Rethinking timing strategies
1/5, look at the timing
In the previous article ” Timing or stock picking, which one is more effective?” “, I once quoted an analysis and research on fund timing and stock selection, and the conclusion is that “timing” does not contribute to fund returns.
But this conclusion seems to have some flaws now. It may also be because public fund managers are not good at it or objective conditions limit the effect of timing, which does not mean that the method of timing itself is invalid.
Before there were no institutions, the “bulls” of A-shares had existed for more than ten years. Some of them were good at mining ten times the big bullish stocks, but more of them explored a set of “timing strategies” with A-share characteristics. Before they successfully reached the billion-dollar level, “timing” was one of the core strategies.
In recent years, there have been many views in the market that “timing strategies are ineffective”, especially in an era dominated by foreign capital inflows after the bottom of the fuse in 2016. Many people think that as long as they hold high-quality leading white horses or long-term targets selected by themselves, You can choose any time.
This concept reached its peak in 2020, but since the Spring Festival in 2021, the market has once again rewarded the “time-selection strategy”. In the past two years, the market volatility has increased significantly, and the time-selection strategy has gained more use.
As an old investor who entered the market in 1996, I have experienced the role transition from retail investor to institutional investor, from various timing strategies to giving up timing, from long stocks to asset allocation and balance. After a series of attempts, in all fairness, I think that if you want to obtain excess returns in A shares, not only retail investors, but even institutional funds, timing strategy is one of the effective methods.
This article will answer four questions:
1. Why A-shares are naturally suitable for timing?
2. What are the four challenges of a good timing strategy?
3. Why did institutions give up timing?
4. What kind of retail investors are suitable for timing?
2/5. Why is A-share suitable for timing?
Timing strategies are basically divided into three categories: only do big bull markets, only avoid big bear markets and band operations. Band operations are to avoid falling bands and intervene in rising bands in exponential fluctuations , so “only do big bull markets” And “only avoid the big bear market” is actually a special case of “band operation”.
Why are A shares naturally suitable for band operations?
Reason 1: High volatility
From the basic principle of the method, the effect of the timing strategy is directly related to the fluctuation range. Since the timing itself has a certain probability of error, the greater the fluctuation, the higher the winning rate of the timing . In an interval with the same increase in the figure below, the red line The market is suitable for timing, while the other two lines are not.
High volatility is only a necessary condition for the success of the timing strategy, and this volatility must also be grasped.
The second reason is that the top and bottom have strong regularity
The top and bottom of the paragraph refer to the time points that are far from the norm and the deviation rate is greater than plus or minus twice the standard deviation. This type of market pattern must be the result of a high proportion of the same direction trading in the market, and behind this combined force is the A psychologically proven and graspable universal psychology with certain regularity.
The reason why A-shares have regular and staged tops and bottoms that can be grasped more frequently than U.S. stocks is based on two reasons:
First, the vast majority of A-share funds are purely stock long strategies, without hedging operations, without asset allocation and balance, and purely relying on position adjustments, it is easier to form consistent operations , resulting in frequent tops and bottoms that deviate from the norm. Timing is more regular.
Second, the proportion of retail investors in A shares is too high.
In the normal market, retail transactions are classified as “noise transactions”, and direction hedging can provide liquidity to the market, making it easier for large funds to be traded and attracting more liquidity;
However, in some special market atmospheres, retail investors are more likely to form common behaviors, such as chasing up the market, grabbing companies that adjust at high levels, and borrowing rebounds to sell after long-term deep deposits, and become the counterparties at the top and bottom of the timed market. , the liquidity provided by retail investors makes it possible for slightly larger funds to conduct timing operations.
Since the timing strategy is a “zero-sum game”, only a market with many retail investors can have a sufficient number of “leek opponents”.
Reason 3: “High Threshold” of Timing Strategy
The timing rule of the stock market is not something that can be seen at a glance. Otherwise, everyone who chooses the timing according to this rule will “smooth out” fluctuations. The laws of timing are complex, probabilistic, and incomprehensible, and can only be perceived through long-term practice.
Taking the core position management of timing as an example, the market has large one-way fluctuations at several key points every year. At this time, it is not important what stocks you hold, but how your positions change.
The above is the proportion of the market’s increase and the number of rising companies in the days before and after the “4.27” market. Every day is either a general increase or a general decline. The final effect of the timing strategy almost depends on the position changes in the days before and after the “4.27” , not the position. There are three specific types:
1. Can you feel that market opportunities are coming amid the panicky bearish atmosphere in late April?
2. In the past two days from 25 to 26, can you keep your attention on the market, but not easily increase your position?
3. In the three days from 27 to 29, can you decisively and quickly increase the position significantly?
What is even more difficult is that the single-day V-shaped reversal pattern of “4.27” is only a type of bottom pattern. Different patterns correspond to different position management methods . Like the one in 2018, there are two bottoms and two bottoms. The shape of the month, the role of position management is not as important as the choice of plate direction.
