IS IT PREDICTION OR A STUDY OF CYCLES?

I have already argued that the prediction of short-term movements in market prices is not possible. It's a view that was also held by the famous financier J.P. Morgan. I like the response Morgan provided to an inquisitive reporter more than 100 years ago: when asked where the market was heading Morgan replied, ‘It will fluctuate.'

But what about long-term changes in the stock market? In 1902 a book called Financial Crises and Periods of Industrial and Commercial Depression, by Theodore Burton, was published. As old as this book is, the title implies something people had already known for a long, long time: there's a relationship between the state of the economy and the health of the stock market. Both cycle. As night follows day, each swings successively from boom to bust, which means there's a pot of gold waiting for the investor who can successfully read the stock market cycle. And here's the beauty of it. Forecasting in the sense of matching events to times isn't necessary. If it's possible to identify the stage of the cycle at any time, then all that's necessary is to buy in bad times and wait patiently. The cycle will do the work for you.

Let's look at some of the tools that have been proposed as market cycle indicators.

DOW THEORY

Many market timers use ‘Dow theory', which isn't so much a single theory as a collection of ideas packaged together and called a theory. Dow theory is named, naturally enough, after Charles Dow, of The Wall Street Journal and Dow Jones Industrial Index fame.

Dow was an intense man — understated, unassuming, but a great thinker. Long-serving Wall Street Journal reporter Oliver Gingold,^a who worked under Dow, commented: ‘I recollect Mr. Dow as a tall, portly, imperturbable man with a beard, rather stooped. I never recollect his smiling and he did not talk much to anybody.'²⁵

Dow was intent on understanding how the stock market works, what forces make it move and how investors can best interact with it. Many of his ideas were revolutionary for the time — some so insightful they form the bedrock of contemporary investment philosophy.

Dow died in 1902 at just 51. It was the editorials he wrote in the years immediately preceding his death that form the basis of Dow theory. (Interestingly, Dow didn't propose Dow theory, and didn't even coin the term; it was developed by others following his death.) Dow theory is a mix of Dow's ideas, interpretations by others of his ideas, and a number of concepts Dow himself never articulated. It was shaped, developed and successively added to over a period of decades by William Hamilton, Robert Rhea and George Schaefer.

There is a common misconception about Dow: many believe he was a hardcore technical analyst. He wasn't, but neither was he a hardcore fundamentalist. His original editorials demonstrate that he drew from both disciplines. But there is one overwhelming feature that comes through in his writings — his appreciation that successful investing is based on the search for value. Value, he believed, was the fundamental driver of market price. And it was this core belief that drove Dow's concept of market timing. Dow never believed market timing was about prediction. He believed it was about developing an appreciation of whether the market was cheap or expensive at any point in time, acting on that information, and then waiting patiently for things to change.

Dow hasn't been alone in holding this belief. It's one many other great investors, past and present, have held as well. Warren Buffett presents a good example. He is constantly in search of undervalued stocks, knowing that if he buys and holds them they will eventually rise to fair value. The following Dow quotes demonstrate the similarity between his and Buffett's views:

It is always safer to assume that values determine prices in the long run. Values have nothing to do with current fluctuations. A worthless stock can go up five points just as easily as the best, but as a result of continuous fluctuations the good stock will gradually work up to its investment value.²⁶

An investor who will study values and market conditions, and then exercise enough patience for six men will likely make money in stocks.²⁷

These comments underpin the activity of the investor who uses value as the bedrock of investment decisions — to independently value a stock and then wait for the market to present a favourable price to either buy or sell. Real opportunities for this don't present often, so the concept of patience is extremely important here. That this characteristic is essential to success is echoed by traders and investors both past and present, such as Jay Gould, Ben Graham and Warren Buffett. You need patience for the cycle to move in your favour, which means long periods of inactivity are a hallmark of true investors.^b

As an aside here, I want to expand on the importance of patience. Warren Buffett's daughter, Susie, was once asked, ‘What two words best describe your father?' She replied without hesitation: ‘Patience and integrity.'

As a practical example of the degree of patience required by an investor, Buffett has often stated that an investor's career should be limited to 20 carefully considered decisions. He recommends the use of a hypothetical punch card to keep a record. In the knowledge that after the card has been clipped for the twentieth time no further investment decisions can be made, we are constantly reminded that each needs to be made with great deliberation.

Investment should be limited to the very best deals we come across in a lifetime.

