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moneysense.ca, 9/07/07
Book Review: Juggling Dynamite
![[Front cover of Juggling Dynamite]](http://www.canadiancapitalist.com/images/books/juggling_dynamite.jpg)
First off, I would like to thank the author Danielle Park for furnishing a copy of her book for review. A lawyer and money manager, Ms. Park likens investing, which can be remarkably volatile and full of risk, to lit dynamite and a money manager’s role to that of a professional dynamite juggler. There is a lot to like in her warning to investors to beware the advice given by brokers, analysts and the media, who have a vested interest in being perpetually bullish and mutual fund salespeople in advocating a buy-and-hold approach in all market conditions.
The author contends that market timing (“the buying and selling of equity holdings within the broader context of the roughly 4- to 5-year business cycle”) is superior to a passive approach to investing. She explains that her approach in equities is to strategically enter and exit different sectors at different stages of the economic cycle.
While I found myself agreeing with most of Ms. Park’s diagnosis of the investment business and its consumers, I found little to challenge the idea that most investors are best served by a “buy-and-hold, keep expenses ultra low” approach to investing. First, there is nothing in the book to show the superiority of market timing over indexing. Even if I bought the idea that market-timing strategies are superior, I doubt that average investors would be able to time successfully.
Despite my reservations, I found myself enjoying the book as it made me think about a diametrically opposite approach to investing than my own. Section III, in which the author discusses risk (“by its very nature an unknown”), leverage (“a high-risk strategy for real-life people”) and income (both employment earnings and investment returns) makes the book worth reading. The soft cover book is available for $16.02 from Amazon and for $16.68 from Chapters (non-affiliate links). You may also want to check out reviews by Jonathan Chevreau and Canadian Dream and the author’s own blog.
moneysense.ca, 9/07/07
Does she show exactly how to time the market?
Obviously you can increase your returns tremendously if you can time the market but the question is how to do it?
Mike
the advice given by brokers, mutual fund salespeople, analysts and the media who have a vested interest in being perpetually bullish and advocating a buy-and-hold approach in all market conditions
Not sure you can lump all these groups into one, CC. Sure, the cynic in me can accept that they may each have their own biases, but I think they’re all somewhat different. Sometimes contradictory.
I don’t think a broker, for example, would advocate a “buy and hold” approach. If anything, that would disadvantage them by cutting out fees — a broker is more likely to tell you to go in and out of hot new sectors several times, no?
Ditto for the media. While I appreciate contrarian writers like Carrick and Hood who advocate going against the flow and the benefits of indexing, a lot of the MSM gets dedicated to the latest flavour of the month. Very few publications consistently advocate buying and holding. Whether that’s because that’s what the public wants to hear or whether that’s the media telling them what to do is a chicken-and-egg scenario I don’t know the answer to.
Mike: That’s my problem with the book. I accept that in theory market timing could beat a passive indexing approach. But the key question is how and the details of the timing strategy is sketchy. The author mentions moving between cash, bonds, equities, currencies and commodities as conditions warrant and buying and selling sector index funds at various stages of the business cycle.
GIV: Good point and the mistake is mine, not the author’s. I’ll correct the offending sentence.
Thanks to CC for your favourable comments on the book.
I agree that market timing is a very daunting task for most people to implement for themselves, beacuse they tend to do it emotionally and exactly backwards, ie., confidence at the top and panic at the bottom. In fariness my book says it is very hard for someone to do this for themselves. It is not easy for even us seasoned professionals to move against the pack at the peak and bottom of market cycles. But like many things that are difficult to do with constant discipline, the effort is key to lasting rewards over time.
It is true that I do not go in to the specifics of how we execute timing at our firm because I did not write the book as a do-it-yourself guide for people to follow our approach. It would be not in the best interests of our clients, for me to explain exactly which metrics we use. I do point out that one can use fundamental and technical filters to monitor price risk and compile their own objective timing rules. And I point out that the rules must be presrcibed in advance and stuck to over time. This is what all the great money managers do. That is why they will tell you that you need to develop a discipline and stick with it religiously.
Yes it is true that we cannot predict the future, but if we are paying careful attention, we can know when markets are significantly overvalued by our selected metrics. And when they are, investors had better have someone looking out for the protection of their hard-saved capital. To do otherwise is to either be ignorant of the nature of the beast or wilfully blind to price risk.
So much energy and focus is on the minutae of what markets do each day and week. And yet, its not about how markets perform, its about what an investor keeps that matters most in real life.
We must wear as much protective armour as possible when we are juggling dynamite. Markets are a risky place to blindly park one’s savings.
Best wishes to you all. D
Debating investment philosophy is a mugs game. In my opinion, it requires all kinds of different opinions and philosophies in order to make a market. If everybody thought the exact same way, then the market wouldn’t move.
