation or needs. The information in this document must not be considered advice or a recommendation to invest in any products or services offered by Swell. You should seek independent financial advice and read the relevant product disclosure statement (PDS) and other offer document prior to making an investment decision, considering the appropriateness of the information and the nature of the relevant financial product having regard to your objectives, financial situation and needs.
About the Author
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