Martin F. Zweig died last week, depriving the investment community of one of its more colorful characters.
Zweig was a prominent market pundit, author and chairman of Zweig-DiMenna Associates LLC, a New York investment firm. His death also marks the close of another chapter in the long-running debate on the virtues of market timing.
Zweig followed his interest in capital markets beginning as a teenager, then to his PhD in finance from Michigan State University, to writing his newsletters for 26 years. He loved numbers (his hobby was baseball trivia) and was closely associated with statistical measures of monetary policy and market momentum that he combined into what he called a “super model” to assess market conditions.
He is credited with introducing the put/call ratio, a measure of investor sentiment, to the toolkit of market forecasters. He transitioned to money management, and in October 1986, he launched the Zweig Fund, a closed-end mutual fund that relied on his analysis of market trends to adjust its exposure to stocks and bonds.
Perhaps his finest hour was an appearance on the television show “Wall Street Week with Louis Rukeyser” on Friday evening, Oct. 16, 1987, when he stated his deep concern about a market crash, which then dramatically occurred the next Monday. His reputation as a financial expert soared. For years, he was introduced as “the man who called the crash.”
The headline of Zweig’s obituary in The Wall Street Journal described him as a “master market timer.”
Zweig was not the only analyst to predict the 1987 crash, but his appearance on “Wall Street Week” was so visible and so perfectly timed that his status as an astute financial guru was greatly enhanced.
The relevant question is whether Zweig’s statistical timing tools were useful to investors. The evidence is mixed at best. His October 1987 market call was accurate, and other pundits praised his skills; however, making one or two great predictions is usually insufficient to generate above-average long-run results. You must be right consistently to achieve superior results.
Moreover, it appears that achieving excess returns with real dollars is more challenging than making prescient forecasts in a newspaper column. Annualized return for the Zweig Fund from inception in October 1986 through Jan. 31, 2013, was 6.79 percent. Over this same time period, the annualized return for the S&P 500 Index was 9.84 percent and 7.90 percent for a static mix allocated 30 percent to the S&P 500 Index and 70 percent to the Barclays Aggregate Bond Index.
Market timers often acknowledge that their signals do not provide sufficient guidance to outperform a buy-and-hold, 100 percent equity strategy. Their goal, they say, is to avoid major bear market losses by holding a large fixed-income allocation during market downturns and capturing a meaningful portion of equity market rewards by increasing stock holdings during the upswing.
Reducing bear market losses may be a laudable goal, but as this example shows, it can also be pursued with greater simplicity by adopting a lower equity exposure at all times and ignoring the costs and frustrations associated with constant fiddling.
It’s safe to say that no one worked more diligently or enthusiastically than Martin Zweig to tease out tomorrow’s stock prices from today’s data. But the evidence suggests that even the most dedicated student of market statistics is unlikely to meet with long-run success. A better plan is to have a consistent long-term investment policy that suits your needs and personality and then stick with it.
Mark Sievers, president of Epsilon Financial Group, is a certified financial planner with a master’s in business administration from UC Berkeley. Contact him at firstname.lastname@example.org.