3 strategies that beat the market timers

Since the Great Recession and financial crisis, many experts have claimed that buy-and-hold investing is dead. The data say otherwise.

By John Reese Mar 29, 2013 8:25PM

Since equity markets peaked in 2007, macroeconomic factors have by and large been the driving force behind stocks. The U.S. financial crisis, the European debt crisis, China's slowdown -- these and many other macro issues have led investors to jump in and out of the market based primarily on their feelings about the global economy. Buy-and-hold investing is dead, many say, and the only way to make good money in stocks is to successfully time the macro moves.

 

But while a myriad of investors have been trying to do just that, few have been succeeding. One example is Mark Hulbert, who for decades has been monitoring the performance of dozens of investment newsletters through his Hulbert Financial Digest.


In a recent Barron's column, he looked at returns since the October 9, 2007 market peak of the more than 100 market-timing newsletters and of web-based advisors monitored by HFD --  to see who correctly called both the market top in 2007 and the market bottom in 2009 (or at least came close to it). He found that, of 140 strategies tracked by HFD, only 15 had significantly lower equity exposure a month after the 2007 top. Of those, just six had markedly higher equity exposure a month after the 2009 bottom.

 

What's more, the six that did meet the timing criteria gave other buy and sell signals in the intervening periods "that had the unfortunate effect of frittering away the gains they otherwise would have realized if they had left well enough alone," Hulbert says. He did say about 25% of the market-timers he tracks have beaten the market since stocks hit their 2007 high, but "none of them did so by getting out at or near the top and getting in at or near the bottom."

 

Just as those advisors have struggled to successfully time the market, so too have individual investors. Over the past 20 years through December, the average individual stock mutual fund investor earned 4.25% per year, while the S&P 500 returned 8.21%, The New York Times recently reported, citing data from Dalbar Inc. A $10,000 investment at 4.25% annualized would be worth $22,989 after 20 years; at 8.2%, it would be worth $48,456 after 20 years. The gap in performance is due in part to the fees mutual funds charge, but also to investors making emotional decisions to jump in and out of the market at inopportune times. "They get excited or they panic, and they hurt themselves," Dalbar President Louis S. Harvey said.

 

Given data like that, I prefer to use a long-term, buy-and-hold strategy, and stick with it during good times and bad. That has paid off for me over the long haul, and, despite all of the buy-and-hold-is-dead talk, it has paid off since the 2007 market peak. Take my three top-performing Guru Strategies (investment models based on the approaches of history's greatest investors) over the long haul. While the S&P 500 is basically flat since that 2007 peak, my Benjamin Graham-inspired portfolio is up over 30%; my Motley Fool-based portfolio is up more than 40%; and my Kenneth Fisher-based portfolio, while not as prolific as those first two, is up about 9%. These portfolios have all been 100% invested in stocks throughout the entire period -- through the Great Recession and financial crisis, European debt crisis, Chinese slowdown, fiscal cliff and sequester. They've had ups and downs to be sure, but they've proven that good strategies can produce strong returns if you stick with them through rough periods.

 

What stocks do these approaches like right now? Here are a few of their favorites. (Keep in mind that you should invest in stocks like these as part of a diversified portfolio.)

 

Geospace Technologies (GEOS): This $1.4-billion-market-cap Houston-based firm makes scientific instruments for the oil industry that use seismic data to find oil and gas. My Fool-based model (inspired by Fool co-creators and brothers Tom and David Gardner) likes that it grew earnings by 150% and sales by 80% last quarter (vs. the year-ago period). It also likes that the firm has no long-term debt, a 0.43 P/E-to-growth ratio, and a strong 94 relative strength.

 

National-Oilwell Varco, Inc. (NOV): Also based in Houston, Varco makes oil and gas drilling parts. The $30-billion-market-cap firm is a favorite of my Graham-inspired strategy. It likes the firm's solid 2.78 current ratio and $10 billion in net current assets vs. $3.1 billion in long-term debt. It also likes Varco's price: Shares trade for a reasonable 14.6 times three-year average earnings and 1.49 times book value.

 

HollyFrontier Corp. (HFC): Formed when Holly Corp. merged with Frontier Oil in 2011, Dallas-based HollyFrontier ($10.6 billion market cap) is one of the U.S.'s largest independent petroleum refiners. It has operations in the Midwest, Southwestern, and Rocky Mountain regions, operating five complex refineries. It's a favorite of my Fisher-based model. Fisher pioneered the use of the price/sales ratio (PSR) as a valuation metric back in the mid-1980s, and HollyFrontier's PSR of 0.52 comes in well below this model's 0.75 upper limit. The strategy also likes HFC's reasonable 22% debt/equity ratio, and $3.25 in free cash per share.

 

Guess?, Inc. (GES): Los Angeles-based Guess makes trendy jeans and a variety of other clothing and accessories. It recently announced disappointing fourth-quarter results and its shares took a hit. But my Graham-based model thinks the hit was too big. It likes the $2.1-billion-market-cap firm's 2.84 current ratio, and its $729 million in net current assets vs. just $8.7 million in long-term debt. The strategy also likes that Guess shares trade for 11.1 times trailing 12-month earnings.

 

Homeowners Choice, Inc. (HCI): Tampa-based Homeowners ($300 million market cap) is the parent of Homeowners Choice Property & Casualty Insurance Company, which provides homeowners insurance in Florida. It posted some impressive growth in both earnings (92%) and revenues (40%) last quarter, part of the reason my Fool-based strategy is high on it. A few other reasons: the firm's high and rising profit margins (18.5%, 10.6%, and 7.9% over the past three years, starting with the most recent); its 95 relative strength; and its 0.27 PEG ratio.

