Market Timing: Should You Attempt It?
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- Kirk
- pjstack
- KLR
- soonertimer
- soonertimer
- CashBurnRate
- Kirk
- InDenial
- Kirk
- CaptRon
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» Kirk - Re: Re: FODDER FOR THE DEBATE
In response to message posted by KLR:Problem with "systems" is as soon as you implement one in a major way, the market will find a way to make them fail. 
I Still believe the best "system" is to fix your asset allocation and then rebalance every time it gets off by a certain amount. I pick a grid size large enough to make transaction costs not an issue. Say you have a $1M portfolio and have 80% in stocks and 20% in Bonds. When the stock part goes up by $5K, take profits. When it goes down by $5K buy something. Grid size is 0.5% and your transaction costs are tiny (say $20 commission on a $5,000 transaction or 0.4% of the total amount) Adjust the grid size so you don't do too much in and out... and you can make money just on market noise.
The ONLY thing that will kill you is if the market declines for 20 years with not enough volatility to make up for the overall decline.
I try to "goose" the above returns by selecting individual stocks ala Graham, Buffet, Lynch, and Lindstrom techniques where I WANT stocks with a high Beta so I get more buying and selling. Look at what I choose to use... AMAT, LRCX, Agilent, HWP, BOWG, IBM etc... (BOWG is not a good value stock, but it does have wonderful volatility!)
-- posted by Kirk
» pjstack - Re: Re: Re: FODDER FOR THE DEBATE
In response to message posted by Kirk:Here's an article I found to be amazing (amazing meaning I don't see how some of the figures can be true): http://g.msn.com/0MCUSENINTERPRESS/MC_BI...
She says that Buy'N'holders really don't! But just how the writers of the basic study came up with the "average investor" figures is not really explained.
-- posted by pjstack
» KLR - Buy-to-Hold Isn't Dead
Buy-to-Hold Isn't DeadSelf-styled market gurus[Bob Brinker?] appear in every market downturn to deplore (but not define) buy-and-hold investing and advocate short-term trading strategies instead. Swiss money manager Felix Zulauf is the latest. Nothing's wrong with short sales or special situation stock investments, but, even if you can consistently trounce the market averages, taxes and commissions still make you a loser.
By Tom Jacobs (TMF Tom9)
March 4, 2002
Many financial writers, money managers, and even some very sharp members of the Fool community proclaim that buying and holding stocks for the long term is a failed strategy for investing now. Here's yesterday's advice from Swiss asset manager and committed Bear Felix Zulauf in The New York Times:
"I think we are in a structural bear market that will last for 5 to 10 years...What is important for the investor is that the winning formula of buying and holding is not working anymore. In fact, it is working against him. If you cannot be successful in the current environment, get out. Leave it to those who can. This is a market for opportunistic investors who can play rallies and can also play the short side. But it is important to know what you are doing if you short stocks." (As Zeke Ashton points out in "The Art of Short Selling," leading off the latest issue of The Motley Fool Select.)
My first Foolish reaction was to turn the page, because with at least 15 years to retirement, what happens over the next five or ten years doesn't affect my strategy. As painful as the last two years have been, nothing has changed the fact that the average return from stocks over every rolling period of 20 years or more since the 1920s exceeds all other asset classes, whether bonds, gold, or real estate.
You might have to wait those 20 years, but if you are willing to, you can obtain that average market return simply by investing in a broad market index fund and taking a long nap, like Rip Van Winkle. If you choose instead to invest in individual stocks of good businesses selected with care, the longer you hold the greater the chance you have of meeting or exceeding the averages.
It matters what price you initially pay, but a longer holding period can help heal all valuation wounds as well as reduce taxes. Buying-to-hold means not holding blindly, either, but being alert to changes in the businesses and other, better opportunities. That's why whenever I hear a self-styled financial guru attack the idea of buy-and-hold-no-matter-what, I see only a strawman erected to promote the guru himself. That happens in every market downturn, as Fool alumnus Randy Befumo exposed in August 1996!
Despite this self-confidence, I did not turn the page. Why not? Because no one can afford blindly to ignore the possibility that he might be wrong, and the only way to learn and grow is to question assumptions. What if Zulauf is right, the world has changed, and the only way to ensure good long-term results is to take a short-term strategy for the next five to ten years? Stranger things have happened.
Put it to the test
I decided to grant to Zulauf and other doomers the benefit of the doubt and agree that the way to make money in stocks has indeed changed for the next five to ten years. The rules are now to "play rallies" (buy low and sell high, market time by buying at the bottom and selling at the top, swing trade) and sell short. Let's assume he is right, and also that you and I can do this successfully.
The ground rules
First, you could "play rallies" in an IRA, in theory, because you have no tax consequences, but not in a 401(k), because it's the rare plan that allows you to buy and sell individual stocks -- outside of your company's, of course -- and even when it does, certainly not for a discount brokerage commission rate. But because we cannot sell a stock short in either a 401(k) or IRAs, we rule them both out. Our Rally-Short Genius investor can only play the short-term strategy in a taxable brokerage account.
