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A Misguided Slam On Active Management

by Gary D. Halbert
September 9, 2008


1.   “Market Timers Don’t Own Yachts”

2.   Why Market Timing Gets A Bad Wrap

3.   Pros and Cons of Market Timing

4.   The Bottom Line On Market Timing

5.   A Market Timer Doing It Right

6.   Scotia’s Moderate Risk Strategy


I might have known it would happen.  The very week last month that I discussed the value of traditional market timing investment strategies in this E-Letter, market timing was attacked in a major financial publication. 

About the same time that I published my August 12 E-Letter extolling the virtues of traditional market timing, mutual fund manager David Dreman, chairman and founder of Dreman Value Management, published an article in Forbes magazine that cast market timing strategies in a very unfavorable light.

Don’t get me wrong, I’m used to the mainstream financial media trashing traditional market timing and other active management strategies.  The same goes for many other investment professionals whose livelihoods generally depend upon their clients buying-and-holding the investment programs that they sponsor, more or less permanently. 

Part of this argument goes back several years when New York Attorney General Eliot Spitzer called certain illegal practices discovered in the mutual fund industry “market timing,” when they were nothing of the sort.  Of course, many in the financial services industry chimed in with Spitzer, since they have never liked market timing in the first place.

No, I’m not surprised or upset that David Dreman chose to take a stand on market timing that is opposite to my view.  However, I did think he was a bit arrogant (and wrong) in the way he did so.  In my opinion, arrogance has no place in investment management.  And when I survey some of the funds that Dreman is managing, I would think it especially true in his case. 

In this week’s E-Letter, I’m going to discuss the main comments that David Dreman made in his Forbes article demeaning traditional market timing.  I will also provide some additional insight on the benefits of market timing as implemented by the successful active managers I recommend and certain others. 

To make my point, I’ll also reintroduce you to Scotia Partners, and their market timing programs that are the envy of the industry at the moment.  Scotia has been knocking down exceptional returns in this very difficult stock market environment of the last 12-18 months, when most fund managers have been struggling to say the least.

As always, past performance is not necessarily indicative of future results, and there is no guarantee that Scotia will be able to continue delivering its clients with such lofty returns.  However, if you are growing weary of buy-and-hold, tired of staying the course and suffering repeated market losses, I think you’ll be very interested in hearing the analysis that follows.

Of Yachts & Market Timers

In David Dreman’s latest Forbes piece, the jab at market timing is actually a very small part of a much larger article entitled “Bear Market Opportunities.”  The article’s supposed purpose was to offer suggestions for investments in light of the major stock market indexes having crossed into bear market territory in July of this year.  The part about market timing came in a discussion about whether investors should get out of the market, where Dreman said:

“In these circumstances, I wouldn’t try to be too clever [as in get out of the market now].  You don’t see market timers who own yachts.  If you pack up now, chances are you’ll miss a good part of the next bull market.”

I will probably be among the first to agree with Mr. Dreman in regard to individual investors, since most have lousy timing (myself included).  However, he paints all market timers with the same brush, and that’s unfair because there are some professionals who have done very well over the years, as I will discuss in more detail later on.

But here’s the rub with Dreman for me: I perceive an air of arrogance where he talks about market timers not owning yachts.  How does he know if any market timers own yachts or not?  Obviously, he doesn’t!  But he would have Forbes readers assume he knows this, nonetheless.

Dreman’s questionable assertion about market timers and yachts may well be a reference to an old Wall Street story from the turn of the 20th century.  According to Barry Popik, a contributor-consultant to the Oxford English Dictionary and various other reference works, the story can be traced back to an 1885 issue of the old Forest and Stream, as follows:

THE BROKERS’ YACHTS. -- When Mr. W. R. Travers was at Newport last summer, a great many fine yachts lay in the harbor. “Wh-who-who-whose yacht is th-th-tha that?” he asked, pointing to one of them. “That belongs to Mr. Jones, the well-known broker.” Mr. Travers raised his dexter finger slowly and brought into line another yacht. “Wh-wh-wh-whose yacht is that?” he asked with some difficulty. “Oh, that's Mr. Smith’s the broker.” “Wh-wh-whose is that?” pointing out still another. “That belongs to Mr. White, another broker.” “W-w-well, wh-wh-where’s the customers’ yachts?” inquired the great Wall street joker. -- Chicago Mail.

