Cecil

The Industry Indicator: Buy When the Market Sells

I agree with the overall message here, but disagree with some of your premises.

First, I was also a broker, for a major wall street firm, so I too know the inside game. You make it sound as if the managers of these firms know full well when the market is about to fall, but greedily advise their advisors to push their clients into buying anyway. This is false on two fronts. Nobody- not managers, not brokers, and not you- knows when the market is going to fall ahead of time. The best anyone can do is make an educated guess and take on the risk of betting against the current trend.

Secondly, the real reason why the brokerage industry maintains a nearly permanent "buy and hold" or "buy more on the dips" posture is only partially explained by greed. It is also explained by the fact that we live in an extremely litigious society, and if a brokerage firm were to advise their clients to sell when everybody else was still buying, and if they were wrong on that market call, their customers would lose money, and lawsuits would start flying in the doors.

Therefore, the potential gain from "doing the right thing" for the customer by advising them to sell, is overwhelmed by the potential pain of guessing wrong on market direction. Prudence therefore dictates that wholesale market-timing should be avoided.

You are right in saying that the brokerage business is all about gathering assets. I would take that further and say that the best way to gather and keep more assets is to perform well for the customer. So that motivation is already built into the process. But brokerage firms do not emphasize this because it involves taking too much litigation risk.

Don't misunderstand me, I am not a defender of the industry. I witnessed the same shameful behavior that you probably did, and the whole system is terribly biased and flawed. But to say that management deliberately screws the customers by giving advice they know to be wrong is giving them more credit than they deserve.

The other problem I have with the article is that you imply that your indicators tell you, with sufficient certainty, when to be in the market and when to be short the market. But you don't offer much in the way of explanation as to how you are able to achieve this. In fact, you make it sound like anyone with half a brain should have known 6 months ago that the market was going to fall. Is it really that easy? Since the ability to predict major turning points in the market is nothing less than the "Holy Grail" of investing, if you really had it all figured out you would be as famous in the world of investing as Babe Ruth was in the world of baseball.