It is this “high threshold” that few people master that ensures the long-term effectiveness of timing strategies . In contrast, other strategies, such as the White Horse Strategy and the High Prosperity Strategy, are too simplistic, and are easy to inflate and fail in a short period of time.
So, in addition to position management, what are the “thresholds” for the timing of A shares?
3/5, 4 difficulties in timing strategy
Difficulty 1. There are a variety of “band patterns” in the brain
Timing requires the establishment of common models of several major band patterns of A shares in the brain, especially the representative disk and market phenomena of “top” and “bottom”.
Most of the market timing experts always have their own methods, such as:
Quickly reduce positions when popular sectors fall by the limit on a large scale
Corresponding operations for some abnormal volume-price relationships
Corresponding operations for some representative plate changes
There are also some typical band strategies, such as nine-turn strategy, grid strategy, and volume-price timing mode
However, no single strategy can explain all market bands. Investors who are proficient in a certain top-bottom model are prone to perform well in one period and fail repeatedly in another period.
The success rate of timing strategy, in addition to the number of “band models” in your brain, there is also a set of “strategy strategies” to determine what kind of “band model” is currently and which timing strategy is applicable.
In addition, there are different levels of bands, corresponding to different operating spaces. Is it secondary fluctuations within ten percentage points of the index, intermediate fluctuations of more than ten points, or only bull markets of more than 30%? These operations are often completely opposite. The time to buy small-level bands is sometimes the time to sell large-level bands. This is the first issue that needs to be clarified for timing strategies.
Difficulty 2. There is a systematic method of buying dips and escaping tops
Many people imagine that the bottom-hunting escape is clearing positions in early 2022, buying on April 27, holding all the way to July 5, selling all the way, and shorting all the way to October 11 and then re-entering the market. Of course, you can use the timing strategy. It is understood as “escape from the top, buy the bottom, escape from the top, and buy the bottom again”, but it is actually far from that simple.
The actual bottom-hunting is like this. Those who can copy the bottom of “4.27” may start buying a few days in advance, especially for large funds with a slower buying speed, assuming that they buy a 20% position in two days. , you need to endure a floating loss of 1.6% for two days, then these two days, you will continue to be tortured by your soul – am I wrong? Do I need to cut meat?
Furthermore, “4.27” dip-hunting is an intermediate-level volatility operation. Theoretically, in the two slumps of the same level before the Spring Festival and in mid-March, at least one should enter the market to hunt for the bottom, and these two dips are likely to result in both. is a loss.
This is not over yet. The premise of bargain hunting is to escape the top or cut the meat. Those who copy the “4.27” big bottom must cut the warehouse and cut the meat after the last bottom-hunting failure. Otherwise, where will the money come from to buy the bottom?
It must be admitted that even for the masters of timing, both bottom-hunting and top escaping are things with a low probability of success. The most important thing is not to identify the characteristics of the top and bottom, but how to judge the failure of bottom-hunting and escape from the top, and how to deal with it after judging the failure. Losses are kept to a minimum?
For example, after the National Day, the two days are likely to be happy, but it cannot be said to be successful. There is still a certain probability that the index has little room for upside and it will bottom out a second time within three months. The current strategy requires a “backward strategy” that is contrary to expectations.
Relative return of timing strategy = return at success * winning rate + loss at failure * (1 – winning rate) – untimely income
An available timing strategy requires that after deducting the loss of timing failure, the expected value is greater than the profit of timing failure, and at the same time, the absolute return is greater than that of bank wealth management products.
Difficulty 3. The timing strategy needs the cooperation of the stock selection strategy
After the buying time point comes out, what target to buy, this is the stock selection strategy.
Timing and stock selection are two completely different systems. Stock selection requires comprehensive consideration of individual stock fundamentals, valuations, industry prosperity and catalysts, and then choosing the right time to buy. Therefore, it is often encountered that the timing of individual stocks is right, but There is systemic risk in the index, or the timing is very successful, but individual stocks that do not rise are selected. Both of these situations will ultimately fall short.
Before the start of the GEM bull market in 2013, the A-share market basically rose and fell together, and you only need to choose the ticket you are most familiar with;
But after 2013, the market has become more and more differentiated, with large and small caps, value/growth, consumption/technology/big manufacturing, track/off track, cyclical/non-cyclical, and the trends are often in the same bed and different dreams. This is also what many people think is a timing strategy One of the reasons for the failure, such as 4.27 bargain-hunting to real estate and infrastructure, the income is very poor.
There are usually two types of stock selection strategies that match the timing:
Strategy 1. Keep researching in the bear market, and be ready if the market situation comes, you can immediately put the direction and target of the position, and replace it continuously . This is not a problem for institutions, but many retail investors often can’t do it;
Strategy 2. There is a fixed set of stock selection strategies or targets , such as choosing the hottest direction of the market at the time, but these methods sometimes fail, such as the hottest new crown drug theme before 4.27 bottom-hunting.