The above-noted passage is a story that is rarely discussed in Wall Street insider circles, for obvious reasons, but it is a story I heard about early-on in my investment career over 30 years ago.  It is as valid a question today as it was over a hundred years ago.

Now back to David Dreman’s latest article in Forbes. When you Google Dreman’s name and the word “yacht,” it seems that one of his most prolific postings is an interview that he gave in 1998…from HIS YACHT…named surprisingly, the  “Contrarian.”  A yacht named Contrarian owned by a buy-and-hold advocate?  Honest folks, you can’t make this stuff up! 

The implication is clear – investors who follow buy-and-hold investment strategies such as Mr. Dreman promotes can afford yachts, while those who opt for market timing in an effort to manage risk cannot.  On a more basic level, it’s as if he is saying that buy-and-hold strategies are successful, and all market timing strategies are not. 

Another thing that those promoting buy-and-hold strategies know is that the longer investors remain invested, the longer the Advisors continue to receive management fees.  As a general rule, selling a fund or otherwise moving to cash stops these management fees, and thus the Advisor’s revenue stream.  In other words, capital preservation for you may cause revenue cessation for them, so it’s no big surprise that they are against market timing.

The bottom line is that while a buy-and-hold scenario may or may not work best for investors over any given time frame, it most certainly benefits fund managers who get paid only if assets remain invested.  In our position as a “manager of managers,” I often explain to clients that few, if any, fund managers will ever tell you to fire them, since doing so would wreak havoc on their revenue.  Think about this next time you’re out on your yacht or wherever.

Market Timing 101

As I noted above, having Wall Street bigwigs and the financial press criticize traditional market timing is nothing new.  As far back as I can remember, Wall Street has pushed buy-and-hold strategies, especially after the explosion in the number of mutual funds in the 1990s. 

They even present misleading and downright inaccurate arguments against market timing in an effort to dissuade clients from choosing such strategies.  I discuss these articles in detail on Page 9 of my Absolute Return Special Report.  Thus, I think it’s a good idea to take a step back and explain exactly what a traditional market timing strategy does.

As I mentioned in my August 12 E-Letter, traditional market timing is nothing more than simply seeking to “take you out of the market and into the safety of cash, or hedge long positions, during major market downturns.”  Obviously, it takes a lot of sophistication to know when to exit the market as well as when to get back in.  In fact, I often tell my clients that the real value of a market timer is not knowing when to get out of the market, but knowing when to get back into a fully invested position again.

To be fair to David Dreman, it’s the getting back into the market that is probably the meat of his argument against market timing on the part of individual investors, and even many professionals who try their hand at the strategy.  I’m sure he sees lots of investors, as we do, that try to time the markets on their own and end up sitting in cash for extended periods of time.  Then, after the market goes up for a period of time, they jump back in about the time the market does an about-face, and they lose even more money.

A traditional market timing strategy has the potential to not only provide steady returns, but also to limit drawdowns, and  smooth out the path to your financial goals.  It just makes sense that limiting losses can help to control the emotions that might otherwise compel you to exit the market when losses get too high.  Contrast this with Wall Street’s buy-and-hold mantra of staying invested at all times, including bear markets.

Mr. Dreman’s strategy  has only a slightly different twist.  His bear market strategy is to ride the market down, and then look for opportunities to buy the stocks of good companies upon a dip in price caused by negative news.  He says:

When that happens, you should sell less-promising stocks to raise cash to buy the companies the market has panicked on. 

While I’m not a yacht-owning billionaire, what Mr. Dreman describes above sounds a lot like market timing, except that he apparently wants to wait to sell the bad stuff (losers) until he finds more promising stocks.  It just seems to make sense to me that if you have losing stocks, shouldn’t you sell them before the market takes them down further.  That way, you would theoretically have more cash to buy the promising stocks later on. 

I think it’s also important to note that there are a number of mutual funds that are breaking with the fully invested mindset and are now choosing to hold significant cash positions rather than holding on to stocks that are likely to decline in price during down markets.  Most will not come out and call it market timing, but that’s exactly what it is.

Pros & Cons of Market Timing

While I have been promoting market timing strategies to my clients for well over 10 years, I have to admit that these programs have both advantages and disadvantages just like any other money management strategies.  Here are some of the pros and cons associated with most market timing strategies.  Here are some of the potential advantages:

Superior Risk-Adjusted Returns – Most successful market timers use strategies that seek to exit the market and move to the safety of money market funds, or “hedge” long positions, during market downturns.  As such, the drawdowns during significant market downturns can be reduced, thus leading to superior risk-adjusted returns.