Taxes and commissions cut into short term gains
In a taxable account, we will have to take capital gains taxes into account. Since we will be following a short- term strategy, we will have gains from stocks held less than one year, and they will be taxed at the highest marginal rate. Let's use the four rates highest for 2001 -- 27%, 30%, 35%, and 38.6% -- for short term capital gains taken in years 1-5, 6-10, 11-15, and 16-20, respectively, assuming that rising income puts us in higher tax brackets as we progress in careers.
Let's also add a 6% state capital gains rate. This is an average of all state capital gains rates, taking into account the few states that do not tax income or capital gains and that some states tax at higher rates. Keep in mind that short sales, as Roy Lewis explains, are always taxed at the highest rate because they are treated as being held for the shortest possible time.
Short Term Capital Gains Tax Rates
Federal State
Years 1-5 27% 6%
Years 6-10 30% 6%
Years 11-15 35% 6%
Years 16-20 38.6% 6%
And for commissions, I'll assume 10 trades a year at $14.95 a trade. You can find lower and higher commissions from discount and other brokers, so this is an average. Because commissions are added to the cost of your shares, I reduce the $149.50 a year by the combined federal and state short-term capital gains tax rate.
Benchmark: We can always hit the market averages
We must measure our success against a benchmark. We can always just stash our cash in a low-expense index mutual fund or exchange-traded fund that follows a broad market average, such as the S&P 500 or broader still, the Wilshire 5000, and snooze. These funds have low turnover, so our taxes will be minimal. Historically, the broad stock market has returned an average 11% over 20-year rolling periods, before taxes, but let's assume Zulauf is right that the game has changed. I like to use 6% over the next 20 years, the more conservative of the 6% and 7% 17-year outlooks presented by Berkshire Hathaway (NYSE: BRK.A) CEO Warren Buffett in two notable Fortune pieces.
Our benchmark for the Index Fund Snoozer investor is a compound annual growth rate of 6%.
Assume we can beat the averages
Lastly, we have to figure that we can handily beat the averages for the next five to ten years using strategies that Zulauf espouses. We'll be wildly optimistic and figure that we will double the market's average return of 6% for the first five years, beat it by 50% for the next five years and 25% for years 11-16, and match the market average for years 15-20. This really is generous, keeping in mind that I know only one mutual fund manager, Legg Mason's Bill Miller, who has exceeded the S&P 500 for more than 10 years. In sum:
Rally-Short Index Fund
Genius Return Snoozer Return
Years 1-5 12% 6%
Years 6-10 9% 6%
Years 11-15 7.5% 6%
Years 16-20 6% 6%
And the winner is...
Starting with $10,000, comparing the estimated returns for playing rallies and short selling versus a sleepy index fund, here are the results:
Rally-Short Index Fund
Genius Snoozer
Starting amount $10,000 $10,000
Total after taxes, 20 yrs. 25,540 32,071
Gain: 15,414 22,071
Compound annual growth rate 4.80% 6%
I've posted the complete table on the Fool on the Hill discussion board (30-day free trial to read, subscription required to post). You see that after all that work and sweat, the index fund wins handily. These numbers could change absolutely but not relative to each other, if, say, you do better or worse in a given year or if the 20-year average annual return from an index fund is better or worse. The index fund still wins, and that's not even including the opportunities foregone by spending hours and hours following the short-term movements of the markets. Index Fund Snoozer has had many more hours to spend with family and friends, expand education or professional capabilities, coach kids' teams and otherwise volunteer, float down the river in an inner tube, and post better investing results.
We need to be open to any strategy that can increase our wealth for the future, and I'm not against the occasional short sale or special situation for the short term -- I've done both. I just haven't seen enough analytical support for a shift en masse to a different strategy for the next five or ten years, when taxes and commissions reduce even the most extraordinary results below the returns from the safe, sleepy index fund alternative over a hypothetical 20 years.
For now, the conclusion is that Zulauf simply needs Zoloft.
Have a most Foolish week!
Tom Jacobs (TMF Tom9) does not own a cummerbund, so the Nobel is out. At press time, he owned no shares in companies mentioned in this story. To see his stock holdings, view his profile, and check out The Motley Fool's tip-top disclosure policy.
-- posted by KLR
» soonertimer - Re: Re: Re: Re: FODDER FOR THE DEBATE
In response to message posted by pjstack:Gee, I read basically the same thing, based on the same study, several days earlier in A. Abelson's weekly commentary in Barron's. Wonder where she got the idea?
-- posted by soonertimer
» soonertimer - Re: Buy-to-Hold Isn't Dead
In response to message posted by KLR:More foolishness from a "Fool", who evidently has not a clue that an index fund is qualitatively different from a basket of "individual stocks of good business". The later inherently involves an evaluation and TIMING of when to sell and replace with something else; i.e., "better opportunities".