Back now to Dow theory, and the various followers of Dow who have developed the theory. It covers several areas, but it's not my intention to explore them all here. I'll limit discussion to that part of Dow theory that relates to market timing.

BEN GRAHAM AND THE COMMITTEE ON BANKING AND CURRENCY

The bottom line is, picking the market cycle isn't that easy. One of the biggest barriers we face is social influence. Whether it's a raging bull market or a crushing bear market, the airwaves will be always be filled with voices justifying the current stock prices. Words like: ‘Sure the stock market is up, and so it should be. Corporate earnings are at record levels. The economy is strong. The outlook is great. Things won't be changing for a long time.' Yet a year later you'll hear: ‘Sure the stock market is down, and so it should be. Corporate earnings are depressed. Workers are being laid off. Things won't be changing for a long time.' The best thing you can do with this fickle blow-by-blow commentary is shut it out. A difficult thing to do, I know, but it's something Ben Graham managed to do.

Ben Graham was a great Socratic thinker. In March 1955 he appeared before the Committee on Banking and Currency. It was the first session of a hearing looking into the factors that affect the buying and selling of shares. An answer Graham provided to the committee shows he didn't rely on market commentary:

Chairman: I wonder if you could give us your views in a broad sense about the economic future of the next few years.

Graham: I will do it with the proviso that these views should not be taken too seriously … As a matter of fact I have never specialized in economic forecasting or market forecasting either. My own business has been largely based on the principle that if you can make your results independent of any views as to the future you are that much better off.

In addition to his verbal comments Graham also prepared a statement for the committee. It provided an insight into how he gauged the state of the market at any point in time. The following are excerpts from that statement:

The true measure of common stock values, of course, is not found by reference to price movements alone, but by price in relation to earnings, dividends, future prospects and, to a small extent, asset values.

As a guide to identifying the present level of stock prices in the light of past experience, I have related the present prices and the high prices in 1929, 1937 and 1946 to earnings of the preceding year, the preceding five years and the preceding ten years. The Dow-Jones industrials are now at a lower ratio to their average earnings in the past than they were at their highs in 1929, 1937, and 1946. It should be pointed out also that high-grade interest rates are now definitely lower than in previous bull markets except for 1946. Lower basic interest rates presumably justify a higher value for each dollar of dividends or earnings.

Graham felt that stock prices were neither cheap nor expensive — they were about fair value. He went on to say it was quite possible prices could rise further, and that in times of optimism markets can move well above fair value.

So was Graham's assessment of the market at that time correct? Of course, we now have the benefit of hindsight. The hearing was held in March 1955. At that time the Dow was just above 400 points, double what it had been at the start of the 1950s. The market continued to rise, more than doubling again over the following 10 years. That took it into the 1960s, the exuberant ‘Go-Go Years' — a period when the market became significantly overpriced. But 17 years later the Dow was at the same level it had been in 1965. By then not only had earnings caught up with prices but they had overshot the mark, which meant that in 1982 the market was cheap. From there the market took off again, increasing 13-fold over the next 18 years.

So there can be extended periods of significant inequity between price and value. As Graham reported to the committee, the true measure of common stock values is not found by reference to price movements alone. Yet this is what most people do. They use price as their single measure. They take their investment cues from movements in stock market prices without ever relating these prices to value.

Graham told the committee how he valued the market objectively at any particular time:

I have found it useful to estimate the central value of the Dow-Jones Industrial average by the simple method of capitalizing 10-year average earnings at twice the interest rate for high-grade bonds. This technique presupposes that the average past earnings of a group of stocks presents a fair basis for estimating future earnings, but with a conservative bias on the low side. It also assumes that by doubling the capitalization rate presented by high-grade bonds, we allow properly for the differential in imputed risk between good bonds and good stocks. Although this method is open to serious theoretical objections, it has in fact given a reasonably accurate reflection of the central value of industrial common stock averages since 1881.²⁹

Graham then went on to discuss something quite interesting. From the 1929 peak until the lowest point in the ensuing Great Depression, the Dow collapsed from a high of 381 to a low of 41 points. Using his method the fair market price for the Dow in 1929 was 120.

BOB SHILLER'S CAPE

The price earnings (PE) ratio is one of the most popular ratios used by investors. It is calculated by dividing the current market share price by the most recently reported annual earnings attributable to each share (earnings per share). It is one of the many tools investors use to judge whether the market price of a stock represents good value. The logic goes that the lower the PE ratio the better the value on offer. (In chapter 13 I will discuss in greater depth whether this is true.)