Professional Management – Most investors are not equipped to handle trading in today’s very volatile stock markets.  By using successful market timers, one can rely on proven strategies that have delivered “absolute returns” over time. Absolute returns refers to an investment strategy that seeks to provide consistent positive returns with minimal losses in both up and down markets.  While you should never enter into a market timing strategy thinking that you will never incur a loss, the overall goal of this strategy is to keep losses to a minimum while also maximizing absolute returns.

Use of Leverage & Short Selling – Market timing strategies often use leverage, which involves the use of various financial instruments and techniques to increase the potential return of an investment.  Many index mutual funds now offer “2X” leverage, meaning that they reflect 200% of the daily return of the underlying index.  By employing leverage, a market timing strategy can get more “bang for the buck” on those days in which it is in the market.

Short selling is another strategy often used by market timers that involves investing in such a way that a drop in a specified equity security produces a portfolio gain. There are numerous specialized mutual funds that provide returns that are the inverse of a wide variety of market indexes – so called “short” or “inverse” mutual funds that have the potential to make money in falling markets.  However, they can also lose money in up markets if they make the wrong call, so just remember that there are no guarantees.

It is important to note that the use of leverage and/or short selling strategies can also  increase the risk of a market timing strategy, just as in other investment strategies.

Here are some of the potential disadvantages of most market timing strategies.

No Market Timing Strategy Is Perfect – I’ll be the first to admit that market timing strategies sometimes stop working in certain market environments, in some cases after performing well for many years.  Using an Advisor who employs a market timing strategy is not a “set it and forget it” investment.  It is important to continue to monitor the performance and trading of the program to see how its current performance compares to its historical norms.  For clients of Halbert Wealth Management, we do this monitoring for them on a daily basis. 

Higher Fees – As a general rule, management fees associated with market timing strategies are higher than those for most buy-and-hold investment options.  Market timers and other active managers typically charge management fees of 2-2½% annually.  Skeptics of market timing often focus on the higher management fees, but market timers who can consistently produce superior risk-adjusted returns above and beyond their fees are worth consideration.  The key is to compare market timing performance net of fees to other alternatives. FYI, all of the performance information that I produce for the Advisors I recommend is net of fees.

Tax Efficiency – Another disadvantage of many market timing programs is that they trade frequently and produce short-term gains and losses.  This disadvantage may be offset by investing IRA or other tax-qualified money rather than taxable assets, or by investing in low-cost variable annuity contracts which also defer taxation until the gains are withdrawn. 

The above list of advantages and disadvantages is not exhaustive, but it does provide a list of idea of things to be aware of when evaluating market timing programs.  My company tries to maximize the potential advantages for our clients while minimizing the potential downsides.  We do this by subjecting any potential market timing Advisor to a strict due diligence review, which includes either an on-site visit to their offices or a face-to-face meeting here in Austin.

The Bottom Line On Market Timing

Many Wall Street types, investment professionals and financial planners have advocated for years that “market timing” does not work.  When it comes to most individual investors doing their own thing, I would have to agree.  Most investors are simply too emotional to effectively know when to get in or out of the markets.

So what about professional market timers?  We have examined hundreds of professional money managers over the years who practice various types of market timing.  Frankly, most have not been successful, or at least did not deliver results that were measurably better than buy-and-hold returns.  So does this mean that market timing doesn’t work, as Mr. Dreman concludes?

Certainly not.

While most market timers have either not been successful, or have not added value above and beyond their higher management fees, there are some professional market timers that have been very successful over time.  The key is how to find them.

We look at hundreds of professional money managers each and every year.  We spend hundreds of thousands of dollars each year in doing so.  We go to conventions where they gather.  We make due diligence trips to their offices around the country to investigate, ask the tough questions and dissect their past performance records.

The point is, most market timers and active money managers fail our rigorous due diligence tests.  Does this mean that market timing does not work, as Mr. Dreman concludes?  NO. It merely means that you have to do a lot of searching to find those market timing programs that have been successful.  They are out there, if you have the know-how and the budget to find them.  That is what we do.  For example…

A Market Timer That Works

As I noted above, most individuals fail at trying to time the market.  I can also attest to the fact that most professionals who try to time the market also fail.  We constantly monitor databases containing hundreds of money managers, many of whom employ market timing strategies.  Most are mediocre, some are terrible, and a very few rise to the top of the list.  One such top manager is Cliff Montgomery of Scotia Partners, LLC.