 

I'm long GES, HCI, HFC and GEOS.

 

John Reese is the founder and CEO of Validea Capital Management and Validea.com and the author of The Guru Investor: How to Beat the Market Using History's Best Investment Strategies.

10Comments
Mar 30, 2013 1:31PM
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Or just buy Large Iconic Stocks that pay dividends - Like the Dividend Aristocrtas or the Magnificent 7 - MMM, WMT, XOM, KO, PG, MCD, JNJ !

 

Buy, Reinvest the dividends and wait for 30 years or more ! Serve warm in Retirement !

Mar 30, 2013 4:50PM
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Almost every long-term strategy beats market timing for the ordinary person because while it's sometimes easy to know when to get out of the market it's a lot harder to know when to get back in.   For short-term trading, you're essentially competing with large firms with teams of MBA's and PhD's who personally visit top corporate officers, get weekly sales numbers from stores, and otherwise have a huge advantage in knowledge over the individual investor.  But for long-term investing, the individual has the ability to see which companies have a decade or longer record of consistent earnings, revenue, and dividend growth where such a trend is likely to continue long-term.  Additionally, studying some relatively easy-to-read books like Mary Buffett's "Buffettology" will get you looking at Long Term Debt, Return on Equity, and other flags about a company's health.  After a few decades in investing, I've learned that those Blue Chip companies give me better than market average returns.
Mar 31, 2013 11:19AM
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Don't believe in this guy Reese BS.  I had Validea managed my money for ~ 7 yrs.  It was negative return.  They're SUCKS.  They talk really well in theory and on paper but application SUCKS.  Buyers beware!!! 
Mar 31, 2013 3:15PM
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The  analysts,  who  are  good  enough;  to  "s e l l ",   their  advice  to  banks  and  institutions,  determine  the  ups  and  downs  of  fortunes.  How  many  good  analysts  are  t h e r e  !?

 

From  the  past  40  years,  I  heard  that  Peter  Lynch  was  the  best.

Mar 30, 2013 11:06AM
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Liked the Article John.....Well written and explained..

Young and seasoned Investors(individuals), both should take note..IMO.

 

I don't believe buy and hold are dead...Hardly.

But investments and choices demand attention...

Trading is needed occassionally, and diversification is utmost.

And you can't hold everything until it dies or is dead to begin with.

Prudent investing and trading wins the race, or helps keep you near the front.

Mar 30, 2013 10:35AM
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NO......Many, actually MOST Pros had it wrong...!!!

Damn few saw it coming....And way too many Panicked or panicked their Clients or Investors, Fund holders, etc.....I have studied some of this for about 6 years, WONDERING WHY.

 

If you beat most of them you were either Good or Lucky...

If you didn't lose as much value as they did you were probably Better or Lucky...

Yes, I still believe sometimes.....That Luck can come into play, at least a little.

Mar 31, 2013 11:42AM
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I kind of "mentioned", that I would be in favor of "self directing or managing" one's investments at a Large and Older Trading Institution...for lesser fees.

 

You can get all the Investing ideas, just by reading on Sites like this or dozens of others.

That you could ever need and more..

Mar 31, 2013 11:36AM
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People that are 30-35....Shouldn't worry about day to day or year to year losses such as what happened in 2008...They have time to regroup and recover..In the majority of cases, history is on their sides.

With all the losses in 2008,then Spring of '09, if you were invested in mostly decent Companies or maybe even MFunds...

You should have recovered and had substancial gains since then; PROVIDING you didn't run away from the Markets or Wall St.

Knowing that MFunds and particularily 401s have many limitations; It may be as wise to start an IRA in a small dose for starters, for retirement also...Having it self directed at a Major Trading house would be preferred, because of cost and fees would be negligible...IMO

 

As a previous Poster related to...Dividend Aristocrats* or the Magnificent 7*, would/could be very good choices over a 25-30 year timeframe.

Many are "stalwart stocks" with decent dvidends and fairly good recovery type (recession proof) stocks or Companies......* previous articles.

I personally would say to double the number of positions to about 15 and diversify into other Sectors, adding a small amount of PMs (precious metals)..Energy or any other non-covered areas to a Portfolio...Also a sm.amount of growth risk on the NEXT..soft ice cream.

If all or most pay a somewhat decent dividend...Re-investing is the key..

Adding what you can on a monthly/yearly basis, builds one hell of a retirement nest egg...

And can give you a comfortable, carefree feeling in your later years.

Start small and build more, if you can.....And don't worry,it will reproduce itself..Several times.

Mar 29, 2013 11:55PM
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I have a hard time believing that pros had it wrong. Especially at the bottom when the pain was screaming "BUY,BUY,BUY". Never the less, it is interesting that so many in the media (all) can't get their heads around the best investment of the decade. If it were IBM or MSFT they would be pounding the table....Going forward this graph will be even more divergent.....[  ]
Mar 31, 2013 6:28PM
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Ellinas...I've been with Fidelity about 35 years, and 1 other broker about 12-15 years ago for about 2-3 years...

I am very satisfied with Fidelity, and the Trading House....All the tools and information I need..

And I pay about 8 bucks to trade with 120-150 per year, no matter how much the amounts are..

They are my "only" recommendation...Period.

With Microsoft Windows...I can go anywhere and do anything I want in the World, financially.

 

 

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