Typically the PE ratio is applied to individual stocks, but US economist Bob Shiller, in a similar fashion to Graham, has adapted the PE ratio in order to gauge the relative value of the general stock market at any point in time. Shiller's market measure was popularised in his 2000 book Irrational Exuberance. Referred to as the cyclically adjusted price earnings (CAPE) ratio, it is regularly updated on the web at www.econ.yale.edu/~shiller/data.htm.

Shiller's CAPE ratio delivers a relative value of the entire S&P 500 index. For the ‘P' in the numerator Shiller uses real (inflation-adjusted) monthly averages of daily S&P closing prices. For the ‘E' in the denominator he uses the average of real S&P composite earnings for the preceding 10 years. So it's effectively a 10-year moving average. He derives monthly aggregate earnings data from the S&P four-quarter totals by using ‘linear interpolation' to derive the intervening monthly figures. Linear interpolation is a method for deriving data for a particular time or period even though an actual measurement hasn't been taken. A line is drawn connecting measured and known data points, then a reading is taken from the line at the interim time point(s) required.

The long-term average for the ratio over the 140-plus year period from which Shiller has drawn data has been 16.6. It reached its highest levels in 1901, 1929, 1966, late 1999/early 2000 and 2007. Spot the pattern? These years were all bull market peaks.^c So it looks like Shiller's ratio is telling us something: there appears to be a relationship between his composite market PE and stock market extremes.

While Shiller's ratio is not predictive, it does allow for a relative judgement of market value. The relative judgement is made by comparing the current ratio with both the long-term average of 16.6 and past stock market periods. It's an objective grounder, a reality check that allows prevailing market conditions to be questioned, particularly during times of value polarisation, as occurs during extreme bull or bear markets. This reality check is particularly useful for investors who are easily influenced by groupthink (and that probably means most people). Shiller's ratio reminds us of the concept of ‘mean reversion' — that as market prices become more extreme, on either the upside or the downside, the chances of an imminent reversion also increase.

Shiller's research has also shown that in the wake of high PE peaks investors should expect prolonged periods of poor returns — for years, and sometimes decades. The data has even been used to calculate an implied market return over the ensuing years and confidence levels for alternate outcomes.

Despite the apparent benefit of periodically reviewing Shiller's CAPE ratio, it's worth mentioning that it isn't without its critics. Their main concern is that the earnings component of CAPE is lower now than it has been historically. This has resulted from the introduction of new accounting standards, changing how earnings are measured and justifying a higher CAPE ratio now than the long-term average of 16.6. In 2013 Deutsche Bank's David Bianco went so far as to construct his own modified CAPE ratio, which he claimed adjusted for the changes in accounting standards and modified the way the ratio was adjusted for inflation. At the time Shiller's ratio indicated that the S&P was more than 50 per cent overvalued compared with its long-term average. Bianco's ratio judged it to be close to fair value.

Others argue that Shiller's CAPE needs to be considered in combination with the prevailing long-term interest rates. That's because there is a strong relationship between interest rates and the discount rates analysts and investors use when calculating formula values for stocks. The lower the discount rate, the higher the calculated stock value.

For example, in May 2015 Shiller's CAPE was sitting at 27.38, about 65 per cent above its long-term average. But long-term interest rates were close to their lowest levels in the 144 years that Shiller's CAPE data covered. Some saw the high CAPE as justified given the low interest rate environment. I saw the situation differently. To me the historically low interest rates were an atypical discount rate indicator and when interest rates did rise, stock prices would likely fall.

Shiller expressed his thoughts about his own ratio in an April 2012 interview with Money magazine: ‘Things can go for 200 years and then change. I even worry about the 10-year P/E — even that relationship could break down.'

JAMES TOBIN'S ‘q'

In February 1969 the Journal of Money, Credit and Banking carried an article that was to have a profound impact on the issue of stock market timing. The article, written by highly respected US economist James Tobin, was titled ‘A General Equilibrium Approach to Monetary Theory'.³⁰ It wasn't specifically about market timing, nor did it have much to do with the stock market. But buried within the 15-page article was a reference to a factor he called ‘q', and stock market watchers have since adopted q as an indicator of fair market value.

