April 6, 2016

Dear Investor:

The incredible perils of trying to time the market are evident from RBS’s January 11, 2016 admonition to “sell everything!

If you read the RBS note, they actually recommended hanging on to some investment grade bonds. Putting aside that irrelevant nuance, on the day of the RBS call, the Dow was at 16,346, almost at the year’s lows. Just three months later it stands at 17,603, nearly 8% above the point where they told everyone to jettison every single stock they owned.

Regardless of whether the Dow returns to 16,000 or lower, the damage has been done to anyone who followed this unscientific advice. If you sold that week, you incurred transaction costs and probably realized significant taxable gains (remember: the call was “sell everything” – not just stocks in tax-deferred retirement accounts). Now you sit in cash, earning 0.01%, waiting (presumably) for RBS to tell you to buy everything back—meanwhile, watching some of the greatest gains the market has clocked since 2009.

Knowing when to get back in based on spurious guidance is just as hard as knowing when to get out. Many who sat on the sidelines in 2009, after selling at the low, never got back into the market, irreparably damaging their retirement.

If the market had declined 20% right on the heels of their call, RBS would be proclaimed geniuses. Now that the market has risen 8%, they might be called dunces instead. Neither is accurate. The reality is that no one can predict the short-term direction of the market: not RBS, not a pundit, not even the best traders. The next uptick or downtick in markets is unknowable.

Following the likes of RBS is apt to be less profitable over time than following value investing—the strategy made famous by Warren Buffett. Value investors buy what’s valuable and sells what’s overpriced, without regard to the short-term direction of the market (which Buffett has the requisite humility to know is impossible to predict; that’s the most important first step).

The market is not a monolith. There are always pockets of cheap forgotten stocks, temporarily eclipsed by the overpriced and fashionable. Value investors generate returns by rebalancing from the latter to the former, as we are doing by selling consumer staples stocks, domestic companies, and healthcare to reinvest those proceeds in emerging markets, steel and energy.

Selling everything is not a strategy. It’s panic, masked as decision-making.