Market Musings 300723: Can you buy at all-time highs?
Market Musings 300723: Can you buy at all-time highs?
The surprising answer is Yes!
Summary:
Buying stock markets at new 52-week or all-time highs is a winning strategy
Country stock markets close to all-time highs: US S&P 500, French CAC-40, UK FTSE 100, Brazil Bovespa, IPC Mexico.
Also Gold is back to $2000/oz on futures, close to an all-time high
Podcast this week: Did you know these five surprising financial facts?
In today’s podcast, Edmund Shing gives five financial facts and explains why they matter.
Brush up on your knowledge of financial markets (stocks, bonds, gold) and learn a few figures to keep in mind while investing.
Should you buy stocks at all-time highs?
This sounds like a strange question: why would you want to buy stocks when they have just reached a new all-time high, and presumably have just enjoyed strong price gains already?
This was the question posed by Meb Faber in this 2019 article. We know that momentum is a factor that works well over time, albeit at the risk of sharp falls every now and then when the market corrects.
Meb Faber then looked at US stock market index data ging back to the 1920s to see if buying the US stock market once it had reached a new all-time high was a good idea.
Specifically, he tested this strategy:
“What if you bought stocks at all-time highs, otherwise you sat in the safety of government bonds?
And it turns out, it’s a pretty damn good strategy. Better returns than just stocks, lower volatility, and WAY lower drawdowns…again, all you do is check at the end of each month…if stocks are at all time high, then you invest in stocks for the next month, and if not, then bonds”
These are the results he found, where the strategy of buying stocks at all-time highs is labelled the “ATH Switch” strategy, then compares to just a buy-and-hold strategy with US stocks.
Source: Meb Faber
As you can see from the chart, not only did this strategy outperform buy-and-hold, but it did so with far less volatility (i.e. scary periods where you suffer heavy drawdowns).
He then repeated this exercise using a number of other asset classes to see if the same was true in those cases too, and found the same result if invested across all of these asset classes using a similar strategy:
Source; Meb Faber
This also holds true for buying at 52-week highs, by the way. Meb Faber examined this question in an earlier 2013 article, and found that buying stock markets at 52-week highs similarly outperformed over the following 12 months.
“We tested which strategy works better: Buying near 52-week lows… or buying at 52-week highs. We looked at nearly 100 years of weekly data on the S&P 500 Index, not counting dividends.
You might be surprised at what we found…
After the stock market hits a 52-week high, the compound annual gain over the next year is 9.6%. That is a phenomenal outperformance over the long-term “buy and hold” return, which was 5.6% a year.
On the flip side, buying when the stock market is at or near new lows leads to terrible performance over the next 12 months… Specifically, buying anytime stocks are within 6% of their 52-week lows leads to compound annual gain of 0%. That’s correct, no gain at all 12 months later.”
Here are his results for US stocks, going all the way back to 1791!
Source: Meb Faber
From 1950, these are his results:
Source: Meb Faber
So, buying both at all-time highs and also at 52-week highs are statically a good idea, toi exploit the positive momentum.
Stock markets today close to all-time highs
I bring up these findings as we are once again close to all-time highs on a number of stock markets around the world, in spite of the central banks’ concerted efforts to rein in inflation by jacking up interest rates, and in spite of the gathering economic storm clouds of potential recession.
The US S&P 500 index is under 5% from its 2021 all-time high, the French CAC-40 index is 2% away from a new all-time high, and the FTSE 100 index is 4% away from the high over 8000 points touched earlier this year.
S&P, CAC-40 and FTSE 100 are all close to all-time highs
Source: tradingview.com
Other stock markets I would consider can be found in emerging markets, particularly in Latin America - Brazil. Not only do I like this chart in local currency (Brazilian reais), but I like the fact that the Brazilian real is also appreciating against the US dollar and other major currencies, adding to the return for foreign investors.