This is how the reasoning goes. Tobin started by considering the market price of capital goods, the tangible assets used by companies to produce whatever it is they produce, such as buildings, equipment and machinery. This was referred to as ‘p'. And the market price of the business was referred to as q times p, or ‘qp'.

Proponents of q argue that there is a strong relationship between the cost of these capital items and the market prices of the businesses using them. This applies to both unlisted companies and companies listed on the stock exchange. This relationship exists for the following reason. If an operating company is achieving a good return on the capital required to conduct its business, then competitors will be attracted to that business space. If low barriers to entry exist, then it is unlikely that a new entrant would pay an inflated price to purchase an existing business — they'd just set up their own. Therefore competitive forces will tend to drive market prices for businesses down towards the cost of purchasing the tangible productive assets required to undertake the business. That is, qp will tend to move towards p, which means q tends to mean revert to one.

If qp represents the market price of capital goods already in use, then, using Tobin's own reasoning, q represents a factor by which the value of existing capital goods diverges from their current replacement cost. Tobin adds: ‘An alternative interpretation of [the model] requires that capital be valued at its reproduction cost i.e., that q=1. This may be regarded as a condition of equilibrium in the long run.'

The argument has then been taken several steps beyond Tobin's paper, and it goes something like this. Some businesses have what is commonly referred to as an enduring competitive advantage. That commonly means they have the capacity to maintain a high return on assets employed. Considered in isolation they would tend to maintain a high q. But when q is applied to the aggregate price of the stock market it tends to mean revert; that is, it reverts to one as the market price reverts to the replacement cost of the capital employed by all the companies in that market.

We accept that stock markets are prone to mispricing; they can be overpriced at times of exuberance and underpriced at times of pessimism. What q provides is an indication of how overvalued or undervalued the market is at any point in time. Like Shiller's CAPE, q is not predictive, but indicative. The further it moves from one, either in an upward or a downward direction, the higher the likelihood it's about to commence its reversion back towards one.

Andrew Smithers and Stephen Wright have applied this reasoning in their book Valuing Wall Street.³¹ They highlight the strong historical correlation between q and general stock prices. When Valuing Wall Street was written (just prior to the dot-com crash), q was approaching 1.8, the highest recorded level over the course of the 20th century — even higher than the 1.4 it reached just before the 1929 Crash. The authors suggested the stock market was a very dangerous place to be at the end of the 20th century.

As Smithers and Wright note, the Dow did come down strongly, dropping by more than 35 per cent from its January 2000 high to its October 2002 low. But by 2006 the US market had fully recovered those losses and it subsequently reached even higher levels as it approached the GFC of 2008. What was q indicating just prior to the GFC? It was travelling at about one. So if you were relying solely on q you wouldn't have suspected the GFC was coming. It's important to realise that indicators aren't infallible.

So instead of relying on just one indicator, use several. Together they paint a picture. For example, Shiller's CAPE would have caused greater concern than Tobin's q leading up to the GFC. At its pre-GFC peak in October 2007, the US market had Shiller's CAPE sitting at 27.31, around 65 per cent above its long-term average.

WARREN BUFFETT'S FAVOURITE METRIC

Warren Buffett's preferred general stock market indicator is not dissimilar to Tobin's q but it's income based rather than asset based. It's derived by dividing the total market capitalisation of the US stock market by the US gross national product. Buffett describes it as ‘probably the best single measure of where valuations stand at any given moment'. Historically there has been a strong correlation, with levels above 100 per cent coinciding with periods of overvaluation of stocks and levels around 50 per cent representing great buying opportunities. In a 2001 Fortune magazine article Buffett stated: ‘If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200% as it did in 1999 and a part of 2000 you are playing with fire.'³² At the time of writing (May 2015) it measured 126.8 per cent, which is best described as significantly overvalued. The Dow was 18 232 points.

It's important to add that Buffett doesn't base his investment decisions either on this metric or on his view on the general index. He's the first to admit he's not a market timer; in fact he doesn't believe market timing is possible. Like every value investor, he looks for disparities between price and value for individual stocks at all stages of the market cycle. It's just that when the general market is depressed there are more stocks being offered at attractive prices. It's therefore likely the experienced value investor can sense the state of the market by the number of undervalued stocks on offer at that time. Buffett's favoured metric simply serves as another ‘grounder' at times of market extremes.