So, just pick a philosphy that works for you and go with it.
My own personal philosophy includes market timing. Don’t buy when the P/E ratios are sky high (in my opinion, sky high is anything above whatever the Big 5 banks are trading for – they are my benchmark). I only sell under two circumstances: 1. the fundamentals behind the investment has changed. 2. when I need the cash for something else.
Which brings me to a question concerning fees…
Someday well into the future when I’m retired… Can I move stocks out of my RRSP in kind, or is it mandatory for me to sell the stock, take the cash out of my RRSP, incur the taxes, put the money into my taxable brokerage account, then buy the same stock back afterwards, incurring the brokerage fees in both directions? That would work out well for my broker, but not so good for me… =0(
Phil, I don’t know 100% for sure but I don’t see why you would have to sell the stocks to move them out of an rrsp account. You can contribute ‘in kind’ so you should be able to de-register the investments ‘in kind’ as well.
Mike
Hi Danielle: Thanks for your comments and I enjoyed reading your book. I’ll accept that market timing is a daunting task and clients pay you to do it because you are successful at it. Of course, if you reveal your secret, everyone will start doing it so that it doesn’t work anymore.
Phil: Good point about market strategies. It is a bit like religion. You can pointlessly argue which one is better but like you say, you should simply settle on something that works for you. My investing style is a bit like yours. If I feel like a stock / asset class is overvalued, I simply keep that portion in cash. For instance, I have no exposure to REITs and emerging markets. However, once I am invested I don’t sell and go to cash.
Having said that I measure every strategy against a passive, indexed and diversified portfolio because it is very simple to implement for the average investor, who has a history of poor returns and has a tendency to chase yesterday’s winners consistently. Many strategies that work for some investors fail this test.
I’m a half breed as well; “timing” the entry based on valuation, but holding forever. Investors are blessed with the best of both worlds with this strategy. Namely, the implied margin-of-safety minimizes the initial downside risk, but maximizes expected future return by ridding of one dead weight: tax-drag.
The reason why the average investors consistently under-perform the market is well understood. As CC alluded to, investors shoot themselves in the foot by chasing overvalued stocks. Although the lingering behaviour is not easily correctable, this under-performance is not accidental.
Here’s my question. If you have the ability to rewire your brain to think independently from the rest, can you improve your odds of beating the market? Although the “average” investors can’t or aren’t willing to diverge from the herds, should the rest should simply toss their hands up? After all, many index investors only sought refuge after chasing Nortel, which hardly qualifies as an admirable attempt to learn the proper market-timing techniques.
I don’t have an opinion on Danielle’s book since I haven’t read it. In general, I think we shouldn’t judge any market-timing book on the merit that the techniques are too daunting for the average investors. Often the average investors aren’t the intended audience.
I agree, market timing will obviously beat almost any strategy… I mean, if we could time the markets properly we would have bought everything at its lowest level and know exactly at what point to sell for the highest profit. I’m sure we would all be multi-millionaires.
Unfortunately, marketing timing is the hardest part for avg joe investor.
I’ll probably receive an earful when I wake up from my time zone tomorrow.
Just so I’m not misunderstood, I’m using “market-timing” very casually to include both value and technical investing. While I hate to label value investing as “market-timing”, I’m afraid the phrase is stuck with the indexing crowd, and I’m simply going along with the flow.
Tom Bradley from SteadyHand reinforces the reasons why most investors fail initially at value investing, and how devoted ones can prevail by embracing a few basic principles.
http://blog.steadyhand.com/default.asp?item=646785
I do not know if Juggling Dynamite engages in value investing. I apologize if I’m going off on a tangent.
FJ: I don’t classify waiting for an attractive entry point (or a “juicy pitch” as Buffett puts it) as market timing. In fact, I haven’t heard anyone but the hardcore adherents to EMH call that market timing. In the book, market timing refers to moving between asset classes depending on conditions. That might include moving to 100% cash if the manager thinks that equity markets are overvalued.
In that sense, market timing is extremely difficult even for professionals. We do have data on market-timing newsletters and the picture ain’t pretty. Mark Hulbert, who tracks these things, says 80% under perform the benchmark index.
Also, indexing is hardly as popular as you think. The popularity of ETFs is mostly with traders, not traditional indexers (BNN even has an ETF Update segment. The other day they recommended the Russia Fund. That’s hardly indexing in my book). Nortel refugees are now busy chasing resources and emerging markets.
I’ll readily accept that value investing and dividend-growth investing are great strategies. However, indexing is the easiest to get right and will work for everyone.
I see. Thanks for the clarifications.
This is an interesting development Claire, thanks for sharing. I agree there is huge upside potential for businesses to harness the spending power of women in their communities. I will follow this case with interest and look forward to an update on how WalMart goes with this. Thanks for sharing!