The landscape for the investment industry has fundamentally changed in the 12 months since the momentous weekend that sent the global financial community reeling. Not the least of these is heightened skepticism among investors about the traditional "stay fully invested" mindset and renewed interest in market timing, where investment managers actively move money into and out of the market.
It seems much longer than a year since that momentous mid-September weekend - over two days, AIG was effectively nationalized, Merrill Lynch was acquired and Lehman Brothers vaporized. I still remember the stunned expressions among Bay Street's denizens the Monday morning that this was announced, as they struggled to make sense of what had transpired.
In light of what's happened to markets since then, it's easy to understand market timing's appeal - after all, who wouldn't like to be invested in the stock market when it goes up and on the sidelines when it drops?
And certainly, there's been no shortage of money managers looking for the magic formula that would insulate their clients from losses, the quest for which is the investment industry's equivalent of the search for the fountain of youth or El Dorado, the mythical city of gold.
There are long-standing and relatively simplistic approaches to doing this, such as "Sell in May and go away" - the notion that since markets historically have done better in the six months from November to April, that's the only time investors should be invested. (That approach also has the virtue of missing some of the spectacular market collapses that have taken place in September and October.)
The nineties saw a boom in "tactical asset allocation" funds - a fancy industry term for market timing, in which managers allocate assets between stocks, bonds and cash based on their assessment of the outlook for the period ahead.
More recently, Wall Street firms have been cherry picking the brightest PhD graduates from mathematics programs around the world, putting them to work building state-of-the-art algorithms and high-powered computer models to predict short-term market movement. The quantitative models designed by these "propellerheads," as they're affectionately called, have revolutionized trading and are transforming the way many firms manage money.
The prospect of getting into the market when it's likely to go up and exiting when it looks vulnerable to a downturn is unquestionably attractive, especially these days.
The difficulty lies in how incredibly difficult it is to time markets with any consistency - attested to by this simple exercise.
Ask veteran investors to point to great stock pickers with long track records of success and a number of familiar names immediately come to mind - Warren Buffett of course, Peter Lynch, John Templeton; here in Canada, Bob Krembil of Trimark fame and Prem Watsa of Fairfax would certainly be on the list.
Ask those same insiders to identify a manager who's been able to consistently get into and out of markets at the right time over an extended period - and you'll typically get silence and blank stares.
Of course, there have been lots of managers who made one or two great calls and dined out on those calls for years - cases in point include perma bear Robert Prechter of Elliott Wave Theory fame and Elaine Garzarelli in 1987 and bizarre characters like Joe Granville who on two different days in the early 1980s caused markets to move with his pronouncements.
In a ranking of market newsletters, Mr. Granville's ranked dead last in the 25 years to 2005 and investors who followed his market timing advice have been devastated - but at the peak of his fame he drew thousands of investors to his seminars, on one occasion making his appearance by walking across a swimming pool that he'd had filled in with concrete, dressed in robes like Moses and carrying tablets.
So yes, you can find managers who've got the odd call or even series of calls right. But you'll look hard and long to find someone who has a sustained track record of success at getting market-timing calls right.
That doesn't mean stock pickers are necessarily fully invested. Recently, I got an e-mail from an adviser who described being seated next to Benjamin Graham, the father of picking stocks using the value investing discipline and the man Warren Buffett considers his mentor. When asked how to know when it's time to sell, Mr. Graham answered: "Sell when there's nothing left to buy."
Here's another demonstration of how hard it is to time the market.
A recent article in a U.S. online publication for financial advisers featured an article detailing how investors could increase their returns and lower risk by altering stock exposure depending on the overall market valuation going into each year - the more expensive the market, the lower the allocation to stocks and vice versa. Whatever didn't go into stocks went into U.S. Treasury bills.
From 1928 to 2008, a simple 50-50 allocation to stocks and T-bills at the start of each year would have led to an average annual return of 8.4 per cent. The author breathlessly announced that by using his model, where the allocation to stocks varies based on an assessment of how attractively priced the market is, he'd increased the average annual return to 9.7 per cent.
This all sounded great - until you noticed that during this same period from 1925 to 2008, stocks alone returned just over 11 per cent - staying out of the market when it seemed pricey would have actually cost investors more than 1 per cent annually.
It's often been said that of all the advice provided to investors, the costliest consists of these four words: "It's different this time."
This was the phrase you heard in 1999 from the tech trio of Abby Joseph Cohen of Goldman Sachs, Mary Meeker of Morgan Stanley and Henry Blodgett of Merrill Lynch, arguing that the traditional rules of valuing stocks no longer applied to technology stocks.
They were the words used by the peak oil advocates making the case for $200 (U.S.) oil.
And they were the words heard from Wall Street analysts explaining why American housing prices could never fall.
So when a money manager tells you he can predict short-term market movements and has figured out how to time the market, don't forget all the investors who were lured down this road before you - generally to their regret.
It may indeed be different this time - just remember that trying to time the market flies in the face of the lessons of history and ask yourself if it really will be different.
Note: the time period for the study cited in a recent article in a U.S. online publication for financial advisers was corrected to 1928 to 2008.