Since early June, I have mentioned Scotia several times in this E-Letter.  That’s because Cliff’s proprietary strategy has been able to navigate a difficult market that has not only put all major stock market indexes under water (both the Dow Jones Industrial Average and the S&P 500 Index are down over 15% YTD as this is written), but has also proved difficult for even many active money managers.  While Scotia’s past accomplishments cannot guarantee favorable future results, I do think the way Cliff approaches the market merits your consideration.

The Scotia program getting the most attention at the present time is the Growth S&P Plus Strategy.  As of the end of August, the Growth S&P Plus program has a year-to-date gain of 73.30%.  (Past results are not necessarily indicative of future performance.)  Needless to say, this compares very favorably to the major stock market indexes, which are nursing double-digit losses for the year.  Additional performance information on the Growth S&P Strategy is presented below.  Also be sure to read all of the Important Notes and disclosures that follow my signature at the end of this E-Letter:

Performance Statistics
(Net of all fees and expenses)

Performance Statistics, Growth S&P Plus

Please see Important Notes at the end of this E-Letter. 

A Scotia Program For Less Aggressive Investors

I recently introduced another program traded by Scotia Partners that is more suitable for less aggressive investors.  However, I made this introduction in my annual discussion of the Johnson O’Connor Research Center for those needing assistance in finding their life’s calling.  Since many of you have read this in past years, you may not have seen the information about Scotia’s S&P Moderate Growth Strategy, so I’ll repeat the introduction below.

When I introduced Scotia’s Growth S&P Plus Strategy in June, I noted how Cliff’s proprietary strategies seemed to have actually benefited from the high level of volatility we have seen in the markets since the onset of the subprime mortgage debacle and the resulting housing slump and credit crunch.  Accordingly, the strategy employed in the Scotia Growth S&P Plus Strategy makes it an aggressive investment. 

Some of the investors who expressed an interest in Scotia’s S&P Plus program later decided not to invest because they were not comfortable with the aggressive nature of that program.  However, I have good news for investors who want a more moderate-risk program that still has a leveraged, long/short exposure.

The Scotia S&P Moderate Growth Strategy uses the same basic trading model as the Growth S&P Plus program, but does not include the overbought/oversold overlay that helps to make the S&P Plus program more aggressive.  As a result, the Moderate Growth program trades less often than the S&P Plus, and limits initial trades to 50% of the account balance.  While allocations can reach 100% of the account balance in the Moderate Growth program if Scotia’s model continues to indicate a high probability of success, the average historical allocation has been in the 61% range, indicating that 100% allocations are likely to be relatively infrequent.

Another benefit of the S&P Moderate Growth Strategy is that Scotia actually began trading this program before the Growth S&P Plus began trading, so the Moderate program has an additional year of track record.  In fact, the Moderate Growth program reached its five-year track record milestone at the end of July.  Over that period of time, the Moderate Growth program has turned in a solid, risk-adjusted performance.

From its inception through August 2008, the S&P Moderate Growth Strategy has produced an annualized return of 14.81%, with a worst-ever month-end drawdown of only -4.76%.   The Moderate Growth program has done even better during the recent bear market, producing a gain of 15.05% in 2007, a year-to-date gain of 28.87% as of August 31, 2008, and a 12-month gain of 39.98%, also as of the end of August.

Again, these are actual results net of all fees and expenses.  As always, past performance is not necessarily indicative of future results.  Additional detailed performance information on the S&P Moderate Growth program is as follows:

Performance Statistics
(Net of all fees and expenses)

Performance Statistics, S&P Moderate Growth

Please see Important Notes at the end of this E-Letter. 

Please be sure to read the Important Notes and disclosures that follow my signature below.

I personally feel that the increased volatility and uncertainty in the stock markets that we’ve seen over the last year and a half will likely continue well into next year.  Scotia seems to be one of the few professional money managers with a system that actually thrives on volatility.


Though my review of David Dreman’s recent Forbes article has been a bit tongue-in-cheek, I hope that it has helped you to understand that money managers whose livelihoods depend upon your staying invested in their funds will likely never recommend market timing as a valid money management strategy. 

