“Sell Everything”. . . At Your Peril

As attention-grabbing as it was, however, this “sell everything” call may be the silver medalist after a similar recommendation made by an influential market guru 35 years earlier. The story of Joe Granville’s market moving directive on Jan. 7, 1981, by Bloomberg contributor Barry Ritholtz, follows. It highlights the risks of trying to “time the market”, and the importance of having a plan and sticking to it.

Be Smart. Don’t Try to Time the Market.

By Barry Ritholtz

Today, we must acknowledge the turmoil in the equity markets, and do so by discussing an infamous anniversary. On the off-chance you were unaware, China’s stock markets had their shortest trading day ever, as the CSI 300 Index plunged 7 percent, triggering a full-day trading halt less than 30 minutes into the session. This follows Monday’s similar losses and market closure.

The reaction overseas was swift, as Europe fell almost 3 percent, and U.S. stock futures followed the rout. Gold bugs finally found some relief from their five-year bear market, as the shiny yellow metal rallied to $1,100.

That all of this action should occur today, Jan. 7, is a wondrous coincidence. As students of market-timing history all know, on this day in 1981, one of the world’s most heralded market timers made one of the world’s most egregious market calls. Today is the 35th anniversary of Joseph Granville’s “sell everything” missive to clients.

The Wall Street Journal reported that the “Granville Market Letter, which thousands of investors relied on for stock-market advice” often moved markets. The result of his historic sell recommendation was a 2.4 percent decline in the Dow Jones Industrial Average on what was, at the time, record volume.

Granville had come to fame during the 1970s, a challenging period of no net gains in markets, when shares staged huge rallies followed by brutal selloffs. He had a run of prescient calls, and according to my colleague Josh Brown, at the peak of his popularity in 1981, he had 16,000 subscribers paying him between $250 and $3,000 a year for his advice.

Subsequent research by Ed Thorpe and others published in the Journal of Portfolio Management debunked the value of those signals. For those interested in learning more about Granville, there is a full chapter devoted to him in Brown’s book, “Clash of the Financial Pundits: How the Media Influences Your Investment Decisions for Better or Worse.”

I bring up Granville for obvious reasons: The anniversary of his terrible market call coincides with the unnerving plunge in Chinese markets. For those of you who may be unfamiliar with the whole story — spoiler alert! —here is the coda to Granville’s market-timing recommendation. As the chart below shows, 1981 was just about the start of the greatest bull market the world has ever seen, rising 1,447 percent during the next 20 years. Granville, who died in 2013, never managed to admit his error or reverse himself; he ended up being consigned to the dustbin of history, his track record in tatters. Mark Hulbert, who tracks the performance of investment newsletters, noted in 2005 that Granville’s letter was at the bottom of the “rankings for performance over the past 25 years – having produced average losses of more than 20 percent per year on an annualized basis.” Ouch.

Granville’s ‘Sell Everything’ Call

Source: @michaelbatnick

I bring up Granville today as a reminder of the many risks we undertake when we 1) try to time markets; 2) take ourselves too seriously; and 3) refuse to acknowledge our fallibility.

It’s the last of those three that has been most resonant this week. Some perennial bears have been declaring vindication for their great market insight — this despite having missed the better part of a 250 percent rally since this bull market began.

My colleague Ben Carlson makes several astute observations about this, perhaps the most important being that “your favorite pundit isn’t going to be able to help you make it through the next bear market.” A close second is that “the majority of the people who have been scaring investors by predicting a bear market every single month for the past seven years will be the last ones to put their money to work when one actually hits.”

The bottom line is this: The relentless rising trend for markets has been broken, and whether it is going to recover anytime soon is unknowable. Your best bet is to have a plan, stick to it and keep your own counsel.

Oh, and don’t try to be a Granville. It’s a career-ender.