It's Not All in the Timing

Market timers' results haven't been so great

By Howard Winell's reckoning, 2000 was a great year for trading stocks. Clients who followed the advice in his Winell Report newsletter would have scored a 46% gain, including profits from short sales, compared with the 10.1% loss in the Standard & Poor's 500-stock index. Now, 1998 and 1999--those were the lean years. While investors who bought and held the S&P reaped 26.7% that first year, 19.5% the next, anyone relying on Winell's calls lost almost 34% in 1998, an additional 18% in '99.

Winell is a market timer, a breed of adviser reviled by the managers whose mutual funds they leap in and out of, and scorned by B-school professors who say it's impossible to do what they claim. While the investing Establishment counsels stashing your money in promising stocks and mutual funds, then riding the inevitable waves to long-term returns, timers such as Winell think they can spot those waves and minimize losses by getting in and out of the water. They rely on technical signs such as whether stocks are trading near their lows or an index sinks beneath a certain moving average.

If such a strategy ever works, last year should have been the year. Timers admit they're likely to fall behind in an up market, when money moved to the sidelines simply misses out on gains. But a down year like 2000, with the Nasdaq plunging 39% and with lots of dips and crests, is a market timer's raison d'etre. Then, yanking money out of stocks is more apt to prevent losses--and to yield profits when selling on the rallies.

So how did timers do in this ocean of potential profit? Not too well. According to Jim Schmidt, whose Timer Digest tracks buy and sell calls from about 100 timer newsletters, only 65% of those he follows beat the S&P. In their kind of market, the timers couldn't even match the performance of the domestic stock funds tracked by Morningstar. More than 69% of the funds beat the S&P. (Looking back to another down year, 71% of Schmidt's timers beat the S&P in 1990, compared with only 41% of the mutual funds.)

And doing it on paper may be easier than with real dollars. Data from MoniResearch Newsletter, which tracks money managers who use market timing to invest, show that about 40% beat the S&P in the first nine months of 2000. They may have done better for the year, but the newsletter has not yet tabulated all the results. Another newsletter that tracks managers, America's Best Timers, says 42% of the 146 timers they tracked beat the S&P last year.

Also, remember last year's timer performance came after a decade strewn with wildly up years, when timers would have been expected to underperform the average. In the bull market years of 1997-99, the percentage of timers who beat the S&P was in the single digits, Schmidt says. Over at MoniResearch, only 4% beat the index in 1999. Not one of 37 managers followed in 1995--a particularly exuberant year for the S&P--came out on top, according to Steve Shellans, editor of MoniResearch. And that's not even considering the tax consequences of moving in and out of stock funds perhaps 8 to 12 times a year (although much of such trading is done in tax-deferred retirement accounts).

Those who focus only on returns are missing the point, argues Roger Schreiner, president of Schreiner Capital Management, who manages $125 million. For the typically older clients who rely on him, avoiding a sharp drop, at an age when they may not have time to recover, may be more important than stellar returns, he says. "We're trying to reduce the risk of the market. We may or may not be able to outperform it," Schreiner says of timers.

Of course, investors don't complain when a timer beats the market. Last year, that person was Winell, 63, who ranked No. 1 on Timer Digest's "Top Ten Timers" list for 2000. On Apr. 13, the day before the Nasdaq suffered an almost 10% one-day drop, Winell advised investors to sell or go short. "Now, it is only a question of how low the averages go," he wrote.

Winell operates his one-man business, with its 18 institutional clients, out of an unimposing midtown Manhattan office. He shares the space with his wife, Kathleen, who runs the couple's over-the-counter cosmetics and ointment business, Donnell Inc. Winell uses a program developed by a now deceased partner, then refined by himself, to bet on when the market will rise and fall. The system gauges the demand for stocks by looking each day at where they close--whether it is nearer their intraday high or low. A stock that opened at 90, for instance, moved to 94, then closed at 91 would give a negative reading for that day. A 93 close would register as positive.

Winell tracks the positive and negative moves for every stock on the New York and American stock exchanges and the Nasdaq, and charts the cumulative ups and downs for the indexes. He then compares those movements (i.e., strength of demand) to what a stock's price--or an index--is doing. In mid-February, Winell was forecasting a rally.

But Winell knows his method isn't foolproof and advises clients to consider other factors such as fundamentals before taking any action. Also, pinpointing the precise time to move based on the signals is difficult, he says.

"It varies. That's the problem. There are times when it can take an interminable amount [of time]. And there are times when it doesn't work." In fact, Winell's overall 10-year return is a negative 7%, according to Timer Digest.

Steven Check, president of Check Capital Management and publisher of The Blue Chip Investor, is the only timer followed by the Digest whose 10-year returns have beaten the market. Check's calls would have resulted in a 315% gain between the end of 1990 and the close of 2000, while the S&P added just under 300%. (Right now, Check is bullish.)

Ironically, this champion timer doesn't manage money based solely on his timing model--and doesn't believe market timing works. "When the market is overvalued according to this model, I just suggest being more careful about what you're willing to buy," he says. But he wouldn't pass up a good stock at a tempting price just because his model was bearish. Says Check: "I think it's useful to use a little bit more caution when it's saying it's overvalued, and maybe be a little more aggressive when it's saying it's undervalued. But don't let it dictate what you do." It may be useful to know what market timers are saying, but investors shouldn't make decisions by the timers' clocks.

By Carol Marie Cropper

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