Market Timing: Should You Attempt It?

Top 10. Jun 13, 2000 7:39 AM

» Will_L - Exactly Fred, The other day on Rande's post there was much dis

Exactly Fred, The other day on Rande's post there was much discussion about gambling. If you go to the library, or bookstore or particularly a gift shop in Vegas, you will find a large number of "How To" books--and many of them hint that they have a "system" that will beat the casino and thereby make you rich. The fact that there is a plethora of those books proves that people buy them. Now just as your question asked--"Why would anyone share a method of beating the casino consistantly for a few bucks??" The answer is as you know -- they don't believe it themselves. That is true of newsletter writers I'm sure as well. They exude confidence--just like the book jackets with extravagant claims and overstated results--but the truth is if it really were a consistant strategy to "beat the market" it would not be something that the individual would share with the masses.

It is human nature though to "believe" that out there is a "system", a simple "formula" that for say 15 bucks a month that will give you "the edge". smile

-- posted by Will_L

Top 11. Jun 13, 2000 7:57 AM

» Kirk - Just one more....

Software

I always run into people that believe they need "just one more class" before they start to make money on a system to day trade. I always ask "if it worked, why would Goldman Sachs not write a computer program to do the system and then make the money?"

I had a boss that actually wrote software for an investment company to do this as a 2nd job when he was a young HWP engineer. When I would share how I was doing in the market, he loved to tell his story. The company did very well, for awhile, then some "exogenous event" wiped them out. He was smarter than them, he rightly boasts, as he just took the money for writing the program!

The problem with life, it is just one long series of "exogenous events" that you can not model.

I love how some think a magic guru can get them back into a stock market at a bottom when recent history shows that this same guru was far too early on his last "bottom prediction" and he blamed missing, after ignoring the fact he missed for many months, on "exogenous events". Duhhhh. You know what that guru learned from that event? He learned to not put his bottom predictions in writing and to only call the bottom after the fact. Of couse, he waved his arms and whispered many magical incantations that ONLY the "truly enlightened" could understand... Perhaps one just needs to subscribe to a newsletter or listen more carefully to his show to get that last bit? Sure reminds me of my day trader friend that wants to take "just one more class" so he can sell his business and day trade to retire early (He actually told me this was his plan!).

-- posted by Kirk

Top 12. Jun 13, 2000 8:11 AM

» shep - Thought-provoking article, Kirk

Your article points out some pitfalls of market-timing, at least according to the quotations by the listed experts. On a conceptual level, I have no problem agreeing with your points. There are numerous reasons, not the least of which are taxes, why market-timing might be a bad strategy for investors. However, as you must have contemplated, it is very hard to prove a negative (No market-timer has beaten the returns of non-timers) using anecdotal evidence. What I found myself longing for was some real-life examples. An THAT, as you point out, is where the fudging can occur...one can always toy with the examples to make your point or disprove someone elses point.

So...how about an example that clearly shows that the top two or three so-called market timers have clearly underperformed in comparison to the buy-and-holders? (Or, is there really only one market-timer you had in mind...VBG)

-- posted by shep

Top 13. Jun 13, 2000 8:40 AM

» Kirk - Bill

I just checked my 1998 page from Forbes that rated the newsletter writers. There ARE a FEW that beat the index funds, but not by much. Also, are they doing it with stock or fund selection, market timing or both?

The problem I have found is that they can reset their starting points if they have a bad period and so the numbers can look better. Some restarted their portfolios in 1988 after getting hammered in 1987!

I would assume that there are many that do much better with small followings... These are so small that they might never hit the radar screens of the tracking people like Hulbert.

What should strike you is that there is no big guru that is maybe 10% better than the index funds over a significant time period.

Rande or others might have more recent data from Hulbert. I remember reading it somewhere and there were a few that were well above the index funds but are they pure market timers and how long have they been performing above average? It might take 50 years to get a statistically valild representative.... i.e. there are so many out there that some might just be lucky! (and I might be one of these.)

-- posted by Kirk

Top 14. Jun 13, 2000 9:40 AM

» Karin_ - Great Kirk

I wish we could spread the word, so others can see it.

-- posted by Karin_

Top 15. Jun 13, 2000 9:42 AM

» Rande - Shep,

Shep,

There's always a "but," isn't there? Why? Because there is something about human nature that says, "We can do better than average." Call it greed on the upside or fear on the downside or whatever -- there will always be some who say, "It can be done!" Getting it right once in awhile only makes it worse -- "See -- you CAN do it." Eventually, and given enough time, the sad in-and-out attempts at beating the market through timing ultimately fall short. Alas, the facts are cruel.