Difficulty four, the limit of the scale of funds
The larger the scale of funds, the stronger the restrictions on timing. The operation of adding a position from a short position to a full position in one day is at most tens of millions, and it is difficult to reach hundreds of millions of funds. Bands, advance volume, and hedging of stock index futures, when it reaches more than 5 billion, timing is basically impossible.
From the above analysis, it is not difficult to see that the timing of big funds has advantages and disadvantages, so why is the mainstream concept of institutions, especially public offering institutions, “not timing”?
4/5. Why should organizations give up timing strategies?
Reason 1: The public offering system cannot cultivate timing experts
Before writing this article, I briefly counted the returns of funds of different sizes this year:
Median of 2,700 hybrid funds under 200 million -14.48%
The median of 45 hybrid funds with a scale of more than 10 billion -18.99%
The reason for the difference in performance is not necessarily the timing, but also because this year is a small-cap stock market, which is not conducive to the stock selection of funds with more than 10 billion yuan.
The lower limit of the stock position of a partial-share hybrid fund can reach 60%. Funds with a scale of less than 200 million can still choose a certain time. However, in this year’s high volatility market, which is very suitable for timing, the performance is not obvious. , indicating that the timing is not selected, or it is not used well.
This phenomenon is actually a reflection of the long-term mainstream view of “time is useless” in public funds, which has led most fund managers to be unwilling to choose the time, or not to choose the time.
Retail investors are experts in timing, and they have experienced several rounds of bull and bear baptism, which is the result of a high proportion of natural selection in the market. They feel good about the market and are more likely to make decisions at sensitive time points; while most public fund managers start from Produced by researchers, research and excellent investment, longer than the understanding of the industry and the company, weaker than the feeling and judgment of the market.
The system of “public fund-brokerage research” makes it difficult to cultivate masters with timing ability, and as a result, the timing strategy can only be abandoned.
Reason 2: Regulatory Orientation
Another reason is the guidance of the regulators, in order to prevent systemic risks, advocate the concept of long-term investment , turn the timing strategy into a negative synonym for “chasing up and selling down”, and even have clear requirements for fund positions and turnover rates. .
But it backfired, and the fund managers who could not choose the timing and had to bear the pressure of ranking and redemption finally chose the “group strategy” to allocate part of the funds to the target of the track sector. Although I do not necessarily agree and understand the investment value of these companies, it can prevent the ranking from falling behind, which is contrary to the original intention of management.
In fact, long-term low volatility is not necessarily a good thing.
The price of the long-term low volatility of U.S. stocks is that mainstream financial products are less tolerant of volatility. Once the market exceeds a certain volatility threshold, the volatility will increase, similar to this year, but because the regularity is too weak, and timing strategies cannot be used, resulting in The probability of financial risks has risen instead, and the US stock market is not a good example.
Reason 3: Ranking System
In the ranking assessment of public funds, fund managers care more about relative returns, and timing is more conducive to absolute returns, which has become the mainstream of many private funds.
But I think that most of the early Christian Democrats were converted from investors, who compared their own stocks and buying funds, and pursued relative returns; but after 2020, most of the new Christian Democrats are stock market novices, who are buying funds and funds. When choosing between financial products, people are more concerned about absolute returns, and their tolerance for losses is very low. The importance of timing strategies will become higher and higher.
5/5. Should retail investors choose the time?
Interestingly, the ten billion fund managers rarely mentioned the impact of the scale on performance due to the inability to choose the right time in their communication with Christian Democrats. Instead, they emphasized the concept of “not choosing the right time”, emphasizing that long-term high positions are friends of time. value investment.
This is a deliberate confusion between “can” and “want”.
For most ordinary retail investors, the timing strategy with a high threshold provides “negative returns”. In terms of the nature of funds, retail investors have their own funds, and there is no redemption pressure, so they can choose the timing completely. , long-term hold.
For some retail investors who feel good in the market, the biggest problem they encounter in choosing the right time is their lack of understanding of the fundamentals of the industry and individual stocks.
However, retail investors also have their own advantages in timing strategies. Due to their small capital, flexible position management, and quick handling when timing fails The big bull market is realized, and those who are good at investing in long-term bull stocks are more just famous.
So, if you think you meet the following characteristics, you can try a timing strategy:
Full-time stock trading
Have a very deep understanding of market preferences and feel very good about the market
It is best to partner with a friend who is good at stock picking
Good at perseverance and dare to admit mistakes
Absolutely calm and 100% in control of your emotions
Diligent, spend most of the day watching and reviewing
Extreme desire for wealth and pursuit of very high yields
Of course, as mentioned earlier, the effectiveness of timing stems from its extremely high threshold, and success is destined to belong only to a few talented investors.
My related article: ” Loss of Diversity: How Markets Go “Crazy”? 》
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