Market Timing: Should You Attempt It?
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- Kirk
- bob90245
- Kirk
- axolotl
- KLR
- Kirk
- KLR
- SteveT
- Kirk
- KLR
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» Kirk - Re: Re: Re: Re: Re: Never Mind Timing.........
.In response to message posted by KLR:
Man that was a great post KLR for starting a series of books to answer! 
Market Timing:
Market timing is nothing more than "predicting the economy." What all my research says is the best predictor of the economy is the stock market. Consider the Nasdaq Boomed and peaked out in March 2000. Here where I live jobs were plentiful and it looked like it could go on forever for nearly a year after that. We started to see cracks in August 2000 as I remember attending a wedding of a friend I used to work with (we even had a date river rafting for two days back in 1980 when I was a young engineer and she was a summer intern! ) Anyway, they paid with the wedding from selling HP stock which had just peaked at $67 and many there were all flush with market gains. One guy who ran our Fab when I was there said he was unable to buy capacity in Asia and all of a sudden capacity was for sale. He warned me that Semiconductor capital equipment stocks could decline quite a bit if the trend continued. Of course I didn't sell on that bit of news but I sure remember how the clues like that leak out and it leads to "distribution." The economy was still booming yet the stock market was going lower.
Don Wolanchuck, one of the best market timers ever (he won so many Timer Digest Awards they stopped following him so they could sell their service) and one I've made friends with says the reason FA doesn't work like Brinker uses in his model for market timing is the market drives the economy! What an amazing statement but so true. I am not sure if Don really adds value with his timing (he won't publish a model portfolio) but if the market goes to new highs in the next two years, then I'll have to say he does add value. He does have some short term money flow stuff he shares for free so others help him track the large set of data. Those that follow it swear by the short term accuracy but I have yet to spend the time to learn and follow. Right now I am tagging along to see what I can learn. I like to learn how others time the market even if I don't really use much myself as you never know what you could learn if you keep a closed mind. I will admit to using a sliding asset allocation in my system now which engineers might just call "hysteresis."
I do think you can do systematic market timing with some degree of success if you stick to something like Dr Ed Yardeni's Fed Model variation I talk about here. I think the taxes from selling so much plus the massive amount of buying at maximum fear points means most will not be able to follow that method and they will under perform.
As for stock picking.
You seem to agree with the experts on the folly of marketiming, but not the folly of individual stock picking.
I don't "pick stocks."
I buy companies I think will make money, hopefully a great deal of it, and then I will get rewarded with a higher stock price. I look at it as if I were hiring a CEO and staff to invest my money into the business they are in. I want to see what sort of return I can get for my money. I see this as no different than Bill Gates deciding to start MSFT or some famous chef starting a restaurant. If they have a great product and can offer it at a competitive price with barriers to entry and I can get good return on my investment, then I buy. Stock pickers in mutual funds try to do this for hundreds of companies. I only have to do it for one every market cycle (my goal) and I do well. Warren Buffett is probably somewhere in between as he too concentrates portfolio holdings but buys several per cycle compared to my fewer buys and much smaller amount of money. Like Buffett, I to will do some bond timing when things look like a fat pitch.
When I find a company or sector I like, I buy into it slowly as I could be too early. If I am late and it takes off, then I just enjoy the gains but I seldom chase once it gets past my cheap metrics to buy. If I am too early, I take hits from the peanut gallery for "a crummy pick" and I buy more as it goes lower while I monitor the business. Sometimes I am very wrong like happened with WCOM but I invested in the telecom sector using three individual stocks Agilent, Carrier Access and WorldCom. I've done well enough with Agilent selling some when up and buying it back when down, I lost 95% in WCOM and I made it all back and then some with CACS and I think that could go 4 to 10x higher still. Folks that want to follow along to make sure my opinion doesn't change subscribe to my newsletter and few complain. My renewal rate this month was 133% meaning some that used to subscribe but got scared out during the bear have come back. The confidence they have to try me again is a great ego booster. For months before this current month, my renewal rate ranged between 80 and 100%. I hear 50% is doing well for most.
Click for a free issue of my newsletter.
-- posted by Kirk
» bob90245 - Re: Re: Re: Re: Re: Re: Never Mind Timing.........
In response to message posted by Kirk:"Don Wolanchuck ... says the reason FA doesn't work like Brinker uses in his model for market timing is the market drives the economy!"
Someone else said the stock market predicted 9 out of the last 5 recessions. Not sure what market history Wolanchuck is looking at. For example, the Oct 87 market crash barely made a dent in the economy.
-- posted by bob90245
» Kirk - Re: Re: Re: Re: Re: Re: Re: Never Mind Timing.........
In response to message posted by bob90245:Actually, in CA techland, it was the pits on and off after the crash of '87. Some others will say the market finished 1987 up and the crash was just correcting a tech bubble.
But your point is a good one. The market can drive the economy but it can still act like a mule.