Source: tradingview.com
In a similar fashion, Mexican stocks also look attractive candidates for a new all-time high soon and have the backdrop of an appreciating Mexican peso:
Source: tradingview.com
Latin American stock ETFs and funds are largely exposed to a) Brazil and b) Mexico, as per
BRLA Blackrock Latin American Trust approaches all-time high
Source: tradingview.com
And of course my favourite commodity - gold (gold futures in this chart):
Source: tradingview.com
Have a great week,
Edmund
Disclaimer
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17 comments
Any opinions on investing in India and Vietnam. I do hold some India Capital Growth Fund (LON:IGC) and used to hold Vietnam Enterprise Investments (LON:VEIL).
Pakistan there are still problems from last year's floods, probably too risky for me.
Momentum investing works in bull markets, but it’s buying at the top if we time it wrong and it’s the peak.
e.g Rolls-Royce Holdings (LON:RR.) was 437p in Dec 2013 and then fell 80% to 66p, since when it’s tripled in no time.
The big flaw in the don’t buy low argument is that the great buy opportunity at 66p has been missed and a tripling of the share price has also been missed.
What about buying Boohoo (LON:BOO) once a big favourite as a momentum buy near the peak? Disastrous decision whereas buying now at less than 40p might not be.
Buffett buys low and so do I. I much prefer it to buying after markets have soared and after the share we choose to buy has already multi bagged. That buy low tactic has worked very well for me for multiple years and with dividends (yields are low when buying at peaks, whereas a lot of mine are over 10%) now paying for nu new investments for free.
Hi Ken
I agree, momentum investing clearly has its risks (as I mentioned briefly in the article) and is not for everyone. Clearly, different approaches to investing can work for different people - I am a big believer in finding the investing approach that fits with your personality...
But looking at former go-go momentum favourites that hve since crashed to earth and are now stabilising is interesting.
Along the lines of BooHoo, I see that famed "Big Short" value ivnestor Michael Burry is invested in Chinese mega-cap Tech names and also Zoom Communications (ZM) - click here for details. What I like about Zoom is that everyone uses it and recognises the brand, it is still profitable (unlike BooHoo) and is still growing sales (albeit slowly), which is not so true for internet retail stocks like BooHoo and ASOS.
Best
Edmund
Thanks for replying Edmund. I agree about doing what works and in a way we’re comfortable with.
A big problem with momentum investing is that we can’t forecast markets and the majority of shares fall in bear markets. So there’s always that risk that we’re buying at or near the top.
OK the counterpoint is valid in that we can’t know when using my buy low approach where the bottom is either. BUT if buying after big falls the risks are skewed to the upside whereas buying after a share has gone to new heights the risks of significant losses are greater.
e.g looking at Blackrock World Mining Trust (LON:BRWM) a Mining Investment Trust I bought too early in 2015 ahead of the Mining Sector bear market ending at the end of 2015. I’ve held BRWM since then aside from a temporary sell during covid market falls. The now very big 6.4% dividend yield was also maximised to around 15% by buying at £2.40 (price now 624p).
BRWM peaked at £7 in May 2008 but fell to £1.80 by December that year. OUCH if momentum investing it then. The price then more than quadrupled to £8 in 2011. Anyone buying at that peak saw the share price crash 75% to £1.85 in Dec 2015. OUCH again. By 2022 the share had again quadrupled to £7.80.
So there were those 2 opportunities to get a quadrupler, but also with momentum approach 2 chances to buy ahead of 70% falls. The chances of similar gains after a share has already quadrupled are surely much smaller. To get those sort of gains buy at bargain prices and not inflated ones.
Hi Edmund, thanks for your usual weekend research, as always very interesting. Just one housekeeping thing though Blackrock Latin American Investment Trust (LON:BRLA) ( I hold) is not close to an ATH , was 520p back 2019 and 760p back in 2011.
Good point. Blackrock Latin American Investment Trust (LON:BRLA) is certainly well off its ATH at present, but it's very close to its 52 week high and rising fast. Probably a reasonable momentum trade using 520p as a target.
As Blackrock Latin American Investment Trust (LON:BRLA) has ~60% exposure to Brazil, it is essentially tracking the ibovespa index which is near all time high measured in Brazilian R$.
