Kenneth L. Fisher on How to Time the Market

Kenneth L. Fisher on How to Time the Market

"There is no end to the lengths people go to try to find the magic key to the stock market."

"At best, one can hope to be right about the stock market perhaps half the time. At worst, one is apt to be wrong most of the time. Stock market seers run hot for a couple of years. Then most embarrass themselves."

But there's more. Even if you COULD predict the market's major moves, Fisher says it wouldn't be worth it. He studied how an investor would have fared had he correctly called every 100-point move of the Dow Jones Industrial Average for the 5-year period ending Dec 31, 1982.

Such an investor (which of course, probably doesn't exist) would have earned a compound rate of return of 51.5%. That sounds great, but according to Fisher, it's no better than the return you could generate by buying a super stock.

And in the perfect-market-timing scenario, you also would be jumping in or out of the market 11 times during that span, resulting in significant trading costs. Plus, since the vast majority of those 100-point swings occurred in less than a year, you'd be taxed at higher short-term gains rates. Super Stocks make their gains over a three- to five-year period, generating long-term gains that are subject to lower tax rates.

Fisher does, however, offer a solution for how to time the market. His two rules:

1. When a company is selling at a (sufficiently) low PSR (Price-Sales Ratio) - BUY it.
2. If you can't find companies selling at (sufficiently) low PSRs, DON'T buy stocks.

Of course, this isn't exactly market timing in the way most people think of it, because it looks at specific stocks rather than the entire market. But whether you call it market timing or not, it's certainly a lot better plan than those used by most investors who try to time the broader market's movements.

Source: Kenneth L. Fisher, Super Stocks, reissued edition (NY: McGraw-Hill, 2008)