-- posted by Kirk
» axolotl - Market does better job predicting economic ..
recovery than recessions - I have quite a bit of experience and time with investing - Buffett is the "king" - his record cannot be spun or argued like Brinker because it is simply the price of BRKA. I used to read the WSJ, Barrons, Forbes, Fortune, Business Week, etc. etc. on a regular basis plus the internet. It is very time consuming to feel like maybe you are a little bit informed. Plus, there is always change going on and some things that you thought that you had correct, you develop doubt about. Here's something that maybe Kirk has an opinion on - will the technology of using diamond instead of silicon ever reach the market?-- posted by axolotl
» KLR - Top market-timing system now bullish
.I like this system...Rated number one timer on a risk adjusted basis every year over the past two decades...and it's strictly mechanical too.
I know some of you nay-sayers will point out that it returned only 13.9% over a buy and hold return of 12.7%...but, you're only in the market one-third of the time. WOWSA!
Top market-timing system now bullish
By Mark Hulbert, CBS.MarketWatch.com
Last Update: 1:12 AM ET Aug. 29, 2003
ANNANDALE, Va. (CBS.MW) -- The stock market timing strategy that, according to the Hulbert Financial Digest has the best long-term record, has just turned bullish.
But before you get too excited, note carefully that this same strategy will turn bearish against next Friday, one week from today.
What kind of timing strategy would flip from one extreme to another in just a few trading sessions? And why would it be turning bullish now if it is going to flip back to bearish so soon?
It is the seasonality timing system. It is an entirely mechanical system that uses nothing more than the calendar to determine when to be invested in stocks: Investors are advised to be invested in stocks around the turn of each month and immediately prior to exchange holidays, and to invest in a money market fund at all other times.
To be sure, the system is for short-term traders only. It involves around 17 round-trip trades per year, for example.
But it also is very conservative. It calls for being invested in the stock market just one-third of the time.
According to the Hulbert Financial Digest, a portfolio that switched between the Wilshire 5000 and 90-day T-Bills on this timing system's signals would have made 13.9 percent annualized over the past two decades, in contrast to 12.7 percent for buying and holding.
Better yet, this outperformance was turned in with volatility (or risk) that was 44 percent less than the market as a whole.
That's a winning combination, which accounts for why this timing system is in first place on a risk-adjusted basis among all timing systems the HFD has tracked over the past two decades.
This timing system considers the two trading sessions at the end of this week to have especially strong bullish probabilities. That's because those days represent the confluence of both sources of bullish seasonality -- the pre-exchange-holiday and the turn of the month.
Though the pre-holiday seasonality comes to an end at the close of trading today, Friday, the turn of month seasonality continues through the end of next week. As a result, followers of the seasonality timing system will stay invested in stocks through then.
Credit for this timing system goes to Norm Fosback, who devoted a chapter to it in his 1974 book, "Stock Market Logic." He also regularly reported on its status in the various newsletters he edited during the 1980s and 1990s, including Market Logic and Mutual Fund Forecaster.
Time Warner, subsequently AOL Time Warner (AOL: news, chart, profile), acquired those publications in 1999 and folded them into a publication called Mutual Funds Magazine. While this monthly magazine continued, episodically, to report on the Seasonality Timing System, AOL discontinued the magazine altogether a year ago.
Because the strategy is entirely mechanical, however, the HFD is able to continue tracking its performance - by constructing a hypothetical portfolio that uses its mechanical rules to get into and out of the stock market.
In addition, Fosback last year inaugurated a new newsletter, Fosback's Fund Forecaster, which reports on a modified version of his seasonality timing system.
-- posted by KLR
» Kirk - Re: Top market-timing system now bullish
In response to message posted by KLR:I know some of you nay-sayers will point out that it returned only 13.9% over a buy and hold return of 12.7%...but, you're only in the market one-third of the time
You know us well!
To be sure, the system is for short-term traders only. It involves around 17 round-trip trades per year, for example.
For many of us with significant assets in taxable accounts, this system would be a huge loser compared to buy and hold when you are working with >30% Fed tax hit and 9.3% CA taxes to pay each year.
-- posted by Kirk
» KLR - Can you make the case for timing?
.Can you make the case for timing?
Despite market gestalt, timing still a loser's game
By Paul B. Farrell, CBS.MarketWatch.com
Last Update: 12:19 PM ET Sept. 2, 2003
LOS ANGELES, CA. (CBS.MW) -- Summer is over. The kids are in school. Football's finally here. The fall television season's heating up. The economy's recovering. Consumer confidence is rising. Third-quarter profits are estimated to rise 14 percent; 20 percent is possible in the fourth.
Folks, we are heading into a hot market. Time to jump on the bandwagon. Win back some of those big losses from the past three years.
But how? What's the best way? Peter Bernstein, author of "Against the Gods: the Remarkable Story of Risk" and a respected market commentator, says the answer is market timing.
Bernstein is just one of many experts who sees low returns and modest growth for the rest of the decade. And he's come to a heretical conclusion: That active timing and trading makes more sense than a passive buy-and-hold strategy, and may be the only way to beat this kind of volatile, unpredictable market.
Dump modern portfolio theory?
