"Don't do something, stand there!" said investing legend Jack Bogle in interviews last week. The founder of The Vanguard Group is advising something resembling catatonia as much as calm; the old buy & hold investing philosophy.
"Bogle should be in the Hall Fame, not still playing the game," says hedge fund manager Simon Baker, the CEO of Baker Ave and a Friend of Breakout. The two comments define both sides of the perennial investing debate: "Can you time the market?"
Baker says yes, arguing that buy & hold is a relic of a bygone era when the economy was stable and consistent growth was the norm. Make no mistake, Baker isn't telling investors to lunge in and out of the market at the slightest provocation, merely that avoiding "2008 type markets" is obviously high on the list of pathways to investment success. That's fine in retrospect, but who could have seen this summer meltdown coming and how would someone have any idea when or if to get back into stocks?
Well, plenty of folks on Breakout saw it coming, including Baker himself during his May appearance when he suggested viewers exit Chinese stocks ASAP, noting that the fundamental and momentum landscape was worsening. Since that call, the widely-followed iShares China FXI index (FXI) is down some 18%, badly lagging the S&P500 as well as the NASDAQ.
Ok, fine, Baker has been good in his Breakout appearances and has a great long-term results. So what's he saying about the here and now?
Baker buys tumbling markets, but not indiscriminately. Obviously all tumbles are created different, though they share the characteristic of being horrifying times to buy, a point Baker acknowledges freely. "It's complete madness out there," he says. That being the case, Simon takes the emotion out of the decision making process by using what he calls the "Blue Buy" indicator. Blue Buys are triggered when 90% of the basket of 4,000 stocks his firm follows are below their 15-week moving average, a rare situation indeed.
The Blue Buy indicator has only been triggered six times over the last 25-years, the last being in July of 2002. In these six times, the NASDAQ is up 90% and the S&P 37% in less than two-years, on average. "We're not there yet," says Simon, but it may be time to get your checkbooks ready. This despite the fact that he agrees with my long-held belief that a recession has already begun.
The last eleven recessions have seen drops of 26% from peak to trough. Last week's S&P 500 1,100 "Fed Bottom" represented a 14.5% decline, about 60 S&P500 points from the average recession drop. Not quite close enough but getting there for Baker, who has remained largely in cash since June 13.
So we aren't quite in Blue Buy mode and we're not in a recession bottom, but Baker is patient and eagerly waiting. "You have to be dynamic in this market," notes the dapper Brit. That doesn't mean hyper trading, it means disciplined buy, sell and holding. It may not be for you but it's been working for Baker and Breakout viewers who have listened to him thus far.
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