Learning Market Timing the Hard Way

Learning the Hard Way

The Other March Madness

Fertile Territory

Stock prices have dropped through the floor, and–at least before the relief rally that–began on Tuesday–had begun digging holes in the basement.  It’s been a nightmare for anyone who has spent years building up a portfolio preparing to retire and even worse for those who have already entered a stock-funded retirement.

The only people who are able to take any comfort from this situation are the people who never trusted the market and are sitting pretty on a pile of Treasuries, a fat savings account book or even an under-the-mattress Posture-Pedic Portfolio.  But even those people have friends and relations to remind them of the widespread misery.

It reminds me of the way most people felt after the Tech Bubble burst in 2000.  Like most of my friends and colleagues at the Large Boston Investment Firm, I had spent the late 1990s stuffing every dollar I could find into the newest, hottest tech funds available … and there were lots of them available.

After nudging over 5,000 in early March 2000 (5,133 on March 10), the Nasdaq did a double hiccup to 4,500, and then spurted back to 5,079 on March 24.  After that, it took just 15 trading days for it to plummet to 3,227 (-37%) … and it was just getting started.  When the Nasdaq finally bottomed at 1,110 in October 2002, it had sent more than 78% of its value straight down the toilet.


Even more horrifying was the fact that we all just sat there during the entire debacle and watched it happen.  We could have picked up the phone at any time and asked our helpful internal broker to move us into a money market fund or Treasuries.  Almost anything would have been better than staying in those crushed-butterfly tech funds, but that’s what we did.  At least that’s what most of us did.

After months of Bursting Bubble punishment, during a sushi break at a Financial District eatery, one of our colleagues finally admitted that he had pulled all of his growth money out of Tech in January 2000 and put it into a money market fund. 

You could have knocked the rest of us over with a feather.

Yeah, we were happy for him … in a way.  But we were also a little shocked, maybe even slightly offended.  Nobody ever said it, but I think the question we wanted to ask was: “If you knew this was going to happen, why didn’t you tell us?”

The truth, of course, was that lots of people had been telling us for a long time that the Tech Bubble couldn’t go on.  But there’s something so seductive about a rapidly rising net worth that it causes situational deafness and blindness in otherwise sensible people.  Our quarterly statements were so rosy that we just couldn’t do what our fortunate colleague did. 

They say that the market is a tough teacher because it tests first and teaches afterward.  We had all been successfully brainwashed to believe that market timing was impossible and that a responsible investor had to just keep investing and let time even things out. 

Fast forward to today, and large investment houses and many other investment professionals are still chanting the same mantra.  “You Can’t Time the Market!” “Time, Not Timing!” And so on.  And it’s still costing people money.

The one big lesson I’ve learned since coming to Cabot is that not only can you time the market, it’s one of the biggest advantages you, the individual investor, has over the big boys.  You can move into or out of the market at a moment’s notice!  And if you still have money in growth stocks, and you’re watching the market take away a little more every week, you need to consider trying it.  Soon.

My colleague Michael Cintolo, who’s the real guru of the growth investing operation here, wrote an excellent quick-and-dirty guide to timing the market in a recent issue.  If you have growth stocks in your portfolio, you need to read it.  Here’s a link.


My growth portfolio just about recovered from its Tech Bubble pummeling in time to present its chin to the Real Estate Bubble for another roundhouse right.  But I was ready for it this time–I learned from my last failure.  The question is, if you’re one of the investors who have been bludgeoned during the past 18 months, will you learn from your mistakes?

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March Madness–the explosion of office betting pool activity based on the annual NCAA Basketball Tournament–is almost upon us.  Selection Sunday, when the NCAA announces the 65 teams in the tournament, is March 15, just three days away.  This will end the (largely manufactured) frenzy of media speculation about “bubble teams” that are teetering between selection and rejection. 

The athletes will actually begin playing on March 17, when two teams will meet in the “play in” game for the honor of becoming the #16 seed that will be eliminated by the #1 seed in that region during the first round game.  (No #16 seed has ever beaten a #1 seed.)

The process that takes the viewing/rooting public from 65 teams to the Sweet Sixteen to the Elite Eight to the Final Four to a national champion will drag on into April, making a mockery of the phrase March Madness, in my opinion.  But then I think the October Classic should be over in October, so my sentiments are a little old-fashioned.

(I will be administering the Cabot office pool this year, mostly because I’m the only person here who really cares about NCAA basketball; this is pretty much a football-focused workplace.  No money will change hands, of course.  That would be illegal. Ahem.)

As a basketball fan, I just enjoy the college game.  But as a person making tournament picks in an office pool, I make one huge mistake that stock investors can never afford to make.  I allow sentiment to dictate my selection strategy.  In short, I just can’t stand to pick a team to beat my team, the University of Illinois Fighting Illini.  They’ve had a great year, finishing much higher than the experts predicted in pre-season analysis and they’ve been fun to watch.  Rationally, I know that they don’t have the horses to compete with Carolina, Duke and the rest of the national powerhouses.  But what can I do?

All I can do is to strengthen my resolve to erase that kind of sentiment from my stock picks and keep it in the office pool where it belongs.  Good luck to your favorite team … as long as they aren’t playing the Illini.

Here’s a thought.  Athletes begin training months before the season begins.  It takes time to reach the state of polished skill and perfect condition that makes for winning performance.  Great athletes are willing to pay the price in sweat and time long before the tip-off/kick-off/first pitch.

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The stock market occasionally takes on a kind of soap opera tone, with emotions running high and complicated romantic tangles proliferating.

There’s a kind of acquisition competition affecting three fertilizer companies, right now that has a little of the “He loves her, but she loves someone else” flavor.

Agrium (AGU), a Canadian fertilizer company with a market cap of $5.8 billion is trying to buy CF Industries (CF), an Illinois company with a market cap of $3.2 billion.  CF, in the meantime, is trying to acquire Terra Industries (TRA), an Iowa company that’s capped at $2.5 billion.

CF Industries has rejected the cash-and-stock offer from Agrium, complaining that it grossly undervalues its operations. 

For its part, Terra has given thumbs down to CF Industries, saying that its offer “substantially undervalues Terra both absolutely and relative to CF.”

There’s no telling how much of this posturing represents genuine disagreement and how much is just low-balling versus pro-forma squeezing.  CF Industries is likely using its takeover bid for Terra to achieve a growth spurt that will put it on an even keel with Agrium, allowing it to stay independent.  Unlike soap operas, sentiment doesn’t usually play much of a role in these negotiations and most companies have a price at which their management would be happy to sell them out.

But one thing is sure.  Whichever company winds up swallowing which, the demand for fertilizer isn’t going away, and with a P/E ratio of 6 (Agrium) and 8 (CF and Terra), there’s a lot of value here.  AGR peaked at 113 last June, fell to 22 in December and has recovered to 37.  For CF, the peak/bottom/recovery numbers are 173/38/67.  Terra’s are 58/11/25. 

All three companies pay a dividend and are likely to appreciate more as the market recovers, although it’s doubtful they will approach their mid-2008 highs.  For an investor who’s either nimble enough to play the bumps and drops of a takeover fight or determined enough to buy and hold, these are three highly profitable, well-run operations.  As with the NCAA tournament, all you have to do is pick ’em.


Paul Goodwin
For Cabot Wealth Advisory


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