COVID-19 caused global stock markets to crater in Q1 2020. In recent weeks, amid a modest recovery, a narrative has taken hold in the financial press of “buy the dip”, which beg the questions; “Is it possible to time the market?” and “Should I have my money managed by a fund manager with this skill?”
We’ve all seen The Big Short, so we know it’s possible.
Henderson Rowe has a very dim view on any manager who claims to be able to consistently time the market. We refer to these “miracle managers” who successfully timed the market as “talking heads”, because there is always one on TV who has got it right, once, but don’t believe that any one of these talking heads gets it right every time.
The truth is that, even among our industry’s most accomplished academics, there is no persistent ability to predict a crisis. The manager who timed the Tech Crash (’01) did not also call the Global Financial Crisis (’08) and is not celebrating their COVID-19 prediction.
On the contrary, Henderson Rowe offers investors a warning about market-timing gurus, and one they may be surprised to hear; instead of rushing to invest with the new star manager who successfully called COVID-19, do the exact opposite.
Among the biggest risks that investors will face in the aftermath of a market crash (like we have just had) are the few investment managers who called it right. Be wary of these managers; they will show positive returns even as global equity markets decline. They will appear on TV and radio. They will become famous, write books, and win awards. On the heels of their good fortune, they will raise billions of new assets, only to then deliver terrible returns. For example, John Paulson raised $14B after “The Greatest Trade Ever” predicting the Global Financial Crisis and returned negative 65% over the next five years.
So beware those managers who, in the aftermath of a crisis, seek to exploit our optimism for their own benefit. There are no miracles; there are only fundamentals, and the real opportunities will go to those who remain calm, remain invested, and stay the course.