THE COPPOCK INDICATOR

One particularly difficult judgement for investors to make is when to re-enter the market in the wake of a stock market crash. At these times the mood is always one of severe pessimism. It's a time when most commentators are delivering strong warnings not to re-enter the market ‘just yet'. Many continue making that call until the market has recovered 40–50 per cent. So in keeping with the theme that objective market indicators are better than subjective commentary, let me introduce you to the Coppock Indicator.

Edwin Coppock developed his metric as a way to determine the beginning of a new bull market following a significant market decline. Coppock was the founder of the Texas-based Trendex Research Group, and he has produced several market publications based on trend-following principles. He was asked by the authorities at the Episcopal Church for a practical long-term buy indicator for the stock market and responded by developing the Coppock/Trendex Indicator. That was in 1945. It became known to the broader investment world in 1962 when Barron's magazine carried an article describing it.³³

Coppock's general philosophy was to turn stock market numbers into stock market charts. He didn't see charts as cold or mathematical, he saw them as painting a picture of human behaviour. As he described it, he was undertaking a process of ‘emotional indexing'. He saw mass selling on the stock exchange as very much an emotion-driven process, which meant that once the selling process began it became self-fulfilling. The selling gained momentum because people took their cue from the actions of those around them. Selling created selling. This resulted in the market over-correcting on the downside.

Coppock felt that after a big market fall, particularly one fuelled by panic selling, many investors would be reluctant to buy back into the market. Their behaviour could be likened to a person who has recently been burnt by an open flame and is reluctant to get close to a fire again. But Coppock knew that over time this emotion dissipates, and he set out to develop an indicator that would tap into these shifting emotions. So he developed an analogy, likening the emotion experienced following a market collapse to a period of bereavement. He asked the bishops at the Episcopal Church what the typical time was for someone to recover emotionally from the loss of a friend or relative; he was told ‘between 11 and 14 months'. Coppock used this information to develop a weighted moving average of the Dow Jones Industrial Average. This is how it's calculated:

1. Calculate the percentage change between the index at the end of the most recent month and 14 months prior.
2. Do the same for the recent month-end value and 11 months prior.
3. Total them.
4. Derive a 10-month weighted moving average of this total.

A 10-month weighted moving total is calculated by multiplying the current month's figure (the sum of the 11- and 14-month changes) by ten, the previous month's figure by nine, the month before by eight, and so on until you get to the tenth-last month, which is multiplied by one. Add the result of these multiplications to achieve the weighted moving total for the current month. When this data is produced in the form of a graph, it shows a line that swings from positive to negative — that is, it moves above and below a horizontal zero line. A signal to re-enter the market is delivered when the Coppock line is below zero and turns upward from a trough.

Of course the most important question is: does it work? Before we explore this question, it's important to note that Coppock himself said there were a couple of things he didn't expect his indicator would tell us:

• It wouldn't work well for individual stocks or sectors. Rather it was designed for the index (he applied it to the Dow Jones Industrial Average).
• It wasn't a precise timing method. It was designed to indicate a condition of low risk for new long-term stock commitment.³⁴

Without conducting any research on the effectiveness of the Coppock Indicator, it's easy to pass one obvious judgement from the way it's mathematically derived. Namely, it will deliver false positive signals: sometimes it will signal a new bull market is underway when it isn't. The Coppock Indicator will turn upwards as a depressed market improves, but if the market quickly runs out of steam so too will the indicator. This lack of dependability obviously trips people up. And, depending upon their personal experience in using it, they'll carry different views on how useful it is. I've heard opinions vary from ‘it's reliable' right through to ‘it's no better than a coin toss'. Its strike rate probably lies somewhere in between these two extremes. That is, it's better than even odds the signal will be correct.

Which begs the question of whether there's any benefit in using it at all. The answer is probably yes — if it suits your investment style. Remember there is no tool, applicable to the financial markets, that provides a 100 per cent hit rate. Success in the financial markets is very much about managing risk and stacking the odds in your favour. Having said that, in the wrong hands the Coppock Indicator is a bit like playing Russian roulette. If you rely on it totally and place big bets, it's like having one chamber loaded in a six-chamber pistol. It's only a matter of time before you blow your brains out.

Coppock of course realised this. So he recommended its use under the following conditions. Firstly, don't rely upon it as your sole analytical tool. And, secondly, use stop losses: if the signal it delivers proves to be wrong, bail out before too much money is lost. What the Coppock Indicator doesn't do is deliver a packaged answer. Like every other tool, if it did it would have made a lot of people rich by now with very little mental effort.

