Hats off to you for cracking the opening sentence of this story, for there truly is no better time to learn about market timing than the present. But if you came here to learn how to time Wall Street, that’s another story, better told in volumes that begin “once upon a time.”
For indeed gentle readers, once upon a Wall Street time there lived an ambitious (or extremely naive) person who concluded that one could regularly predict the ideal time to buy and sell stocks. It’s safe to say we’ll never know the name of this rainbow chaser, for if their tack had worked they’d have as many acolytes as Warren Buffett.
Alas, that billionaire practices the very opposite: value investing that commits to a stock for decades. Still there’s something about these get-rich-quick, make-money-fast, hittin’-the-lottery times that makes market timing irresistible — even if it’s illogical at best, idiotic at worst and impossible as a rule.
“Most of us mere mortals cannot time the market with a high degree of confidence of success or positive outcomes,” says Mark Hamrick, senior economic analyst and Washington bureau chief for Bankrate.com. “Turns in the market typically come at a time of their own choosing and don’t hold a news conference.”
[See: Warren Buffett’s 8 Favorite Stocks.]
Consider, for example, the huge stock market turn that came after the November 2016 election. “Few professionals saw that coming,” Hamrick “They likely won’t see the next major turn lower either, whenever that happens.”
Admittedly, there is a time when market timing can work out beautifully: Once.
“It works all the time with single bets,” says Dan Cupkovic, director of investments at ARGI Investment Services in Louisville, Kentucky. “Think of the teenager who is a bitcoin millionaire and timed that market right. The problem is, that’s not a sustainable strategy. After you get lucky and win, what do you do next?”
The story, of course, ends like it does for many a sad sack at the blackjack table: “Previous timing winners try to time again and lose, then lose again, and the vicious cycle repeats itself until a lesson is learned or all money is lost.”
There’s a good reason why the odds are stacked against timing the market. Compared to workaday investors, who concern themselves more with picking the right stock or fund, market timers have to get things right twice: entering and exiting the markets at opportune times.
“Economist William Sharpe calculated a market timer would have to be correct 74 percent of the time — on both the market decline and recovery — to outperform another investor who just lets their money sit in the S&P 500,” says Joshua Escalante Troesh, owner of Purposeful Strategic Partners in Rancho Cucamonga, California. “This compares poorly against the ‘expert’ market timing gurus who have a track record of 47 percent correct predictions.”
Even those who staunchly stuck by market timing have changed their stripes over the years. At its launch in 1983, Seattle-based Merriman was a money management firm and newsletter publisher that sang the praises of market timing. But over two decades, the company adopted a diametrically opposite viewpoint.
Now, “we encourage our clients to adopt a long-term view of investing,” Merriman’s web site states, “because it reduces risk and increases the likelihood of success.”
[See: 9 Things to Know About Robo Advisors.]
Indeed, finding any persuasive evidence in support of market timing requires a rather deep dig. A paper by the Federal Reserve Bank of Kansas City concluded that it “may be possible” — “may” being the key word — to improve on buy-and-hold strategy, thus avoiding “some of the market downturns” — notice how they use the word “some”? And that analysis was published in 2002, well before the Great Recession, let alone the first robo advisor.
Moreover, market timing gone awry leaves the investor feeling powerless. Astute analysis gives way to anxious paralysis.
“Most investors suffer from a delusion I call the ‘prediction theory of investing,'” says Mark Matson, CEO of Matson Money in Scottsdale, Arizona. “They believe they need a short-term forecast about the future to be successful. But this belief causes massive fear and panic when they inevitably find out they cannot predict the future. Panic by definition is never productive; in other words, it is never the right time to panic.”
Still, market timing appeals to the casino gambler inside investors. It hinges on the notion that somewhere, somehow, someone has figured out how to beat the house.
Yet think about how much water that holds compared to the efficient market hypothesis. Quite simply, it’s impossible to beat the street through timing because market efficiency causes existing share prices to always incorporate and reflect all relevant information.
“This means that all available news, information, and expectations have already been priced in,” says Dejan Ilijevski, investment manager and president of Sabela Capital Markets in Munster, Indiana. “The only information that’s not priced in is tomorrow’s news, and news by its inherent definition is impossible to predict.”
In other words, market timing is the equivalent of knowing, just knowing, that you’re about to roll a seven in craps, or when to bet on double-zero in roulette. In that case, you’d just as well consult some psychic of Wall Street. But why do that when you could call upon the Oracle of Omaha instead?
“Buffet says that if we aren’t willing to buy and hold shares of a company for 10 years or more, we shouldn’t buy it,” says Ted Snow, founding principal of the Snow Financial Group in Addison, Texas. “This is so because over time, the market takes care of us. If we buy good companies and hold them, we should be compensated.”
[See: 8 Ways to Cash In on a Hot Housing Market.]
He adds: “Market timing only makes the brokerage house rich and deflates what ‘success’ the day trader had. It is a fool’s game.”
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No Right Time for Market Timing originally appeared on usnews.com