Note that Argentina has been outperforming every other country in Latin America over the last 12 months yet this fund only has a 4% allocation to that country!
The fund's largest position is Petrobras which is an American Depositary Receipt (ADR) version, not the real version listed in Brazil. The funds dividend yield is mainly coming from high yielding Brazilian ADR stocks such as petrobras, Bradesco, Vale, Gerdau etc. Remember Petrobras has a 40% dividend yield right now, it is churning out cash flow.
Political risk it worth thinking about here and I don't mean political risk coming from Latin America. I mean political risk coming from potential future western (read: American) sanctions. The top 4 countries that this trust has exposure to are pro BRICS pro Russia/China countries:
Source
Colombia is probably the cheapest market in Latin America right now and more importantly it is the only "pro west" nation down there. The Global X ETF Global X MSCI Colombia ETF (PCQ:GXG) tracks their market, dividend is about 10%.
...and to digress slightly: Also take a look at Pakistan, another pro BRICs country, there is no market in the world cheaper than Pakistan right now. The entire market has a PE below 3 so it is about 10 times cheaper than India at the moment. The only ETF that tracks their market is Global X MSCI Pakistan ETF (PCQ:PAK). Dividend yield is around 10% I believe. If you look inside this ETF, it is comprised of energy, fertilizer and other useful "stuff". Pakistan is interesting to me because it is a key component of China's (BRI) Belt and Road Initiative.
Pakistan has succumbed to debt-trapping by the Chinese Communist Party and much of its economy & critical infrastructure is now captured by it - with no way back, I'd suggest. So cheap for a reason. Very cheap, so you might make money - good luck if you do. I wouldn't go anywhere near it.
PS Debt-trapping by the CCP didn't work out so well for Sri Lanka. Safe Investing!
Thanks for this interesting article, Edmund. Of course, if one buys an ETF when the market it tracks is at an all time high, but is just before that market crashes, that could lose one a lot of money. As people who invested in technology shares at the peak of the Dot Com 'bubble' in March 2000 discovered. The point of Meb Faber's research is that the probability of a crash happening soon after any occasion when a market reaches an all time high is in reality quite small. So on average, over many years, the profits made by this approach at times when it is successful compensate for the losses made when this approach fails.
Yes
the general idea is to buy when an index has JUST made an new all time high, especially after many years of consolidation. That is a classic “breakout” pattern, not just buying every time the index makes a fresh all time high if the last one was made recently…
this improves the odds somewhat…
Edmund
So how does this work re the bonds - is the recommendation sell most the existing as it drops and buy bonds or is it just buy bonds on next investment?
Well Russell,
in the back tests above, the idea was to buy the stock index once it made just made a new all time high (for the first time in > 1 year) then hold the stock index for Q2 months from that date. Then switch out of the stock index back into bonds, and hold bonds until another new all time high in the stock index has been reached.
edmund
Thanks Edmund. A particularly useful piece as the stock markets are approaching all time highs.
I think the premise might be truer for stocks than for commodities - if you'd bought gold at the ATH in 2011, you'd have had to wait nearly 10 years to make a profit.
In practical terms, a 52 week high is also a useful buying point.
If you'd bought the 52 WH for the Nasdaq 100 (NDX) in April this year, you'd be around 16% up by now, and for the S&P 500 (SPX) you'd be up around 10%.- and with the prospect of another 5-10% when the ATH is reached.
With gold, the idea would have been not to buy in 2011 but to have bought when a new all time high had first been reached, I.e. back in 2006. Big gains from 2006 to 2011!
Edmund
Thanks Edmund. You are of course quite right! As with all trading it's about knowing when to get in and when to get out - and avoiding bubbles.
Fascinating article. Momentum works, averaging down does not!
to be fair the difference between buy and hold and buying at ATH is not great if you look at 5 yearly periods.
One question which has not been addressed here is buying on dips when the market is rising . It probably adds to the final returns.
The other eternal investors question of course is: it is a bad trade to sell at ATH?
My choice has been to sell at ATH and buy on dips in a rising market.
overall, excellent read. Thank you Edmund.