The Coppock Indicator is a tool for those who believe that markets both trend and can be successfully timed. But it doesn't address the most fundamental question in investing: what stocks do I buy? It's not a tool for stock pickers. The tools stock pickers use don't rely on an assessment of the market cycle.

MARKET TIMER OR STOCK PICKER?

It's commonly said that there are two ways to achieve superior returns in the stock market — by market timing or stock picking. That is, either buy when stock market prices are generally depressed and sell when they are generally inflated, or buy great companies that are underpriced independent of the market cycle.

Many confuse the two activities, and a conversation I had several years ago with a friend of mine shows how.

‘Buffett's a market timer', my friend announced. ‘Don't know why he says he isn't.'

‘What do you mean?' I asked.

‘Well,' he replied, ‘whenever the market collapses he pulls out his chequebook.'

It was an easy one to respond to. I replied: ‘Sure he does. Because that's when there are plenty of great stocks around that are cheap. But he's still a stock picker through and through, not a market timer. He's not indiscriminate in his buying. He knows beforehand the companies he wants to buy. Once chosen he waits and, when they're offered to him at the price he wants to pay, he acts on the opportunity.'

The simple truth is that stock pickers don't need to be market timers. They can cast their net at any stage of the market cycle. It's just that they catch more fish when stock market prices are down across the board. Buffett isn't sitting there saying, ‘The Dow has fallen enough now, I think I'll buy some stocks.' He's saying, ‘The price of ABC Ltd has now fallen to a price I see as attractive.' It just so happens that the odds of ABC Ltd, or any other stock on his wish list, hitting its buy price are greatly improved in a bear market. And conversely it becomes increasingly difficult to find stocks at attractive prices in a bull market.

In 1956 Buffett formed an investment partnership, effectively a hedge fund. He was extremely successful at investing the partners' money, achieving an annual geometric rate of return of just below 30 per cent over the 13 years of its existence. It's interesting then that he wrote to its members on 29 May 1969 announcing his intention to retire from the partnership at the end of that year. He commented: ‘Opportunities for investment that are open to the analyst who stresses quantitative factors have virtually disappeared, after steadily drying up over the last 20 years.' In other words, he could no longer find any stocks worth buying. Buffett didn't come to this conclusion by drawing on any general market timing skills or tools; he just couldn't find any undervalued stocks.

There are apparently experienced market commentators who fail to understand this simple principle. I heard a broker, who regularly appears on Australian TV, once declare that investors who rely solely on stock picking possess only half the jigsaw, the other half being the capacity to time the market cycle. Interestingly, during the GFC the same commentator declared that it was too dangerous to re-enter the market. In the ensuing 12 months the market climbed more than 50 per cent.

I read this recently in an investment newsletter:

While fundamental analysis tells the investor which stocks represent value and might be the best stocks to buy, technical analysis by contrast gives the investor some insights into the emotions of market participants and can tell the investor when to buy.

While this comment acknowledges that emotion can result in a discrepancy between price and value, investors don't need to gauge the level of that emotion in order to act. They merely need to identify solid companies for which a significant gap exists between market price and value.

As a further example of the contradictory advice existing in financial markets, Coppock had this to say about buying stocks in recently depressed but recovering markets:

Do NOT try to buy a depressed stock. Instead, buy … stocks even though you may feel you are paying too much for them. At that moment, you can test whether or not you are on the road to becoming a realist. You see, a novice tries to chisel the market, while a pro knows from experience that the better bargain, at the time of such a major bottom signal, is the stock that is then at a new high for the past several months! Does this sound foolish to you? If you answer with a yes, you are still in the kindergarten of the stock market world.³⁵

Interesting, isn't it? Advising investors not to buy depressed stocks, and that to do so demonstrates you are still in the kindergarten of the stock market world. These would be difficult words for experienced, market-hardened (and, might I add, wealthy) value investors to accept. Coppock believed in market timing and picking trends; he placed less weight on selecting stocks based on their business merit and value. It's not that he felt these issues were unimportant, just that he felt there was no advantage in acting on financial information that's freely available to all investors.

It's tempting to believe this, and for many investors it's probably true that they can't profit from publicly available information. But successful stock pickers are like elite sportspeople. Champion golfers, cricketers and baseball players use the same sports equipment that's available to the masses, yet they excel in its use. Great investors use the same information as the masses, yet they too excel in its use.