I used to think that the major divide between investors was value versus growth: You either like your investing slow and steady or with a shot of adrenalin.
But I've come to believe there is a much deeper divide, at a more fundamental level: Those who try to time the market and those who don't.
Last week I wrote about those who don't, looking at two studies that analyzed stock market returns over 75 years - and how a very small number of days accounted for a large percentage of market gains and losses. Since an investor doesn't really know when those days will occur, the studies suggest it's best to buy and hold - to stay in the market until things improve.
By Monday, my e-mail box was full from investors who came down on either side about whether an investor can successfully time the market. Decidedly on the side of "yes" was Don Vialoux, an investment expert who writes the market analysis blog at timingthemarket.ca.
"Timing the market does work if you know what you're doing," he wrote. He is such a believer that he has spent six years since retiring as a technical analyst at RBC analyzing everything about the markets - and posting what he learns on his website.
On a macro level, Mr. Vialoux says equity markets move in alternate 16-year cycles, what I think of as periods of boom or bust. In boom periods - like 1950-1966 and 1983-1999 - life is good and the markets flourish. The Dow, during the last boom, rose 1,000 per cent. Even Mr. Vialoux agrees that during periods like these, with steady increases, the buy-and-hold approach can work well for investors.
However, we're right in the middle of a bust, which Mr. Vialoux describes as "a period of very volatile markets where essentially from the beginning to the end of the 16-year period you don't make any money." It means, for example, that the Dow was relatively at the same point in 1982 as 1966; during that time, it recorded a $0 return.
But that doesn't mean there isn't money to be made, Mr. Vialoux argues - you just can't make it through a buy-and-hold strategy. You have to take advantage of the market's volatility.
How does one do that? Through more analysis, of course.
In fact, Mr. Vialoux's analytical approach may seem complicated - the graphs on his website, for example, are breathtakingly hard to read at first (although he does provide excellent written explanations) - but in many ways it's like a breath of fresh air. There's something very reassuring about following the rules, letting numbers be your guide. It takes all the emotion out of things and prevents you from impulse investments.
Here's how his system works: Mr. Vialoux's first step is knowing seasonal trends - annual recurring events that are important to a company and its sector - and how those trends affect a company's share price. For example, he says "the sweet spot" for oil is from the end of January to the end of May, when refiners begin to build gasoline inventories for the summer driving season and gas prices move higher.
Similar sweet spots exist for every sector, and even for indexes in general. Mr. Vialoux cites the example of the S&P 500, which he says is at its strongest between the end of September and the end of April. "This particular trade has worked in eight of the past 10 periods at an average return of 6 per cent," he says.
The key is to invest only during a company's or index's seasonal strength. Outside of that period, it may be possible to make money, but Mr. Vialoux says that's a random result. Using the example of the S&P 500, during the last 10 periods between April and September, the index was up five times and down five times for a loss of 3.3 per cent.
Even when you're in a period of seasonal strength, it doesn't mean you automatically invest. You need to do some basic fundamental analysis to determine whether it makes sense. Prior to last year, Mr. Vialoux says, Canadian banks were practically a sure thing from the end of September to the end of December. "That trade worked in 10 of the last 10 years prior to last year."
Then came the news of writeoffs, along with fewer possibilities of dividend increases or stock splits. Suddenly, the reasons why that season was so strong were gone.
Once you understand seasonality, there's even more analysis to be done: You need to do some technical analysis to pick the exact date of when to buy and sell - "whether the stock is going up or going down; whether there's an upward trend or downward trend; what are the momentum indicators," Mr. Vialoux says.
And any time you're not invested in equities, you put your money in Treasury bills.
Two weeks, two widely divergent philosophies. My approach for the past several months has been buy and hold, just hanging in there while the markets tumble around me.
Nevertheless, this week I went out and bought a copy of the seasonal investors' bible - Thackeray's 2009 Investor's Guide - which gives month-by-month breakdowns of various investing trends. It's quite an amazing trove of trivia. It remains to be seen what I do with the information, but with a new year approaching, anything is possible.