Likewise, the financial press is not likely to embrace the idea of market timing because they don’t have the foggiest notion of how to find a successful professional market timer, and they are so hung up on management fees they are convinced (right or wrong) that market timing will never be able to compete with low-cost index funds and exchange-traded funds (ETFs).

However, you now know that there are market timing money managers who do have long-term successful track records that showcase their ability to manage the risks of being in the market.  And more importantly, when to exit the market or hedge long positions during downturns.

These types of successful active money managers are out there.  But you will likely never hear about them from the traditional investment outlets, and you are unlikely to find them on your own.  That’s where we come in. 

If you are tired of the volatile ups and downs of index investing or asset allocation strategies, or if you would like to learn more about Scotia’s market timing investment programs for a portion of your portfolio, I urge you to contact one of our Investment Consultants at 800-348-3601, via e-mail at, or complete one of our Scotia Partners online request forms.

Very best regards,

Gary D. Halbert


Halbert Wealth Management, Inc. (HWM), Scotia Partners, Ltd. (SPL), and Purcell Advisory Services, LLC (PAS) are Investment Advisors registered with the SEC and/or their respective states.  Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice.  Please consult a competent professional and the appropriate disclosure documents before making any investment decisions. There is no foolproof way of selecting an Investment Advisor. Investments mentioned involve risk, and not all investments mentioned herein are appropriate for all investors.  HWM receives compensation from PAS in exchange for introducing client accounts.  For more information on HWM or PAS, please consult Form ADV Part II, available at no charge upon request. Any offer or solicitation can only be made by way of the Form ADV Part II.  Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.

As benchmarks for comparison, the Standard & Poor’s 500 Stock Index (which includes dividends), and the NASDAQ Composite Index represent unmanaged, passive buy-and-hold approaches.  The volatility and investment characteristics of these benchmarks may differ materially (more or less) from that of the Advisor.  The performance of the S & P 500 Stock Index and the NASDAQ Composite Index is not meant to imply that investors should consider an investment in the Scotia Partners Growth S & P Plus or the Scotia Partners S&P Moderate Growth trading programs as comparable to an investment in the “blue chip” stocks that comprise the S&P 500 Stock Index or the stocks that comprise the NASDAQ Composite Index.  Historical performance data represents actual accounts in  programs named Scotia Partners Growth S&P Plus and Scotia Partners S&P Moderate Growth, custodied at Rydex Series Trust, and verified by Theta Investment Research, LLC. Since all accounts in the program are managed similarly, the results shown are representative of the majority of participants in these programs.  The signals are generated by the use of a proprietary model developed by Scotia Partners.  Statistics for “Worst Drawdown” are calculated as of month-end.  Drawdowns within a month may have been greater. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.  Mutual funds carry their own expenses which are outlined in the fund’s prospectus.  An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency.

When reviewing past performance records, it is important to note that different accounts, even though they are traded pursuant to the same strategy, can have varying results.  The reasons for this include: i) the period of time in which the accounts are active; ii) the timing of contributions and withdrawals; iii) the account size; iv) the minimum investment requirements and/or withdrawal restrictions; and v) the rate of brokerage commissions and transaction fees charged to an account. There can be no assurance that an account opened by any person will achieve performance returns similar to those provided herein for accounts traded pursuant to the Scotia Partners Growth S&P Plus and Scotia Partners S&P Moderate Growth trading programs.

In addition, you should be aware that (i) these programs are speculative and involve a high degree of risk; (ii) the Scotia Partners trading programs’ performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in the programs; (iv) Purcell Advisory Services will have trading authority over an investor’s account and the use of a single advisor could mean lack of diversification and consequently higher risk; and (v) the Purcell Advisory Services  trading  program’s fees and expenses (if any) will reduce an investor’s trading profits, or increase any trading losses.

Returns illustrated are net of the maximum management fees (which are deducted in full quarterly, and not accrued month-by-month), custodial fees, underlying mutual fund management fees, and other fund expenses such as 12b-1 fees.  They do not include the effect of annual IRA fees or mutual fund sales charges, if applicable. No adjustment has been made for income tax liability.  Money market funds are not bank accounts, do not carry deposit insurance, and do involve risk of loss.  The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.

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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc. Gary D. Halbert is the president and CEO of Halbert Wealth Management, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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