BCA Research have issued a very useful report in which they try to ascertain whether investors can increase their chances of gaining an edge over “normal” returns by reading markets for clues as to whether it is a good time or not to invest. 
The ideal scenario is undoubtedly to buy when prices are low and sell when prices are high, but the odds on Leicester winning the title were low in comparison to those of being able to follow this seemingly simple aim successfully and consistently. Treat with the utmost suspicion anyone who claims to be able to perform this feat as a matter of course.
However, there is a huge difference between something that is largely unpredictable and something that is totally unpredictable.
A surgeon that kills his patients 40 per cent of the time will not remain in their job for long whereas an investor can make mistakes 40 per cent of the time but still come out with good overall returns as long as the 60 per cent they get correct is meaningful.
The report identified six areas that have consistently aided superior returns if one is able to read them effectively, and act accordingly.
These are valuation, the state of the business cycle, monetary and financial conditions, sentiment, momentum, and calender effects. Get the combination of these correct and you stand a far greater chance of achieving an above average risk adjusted return over time.
12 years to make ANY return
Taking valuation first, it seems fairly straightforward to understand that if you buy when stocks are cheap, your longer term returns will be better than if you buy when stocks are expensive. It’s surprising how rarely this happens.
In fact, very often the precise opposite occurs. This is tied into sentiment, because it is at the very time that prices are at their most expensive that investors shut their eyes and ears to the warning signs that are sounding all around them as they fear missing out on a bull run that is highly unlikely to continue.
Once the market tips over, of course, investors have a psychological block about what they think their investment is truly worth, and they hang on in vain for it to recapture the previously bloated value. This behaviour is not just restricted to the stock market – it is also abundantly prevalent in connection with the property market too.
Take the technology boom of the late 90s into 2000 as an example.
Performance of index between September 2000 and October 2012
Source: FE Analytics
If an investor had invested in the S&P 500 index in the US at the peak of the boom on 12 September 2000, they would have to have waited 12 years to see any positive return on their capital at all.
However, an investor who put their money in when that particular boom had hit the floor in the bust on 13 February 2003, and who took their cash out on exactly the same date of 4 October 2012 as the hapless peak investor, would have seen a return on that investment of 105 per cent.
Performance of index between February 2003 and October 2012
Source: FE Analytics
Sadly, the likelihood of the latter investor being anyone other than a very lucky individual who had been living under a rock for the previous 30 months oblivious to the outside world and its tech-driven market horrors, is very slim as the sentiment in February 2003 would have been such that no one expected the stock market to ever be a worthwhile source of returns again.
Put simply, the market in 2000 was very expensive, whereas that same market in 2003 had become very cheap.
There is a measure known as the Shiller P/E Ratio which is used to assess the value of a given market at any time and this ratio had hit an all-time high figure of 41 in August 2000.
Today it stands at 26, some 30 per cent above the post-1960 median. If history is a guide, BCA suggest that this indicates real rates of return of between 3 per cent and 6 per cent per year over the next 10 year period, which although far from exciting, are reasonable if interest rates and bond yields continue to trudge through the treacle of central bank policy as we expect them to do for some while yet.
There are many other markets to consider other than the US one and it is interesting that those of Europe, Japan and China all offer ratio entry points lower than that for the S&P, suggesting better overall returns in the next 10 years.
These markets are cheaper for a reason though and sadly offer a potentially more volatile route to the end point, which some investors may not be able to stomach.
Tell me why I don’t like Mondays
Bob Geldof was the first to put this particular poser out there, but it may have been that the young lady about whom the song was written was subconciously reacting to her investing habits rather than railing against the world at large.
History has a strange habit of repeating itself as we all know. Is it coincidence that in the extract above, the market bottomed on 13 February 2003 while it looks as though the recent crash in commodity prices and mining companies may have found its particular bottom on 11 February this year?
Performance of index over 5yrs
Source: FE Analytics
The table below shows how there is an uncanny similarity about the better or worse times to invest which appear at first sight purely random.
Between 2000-2016 you can see that January has been a bad time to invest, whereas it was a cracking month to go in from 1948-1999. Now we have an annual “Santa Rally” which suggests that traders have got wise to the January statistic and want to get their trades done a month earlier.
The other striking numbers from the table are just how much of an advantage it appears to be if you buy on the first trading day of the month, or indeed in the last 3 or the first 3 trading days of the month, compared to the returns that you appear to get if you trade on any other day of the month.
Source: BCA Research
But what is it about Mondays? Compared to the other days of the week you can see why no one should really like Mondays. Could it be that policy makers and companies have got used to making unfavourable announcements late on a Friday so that people can digest the news over the weekend?
As we began this communique, any factor, no matter how small or apparently random, that helps you to gain an edge over the average when investing either professionally or personally is worthy of consideration, even down to which day of the week you invest on.
Andy Merricks is head of investments at Skerritts Wealth Management. All the views expressed above are his own and shouldn’t be taken as investment advice.
