There is no short-term timing strategy that works accurately and consistently
Many people believe that the fastest way to the highest market returns is by short-term trades that are accurately timed. But many years in the investment arena, there is no short-term timing strategy that works.
All nature of pundits have come and gone over the years.
Better in the market invested in value stocks than play the timing game
It is simply better to be in the market, invested in the value stocks that offer the highest potential return, than to play the timing game.
The reality is (and it has been proven) that the biggest portions of investment returns come from short periods of time but trying to identify those periods and coordinate stock purchases to them is nearly impossible. Two issues are at play here, both equally important:
(1) short-term timing doesn't work; and
(2) the highest returns are achieved by being fully invested in the market at nearly all times so that you can capture the times when stocks rise the most. You have to be in the game to win it!
Long-term value investing is like flying long distance
Long-term value investing is like flying from Singapore to London. While you may encounter some air turbulence over Europe, if your plane is in good shape, there is no reason to bail out. You will eventually reach your destination safely, and probably even on time.
The same goes for investing. If your portfolio is well constructed, a bit of market turbulence is no reason to bail. You will reach your financial goals.
Predicting short-term stock market direction is a fool's game
Predicting short-term stock market direction, however, is a fool's game and is disservice to the investing public.
Long term, the market is going up. Always has, and most likely always will.
Market timers like to think they can capture large returns by jumping in the market to profit during periods when stocks are up, and jumping out of the market when stocks are down.
The majority of investors buy high and sell low.
All manner of studies have proven, in many ways under many scenarios, that the majority of investors buy high and sell low.
1. Peter Lynch, the legendary and highly successful manage of the Fidelity Magellan Fund for many years, once remarked that he calculated that more than half of the investors in his fund lost money. This happened because money would pour in after a couple of good quarters and exit after a couple of not so good quarters.
2. Nobel Prize winner William Sharpe found that a market timer must be right a staggering 82% of the time to match a buy and hold return. That's a lot of work to achieve that could be accomplished by taking a nap.
3. Even worse, other research shows that the risks of market timing are nearly two times as great as the potential rewards.
Day by day, minute by minute prices are so widely available
One of the more difficult factors in maintaining a long-term approach is that prices are so widely available. We can check the value of all of our stock holdings day by day, minute by minute. We can see how they fluctuate around short-term factors, and in many cases this information can make us a little nervous.
Would you take a minute-by-minute pricing approach with anything else you own?
How would you react if your house was priced every day and the quotes listed in the local newspaper? Would you panic and move if you lost 2% of your home's value because a neighbour didn't mow his lawn? Would you rejoice and sell if it went up 5% in one day because another neighbour finally painted his house.
A collection of businesses bought at excellent prices is no less a long-term asset than a piece of real estate and should be treated the same way. Prices will fluctuate both up and down. What is most important is that you own the right stocks when the market does go higher.
Using the tenets of value investing and always keeping in mind the margin of safety, the odds of winning with our approach are a bit better than playing the lottery and is is far more remunerative than sitting on the sidelines.
Missing the 10, 30 and 50 best days in the market
According to an investment study, if you had ridden out all the bumps and grinds of the market from 1990 to 2005, $10,000 invested would have grown to $51,354.
If you have missed the 10 best days over that 15-year period, your return would have dropped to $31,994.
If you had missed the 30 best days - one month out of 180 months - you would have made $15,739.
Had he missed the 50 best days you would have come out a net loser, and your $10,000 would now be worth only $9,030.
The evidence is clear.
It is pretty close to impossible to consistently make money market timing, and you are better off investing for the long term, riding out the bumps.
Value investors have the extra security of knowing that they own stocks that have one or more of the characteristics of long-term winners and that they have paid careful attention to investing with a margin of safety.
It is a marathon, not a sprint.
Many people believe that the fastest way to the highest market returns is by short-term trades that are accurately timed. But many years in the investment arena, there is no short-term timing strategy that works.
All nature of pundits have come and gone over the years.
- For a short time, any of them may be right and may make one or two amazingly accurate predictions.
- Eventually, all of them lose the interest of the public when the predictions prove inaccurate.
Better in the market invested in value stocks than play the timing game
It is simply better to be in the market, invested in the value stocks that offer the highest potential return, than to play the timing game.
- Between 80 and 90% of the investment return on stocks occurs around 2% to 7% of the time.
- It is a daunting task to find a way to reliably predict the 7% of the time stocks do well.