Total period returns, 1/1/88 through 3/31/00:

Nasdaq Composite 1,283.61%
Morningstar average mid-cap growth fund 965.26%
Morningstar average large growth fund 829.62%
S&P 500 736.14%
W5000 699.08%
P1 = 607%
P2 = 487%
P3 = 182%

Returns are pre-tax, not adjusted for risk, and are gross of annual subscription charges.

ASK YOURSELF -- which is more ridiculous:

1. Birthright expectations of double digit returns.

2. Double your money overnight on gasoline futures.

3. The Crash is coming -- cash under the mattress is king.

4. You can enjoy all the rewards of equity investing by participating in the upside while sidestepping the downside through deft market timing -- all you have to do is pay me and I'll share my magic model with you.

ANSWER -- All of the above. Prudent asset allocation based on individual goals and objectives, time horizon, and risk tolerance remains the way to go for intelligent and serious investors.

-- posted by Rande

Top 16. Jun 13, 2000 10:16 AM

» Will_L - Amen Rande, we all want that "Genie's magic" but it is mighty e

Amen Rande, we all want that "Genie's magic" but it is mighty elusive and often short lived when you find it. You are very perceptive about how figures can be manipulated quite easily to make it appear that one's performance is superior. A stroll though adds of both managed funds or claims of newsletter writers advocating timing reminds me of Garrison Keiler's village of Lake Woebegone, "where all the children are above average". smile

By picking time frames they can certainly usually find an area where the "out performed thier peers and the indexes". However when you look at a long time frame not hand picked those comparisons begin to fail.

It really isn't the fund manager or the newsletter writer's job to point out their shortcomings any more than it is Ben and Jerry's job to tell you that if you eat enough of their product you won't fit through the door. So its up to the individual to sort through the Bs and arrive at the actual performance of the fund or guru.

It seems many times after being sucessful guru's begin to believe they have a "midas touch" and can indeed deftly move in and out of stocks, sectors or the market itself adding greatly to performance. I remember guys like Granville who's major sucess probably set him up to make himself rich and his followers poor trying to jump back and forth on his whims. I really think after the intial call he was seldom right. IF he would have blown the first call a few would have lost money but then not followed him--I am sure those that became believers lost millions before giving up on him.

Heiko Thiema (sp) of American Heritage funds was a similar story a few years ago--it way outperformed the averages and his flamboyant style and confidence --(seemed more akin to arrogance to me) sucked in a lot of money--only to see his fund's performance be the worst of the last few years as he timed from this to that and placed large bets in a few stocks-leading to ruin of many investors I am sure.

44 wall street was a similar story from years ago--. They had "the magic", the "inside scoop". And attracted a lot of attention--and then way underperformed.

Garzerelli, and Accompora--both made a name by calling a big event--and being right "once". Subsequently anyone following their advice or investing in her mutual funds were sorely disappointed.

The moral is -- do your homework. If you are a newsletter writer or guru--making the one big call will make you rich and famous-regardless how you underperform from there on.

For investors there is no one who has sucessfully timed the market or even jumped around sector to sector and consistantly beaten the averages over time-the real danger is in following someone after "the big call" if they get it right. They universally underperform.

What I wonder is how many times when they were obscure these same folks made what they hoped would be "the big call" and got it wrong? smile

-- posted by Will_L

Top 17. Jun 13, 2000 10:20 AM

» Kirk - Agressive Growth Portfolios

Agressive Growth Portfolios

In Hulbert and other publications, they often compare "agressive Growth" portfolios to the S&P500 and this is wrong. For the level of risk "agressive growth" implies, they should be compared to the three growth benchmarks Rande gives.

I think Lewis Naviler had top returns in the 1998 survey but I don't know what sort of portfolio he uses. Remember, in a bull market, growth funds SHOULD do better than the average. The fact that so many mutual funds fail to even meet the average of the S&P500 should be an indication of how difficult it is.

-- posted by Kirk

Top 18. Jun 13, 2000 10:30 AM

» Kirk - Style is also important

...and style goes in fads just like ties and hemlines.

Right now, Technology guru's are in style. Perhaps Kevin Landis and myself, to name two that have beaten QQQ the past 18 months, do well because we understand a narrow sector of the market that is hot?

IF it were ONLY bio that was scoring big, I am sure I would underperform as I know next to nothing about that technology compared to transistors where I have done everything from actually fab a transistor (I did every step in lab at UC Berkeley) to design large mixed signal (analog and digital) circuits.

The same can be said where internet analysts like Mary Meeker and Harry Blodget got great fame for being in the right place at the right time (analysts for internet companies) and yet a close look shows that a chimp with a dart beat their internet stock picks!

-- posted by Kirk