I used to think, like most value and fundamental investors, that market timing is difficult or impossible. I’m starting to come back on this and considering having a market timing component to my portfolio. It’s too risky to do on the market as a whole — moving one’s entire portfolio between stocks and cash or bonds — because this is undiversifiable (a portfolio dominated by whole-market timing has effectively 1 holding), but there may be opportunities for risk controlled allocations to sector or company specific cycles.
As a starting point I’m building a check list for spotting sectoral cycles. It’s a work in progress but here it is:
|Dominant discourse||“Paradigm shift”||“This is a bubble!”, “This is the opportunity of a lifetime!”||“Nobody ever made money investing in this!”|
|(Social) media interest||High||High||Low|
|Closed-funds discount||Premium||Small/no discount||Discount|
|Themed ETFs and retail products||Launching||Closing down|
Why isn’t everybody doing it?
Most of these factors are reasonably easy to spot. But it’s that easy, why isn’t everybody doing it? A couple of possibilities:
- The idea here is to capture sentiment, so it’s subject to errors if there are fundamental change that can kill an industry or are real paradigm shifts involved.
- Knowing broadly where you are in the sentiment cycle seems straightforward, though imprecise and unlikely to find exact tops or bottom. Waiting for the cycle to turn may take longer than most investors’ attention span. Capturing a bottom or shorting a top may require more patience than most people have.
- Intermediaries will have a hard time selling market-timing products as most clients behave like the herd (by definition).
|Bubble||Bull trap||Bear trap||Bottoming|
|Biotech, Internet retail, Unicorns||Small caps, Equities||Oil, Energy||Metals mining, Airlines, Tankers/Shipping|
Now the question is: is this confirmation bias? The Obliquity Portfolios have grown slight under/overweight in most of these themes — before I quite realised I was trading boom and bust cycles. I’ve also opened a little long tankers option basket a few days ago.