The reality is (and it has been proven) that the biggest portions of investment returns come from short periods of time but trying to identify those periods and coordinate stock purchases to them is nearly impossible. Two issues are at play here, both equally important:
(1) short-term timing doesn't work; and
(2) the highest returns are achieved by being fully invested in the market at nearly all times so that you can capture the times when stocks rise the most. You have to be in the game to win it!
Long-term value investing is like flying long distance
Long-term value investing is like flying from Singapore to London. While you may encounter some air turbulence over Europe, if your plane is in good shape, there is no reason to bail out. You will eventually reach your destination safely, and probably even on time.
The same goes for investing. If your portfolio is well constructed, a bit of market turbulence is no reason to bail. You will reach your financial goals.
Predicting short-term stock market direction is a fool's game
Predicting short-term stock market direction, however, is a fool's game and is disservice to the investing public.
Long term, the market is going up. Always has, and most likely always will.
Market timers like to think they can capture large returns by jumping in the market to profit during periods when stocks are up, and jumping out of the market when stocks are down.
- It may get you ahead for a brief period but you will quickly give up gains when abrupt events that could never have been predicted (such as the tragedy of 9/11, geopolitical evens, and even weather cause brief downturns that are almost always followed by rising prices).
- You will also give up your profits to the increased costs of trading from commissions to taxes.
The majority of investors buy high and sell low.
All manner of studies have proven, in many ways under many scenarios, that the majority of investors buy high and sell low.
1. Peter Lynch, the legendary and highly successful manage of the Fidelity Magellan Fund for many years, once remarked that he calculated that more than half of the investors in his fund lost money. This happened because money would pour in after a couple of good quarters and exit after a couple of not so good quarters.
2. Nobel Prize winner William Sharpe found that a market timer must be right a staggering 82% of the time to match a buy and hold return. That's a lot of work to achieve that could be accomplished by taking a nap.
3. Even worse, other research shows that the risks of market timing are nearly two times as great as the potential rewards.
- Between 1985 and 2005, the annually compounded rate of return for the Standard & Poor's 500 Index was 11.9%.
- However, a recent research study concluded that the average investor only compounded at 3.9% over that period.
- Why? The research paper concludes that most investors head for the hills during period of market declines, thinking the decline will go on indefinitely. Once the market has rebounded, they return, having missed the best part of the rebound.
Day by day, minute by minute prices are so widely available
One of the more difficult factors in maintaining a long-term approach is that prices are so widely available. We can check the value of all of our stock holdings day by day, minute by minute. We can see how they fluctuate around short-term factors, and in many cases this information can make us a little nervous.
An example of a successful commercial real estate broker who saved at least half of his earnings each year. His money was invested for the long term, and he could afford to leave it invested. But he could not stand to see the prices of stocks rise and fall each day. If he owned a stock and it closed down on a particular day, he was deeply upset. He did not realise that bonds also fluctuate in price; but since he could not check their closing prices every day he was not worried. He got his regular interest check, which he reinvested and was happy. Over the ensuing 10 years, his municipal bond portfolio grew at an assumed interest rate of 5%. If the same funds had been invested in the Standard & Poor's 500 index, he would have made 15.3% annually compounded rate of return. His loss for not being invested in stocks was staggering.
Would you take a minute-by-minute pricing approach with anything else you own?
How would you react if your house was priced every day and the quotes listed in the local newspaper? Would you panic and move if you lost 2% of your home's value because a neighbour didn't mow his lawn? Would you rejoice and sell if it went up 5% in one day because another neighbour finally painted his house.
A collection of businesses bought at excellent prices is no less a long-term asset than a piece of real estate and should be treated the same way. Prices will fluctuate both up and down. What is most important is that you own the right stocks when the market does go higher.
You have to play to win.
Using the tenets of value investing and always keeping in mind the margin of safety, the odds of winning with our approach are a bit better than playing the lottery and is is far more remunerative than sitting on the sidelines.
Missing the 10, 30 and 50 best days in the market
According to an investment study, if you had ridden out all the bumps and grinds of the market from 1990 to 2005, $10,000 invested would have grown to $51,354.
If you have missed the 10 best days over that 15-year period, your return would have dropped to $31,994.
If you had missed the 30 best days - one month out of 180 months - you would have made $15,739.
Had he missed the 50 best days you would have come out a net loser, and your $10,000 would now be worth only $9,030.
The evidence is clear.
It is pretty close to impossible to consistently make money market timing, and you are better off investing for the long term, riding out the bumps.
Value investors have the extra security of knowing that they own stocks that have one or more of the characteristics of long-term winners and that they have paid careful attention to investing with a margin of safety.
It is a marathon, not a sprint.
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