Instead of creating his own "strawman" in Zulauf's approach of short-selling individual stocks, he might have changed his "ground rules" to mention that it is a reasonable strategy for the average "Fool" to simply be on the lookout to buy more of those "individual stocks of good businesses" or maybe even some extra index fund shares in a bear market; and consider reducing their equity allocation some after a bull move.
-- posted by soonertimer
» Kirk - Five-year-old girl beats experts
Five-year-old girl beats experts in stock market challenge
Cute photo
http://www.ananova.com/yournews/story/sm...
Five-year-old girl beats experts in stock market challenge
A five-year-old girl is still beating the stock market and financial experts after randomly picking shares.
<img src=http://www.ananova.com/images/business/t... width=410 height=274>
Tia Roberts took part in an experiment last year to compare different ways of predicting the stock market.
The experiment pitted Tia against financial astrologer Christeen Skinner and independent analyst Mark Goodson.
Each invested a virtual £5,000 in a fantasy portfolio during National Science Week 2001, with Christeen choosing stocks based on the movement of the planets and Mark using his expertise and computer analysis.
Tia, who picked her stocks at random by grabbing numbered notes representing each company in the FTSE 100 Index, won last year's competition as her shares performed best during National Science Week.
The test of time shows Tia is still a winner, with her portfolio the only one to gain value a year later.
Tia's portfolio is up 5.8% one year on; while Christeen's is down 6.2%; and Mark's selections have fallen by 46.2%. During the year, the FTSE 100 Index has dropped 16%.
Richard Wiseman, a psychologist at the University of Hertfordshire who devised the experiment, says: "It's amazing to see that after a year of the experiment, Tia's portfolio is still doing well.
"The original experiment looked to see if it was possible to predict the stock market over a short period of time. During an unstable year for the stock market, when the FTSE 100 dropped 16%, Tia's random selection has still managed to outperform the others."
Analysis of the portfolios has been carried out by Henk Potts, from Barclays Stockbrokers. This year's National Science Week, which runs until March 17, is organised by the British Association for the Advancement of Science.
Story filed: 14:57 Wednesday 13th March 2002
-- posted by Kirk
» Kirk - Yale Hirsch Broke?
http://www.myprimetime.com/money/investi...
Famous Market Timer Yale Hirsch:
He writes a book on market timing (Stock Trader's Almanac 2002 ), and either can't follow his own instructions or the instructions don't work? Read the article and You make the call:
Out to Dry
by John M. Grund
People are always looking for patterns in the stock market, but maybe they shouldn't.
One of the market's greatest pattern-finders just turned out to be flat broke after 18 years of "the greatest bull market of all time," as he called it himself.
Yale Hirsch appears on Nightly Business Report as the nation's leading expert on the connection between presidential elections and stock market returns. He's quoted in investor magazines as the man who named the Santa Claus rally, and as the discoverer of the January barometer — the curious ability of the S&P 500's January performance to predict the year ahead, which has worked, for the most part, in 46 out of the past 49 years.
He's about to publish the 34th edition of The Stock Trader's Almanac, an annual compendium of stock market data that sits on the desks of thousands of traders, brokers and investors around the country. He also publishes two investment newsletters, Smart Money (not related to the magazine of the same name) and Ground Floor.
Probably few of his followers, however, are aware that this summer Hirsch agreed to a judgment in a small-time stock scandal.
"Without admitting or denying the allegations" in a complaint filed by the Securities and Exchange Commission, he agreed to disgorge $127,007 in profits and interest.
The money was gained by accepting rights to purchase favorably priced stock in Davistar, a small medical devices company, in 1991, while pushing the stock in his newsletters.
Hirsch had failed to disclose to his readers, except in the first report, that he had a financial interest in the success of the company.
More significantly, however, Hirsch filed a sworn financial statement showing he would be unable to pay further civil penalties in the case. In other words, he got out of fines that could have totaled hundreds of thousands of dollars because he's broke.
"We even agreed to let him pay the $127,000 penalty over time," says the prosecutor who handled the case for the SEC.
What does that say about Hirsch? I think it says he's claiming to be a master tailor when he's wearing a bad suit. More importantly, it says that the kind of strategies he's pushed for years, which include heavy doses of market timing and bets based on past history, just don't work.
Defending himself in a phone interview Hirsch says trading "is a full-time job, and I have too many other interests ... I'm not a trader."
But that just makes him a chef who won't eat his own cooking — not much of an improvement over the bad tailor. Remember Yale Hirsch the next time you're tempted to play the patterns in the stock market.
Voting for a Bull Market
John M. Grund is senior editor of RedChip.com, a Web site with news, research and tools for investors in small-cap stocks.
-- posted by Kirk
» CaptRon - Re: Yale Hirsch Broke?
In response to message posted by Kirk:can't follow his own instructions or the instructions don't work?
FWIW, I believe the instructions work...the history is at the Seasons thread.
Personally, as long as they continue to work, why not follow them?
As for Hirsch, he wouldn't be the first fella to plead poverty in face of a judgement, would he?
-- posted by CaptRon
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