Modern portfolio theory is the foundation of virtually all institutional-investment strategies for the past few decades. The theory simply says that focusing on your portfolio, not your stock picking, wins the investment game.
But Bernstein would say "get rid of the extra freight of long-term optimization and let short-term forces play the dominant role." In other words, you should adopt a new core strategy, you should start playing the market, you should become a short-term market timer and get into active day-trading.
Vanguard founder Jack Bogle disagrees vehemently: "Beating the market before costs is a zero-sum game." There's a buyer for every seller. So losers balance out winners across all market trades. In fact, "the odds of making the right decision are, because of costs, even less than 50-50."
The great paradox of investing is that the very costs incurred by those managers who would help investors to beat the market, themselves constitute the reason that the managers as a group are destined to fail at the task, Bogle says.
"A lifetime of experience in this business makes me profoundly skeptical of market timing. I don't know of anyone who can do it successfully, nor anyone who has done so in the past. Heck, I don't even know of anyone who knows anyone who has timed the market with consistent, successful, replicable results," he said.
Cost may be the only thing that does matter. And you don't have to take it from Bogle or Vanguard. A study by the Financial Research Corporation prepared for industry insiders concluded just that.
FRC's research tested seven common predictors of future performance -- Morningstar ratings, past performance, the expense ratio, turnover, manager tenure, net sales and asset size -- and four risk/volatility measures -- alpha, beta, standard deviation and the Sharpe ratio.
All but one predictor failed. Morningstar ratings are "not very effective as a guide in finding funds with above-average future performance potential." The Sharpe Ratio, alpha, beta and standard deviation (all those fancy Nobel prize-winning measurements of risk and volatility) also had no predictive value of a fund's future performance.
The expense ratio is the only reliable predictor of future performance. And that's been Bogle's point for the past few decades, a point market-timing advocates like Bernstein seem to ignore.
"In the final analysis," concludes the FRC study, "your best strategy is still to focus on portfolio asset allocation, diversification and risk assessment, not specific funds, it's that basic." In short, avoid market timing like the plague, it's "a loser's game."
Rebalancing may be timing in disguise
Watch out folks, even your well-meaning rebalancing may be a form of market timing in disguise, which can sabotage the best of intentions.
Take long-term rebalancing, for example, where an investor is convinced that a long-term bull-bear cycle has run its course. I see this as a variation of Warren Buffett's first rule of investing: Never lose money. You simply take your profits and go to cash at the peak of a long-term cycle. But still, you have to be savvy enough to know when the long-term cycle is about to crash and get out.
Lots of luck, folks. The last opportunity for strategic timing was early 2000, when the Nasdaq was over 5000 and P/E ratios were so out of whack they were screaming "get out." But few listened. I only know of one astute investor, an economist, who heard and heeded the call, and dumped stocks for bonds. And now, 40 months later, as the cycle turns again, he's recommending a return to the market. But this time, he could be wrong.
In the final analysis, this kind of long-term rebalancing will fail for most investors because the market is unpredictable.
More frequent short-term rebalancing can also become a form of market timing. When investors rebalance they should, theoretically, be bringing their actual market allocations (which have drifted) back in line with the long-term asset allocations of their ideal portfolio, one that makes most sense for their age, risk tolerance level and lifestyle.
Many investors, however, use periodic rebalancing as an opportunity to adjust the asset allocations of their ideal portfolio in order to take advantage of opportunities they see in the current market.
No rebalancing, no timing, no trading
The truth is, if you have wisely worked out portfolio allocations, you don't have to do much rebalancing. There's a classic Schwab/Morningstar study on rebalancing that essentially concluded the differences in returns between annual rebalancing versus waiting three years is less than one percent.
To their credit, Bernstein and other market gurus have forced us to reexamine our investment strategies and priorities by challenging the very foundations of Modern Portfolio Theory.
But that hasn't changed our minds. Forget market timing, in any form. It's a very risky game passive buy-and-hold investors should avoid like the plague.
-- posted by KLR
» SteveT - Re: Can you make the case for timing?
In response to message posted by KLR:"There's a classic Schwab/Morningstar study on rebalancing that essentially concluded the differences in returns between annual rebalancing versus waiting three years is less than one percent.
To me there is no point in rebalancing at given times makes no sense. Why do it if you are within 1% or 2% of your target just because the calendar says so? Now, rebalncing when your allocation is 5% or more out of whack, now that makes sense imo. That could be the other side of the coin. It would be interesting to see a study on that. It may out perform by 1% or so? Wonder if Schwab or Morningstar would take that on?
-- posted by SteveT
» Kirk - Re: Re: Can you make the case for timing?
In response to message posted by SteveT:Bingo Steve! We have a winner!
Of course it helps to have your total portfolio in a computer so it updates automatically and tells you what your allocation is (I have this in EXCEL).
Lets say you have a $1M portfolio at 50:50
If it is out of balance by 1%, at 49% vs 51% you are still talking $10,000 dollars that you can now apply to an area in that is showing weakness. the percentages can seem small but they do add up over time to significant real dollars.
-- posted by Kirk
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