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Misconceptions: Market Timing verse Stock Picking

© Kirk Lindstrom

I was repeating my claim elsewhere on the internet that "market timing doesn't work and the best market timers resort to leaving off their worst picks from the record to give the appearance that their advice works so they can sell it." This led to the following comment:

The trouble with saying "market timing doesn't work," as a blanket statement like that, is that you place yourself in the position of denying the work that Graham and Buffett have done in the very long term. It also begins to sound like a dogma.

I know you don't like to think of Graham and Buffett as market timers, but when you consider their success at forecasting long periods of above average and below average market returns; I don't know what else to call it.

Below I have turned my answer into an article as this question comes up often.

A lifetime of 20 buys and sells

Warren Buffett wrote in his 1996 annual report that

"inactivity strikes us as intelligent behavior. Neither we nor most business managers would dream of feverishly trading highly profitable subsidiaries because a small move in the Federal Reserve's discount rate was predicted or because some Wall Street pundit had reversed his view on the market. Why, then, should we behave differently with our minority positions in wonderful businesses?"

In the above, Buffett is saying how he doesn't buy or sell the stocks of companies he owns and likes just because piece of market information changes. Buffett buys stocks for the very long term. I just recently heard Buffett say that investors should be given "20 trade coupons" where they are ONLY allowed a total of 20 buys and or sells their lifetime! This would reduce the trading they do and cause them to focus on buying only the very best companies and holding them for life.

A bell doesn't ring at the bottom

John C. Bogle wrote in his exceptional book, Common Sense on Mutual Funds:

The idea that a bell rings to signal when investors should get into or out of the stock market is simply not credible. After nearly fifty years in this business, I do not know of anybody who has done it successfully and consistently. I don't even know anybody who knows anybody who has done it successfully and consistently. Yet market timing appears to be increasingly embraced by mutual fund investors and the professional managers of fund portfolios alike.

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