Investment Insights: Timing the Stock Market

With all the stock market turmoil, I thought I’d share some investing quotes that I ran across when reading The Bogleheads’ Guide to Investing. The general topic is “market timing” – i.e., the practice of jumping in and out of the market, trying to buy in at the low points and sell out at the high points. There are (in my opinion) some real pearls of wisdom in here.

“I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two.”

Warren Buffett, CEO of Berkshire Hathaway (BRK.A and BRK.B)

“Market timing is a poor substitute for a long-term investment plan.”

Jonathan Clements, Wall Street Journal Columnist

“Market-timing is bunk.”

Pat Dorsey, Director of Morningstar Fund Analysis

“I’ve learned that market timing can ruin you.”

Elaine Garzarelli, Stock Investing Analyst

“If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what’s going to happen in the stock market.”

Benjamin Graham, Investor and Author of The Intelligent Investor

“The market timer’s Hall of Fame is an empty room.”

Jane Bryant Quinn, Columnist and Author of Smart and Simple Financial Strategies

20 Responses to “Investment Insights: Timing the Stock Market”

  1. Anonymous

    If markets were truly efficient then the entire financial industry would be gone. There would be no value in analysts, money managers, hedge funds, market timers or otherwise. This is akin to assuming the statistiscal probability of insurance risk is always the same, and therefore all insurance companies should have the same prices, the same profits, etc.

    Capitalism is why market timing works. Just like the reason some statistical risks that are nearly coincidental in the insurance business produce varying results from the insurance companies. There are numerous inefficiencies in the investment world: namely idiots who manage money with emotion, hunches or no recognizable pattern whatsoever. These inefficiencies are calcuable. Since most of the posters here seem to be buy and hold or index investors; they would not be creating inefficiencies – but you’d be a fool to believe they do not exist.

    This is why 25% (or closer to 21% as I’ve read) was posted above as the percentage of money managers who beat their benchmark. This is somewhat like Paretos Law; the 80/20 rule, et al. A majority of investors do not have the emotional fortitude to stay invested in some markets nor the dicipline not to chase a runaway bubble. When exploited, the 20% or so who are using statistical probability are able to make the majority of returns. This is not science fiction, it’s reality. This is the very reason that there are managers, timers, traders and the like that have handily produced positive returns for decades and annualized returns much higher than broad world or US stock indices.

    It’s too bad that CNBC and their fellow market commentators only add fuel to the fire with lousy commentary and idiot money managers who are consistently wrong. Bad for buy and hold, I should say. For mathmaticians and statiticians, on the other hand, this is exactly why market timing does work but is usually not made available to the broad investing public.

    Stock Market Timing does work; but thankfully, not for most.

    Cheers,

    Jason

  2. Anonymous

    Don’t forget another description of market timers, ‘bull market geniuses’ –

    Of course, bear markets always put them in their place. . .How you doing Wade Cook?

    (But where did the lighter fluid come from?)

  3. Anonymous

    Try this on for size. Dollar cost average your money INTO the S&P 500 only when it’s below it’s 15 year moving average. When it’s above, dollar cost average into money market funds.

    This is the Ben Stein method of timing the market.

    I use something similar, but look at several other technical indicators including stochastic oscillators, different moving average intervals, MACD, and a hybrid StochRSI with a 20 day interval. These have never let me down. I also look at the money flow index.

    Since 85% of all stocks are owned by pension funds, mutual funds, and big retirement accounts, watching what they do can pay off big time. With less than $20 billion to manage, I’m able to do what Buffet affectionately calls, “dancing in and out of markets.” Oh yeah, remember that Buffet says that the efficient market theory is bunk and that he hopes business schools keep teaching it because it makes him a lot of money.

  4. Anonymous

    I’ve only tried market timing once. That was in early 2007 when I could see the housing crisis looming, but no one else seemed to. So I bought some SRS and SKF (ultrashort RE/Financial ETFs) and have made out pretty well (my IRA has gone down at the same time, so it was more of a hedge than anything). The market didn’t seem to be efficient in that case.. I could see the writing on the wall with a little research, but housing and financial stocks were still sky high until last fall.

  5. Anonymous

    All market timing is not the same. If you watch for trends, you can make a lot of money. Ignore them and you’ll lose big time.

    Buffet speaks of “dancing in and out of the markets” lamenting the fact that it is much more difficult when he’s managing billions.

    He also speaks of buying companies when they’re “on sale.”

    The key to market timing is to know how to properly value a company.

  6. Anonymous

    My “get rich quick” scheme: I get a nickel everytime one of my friends/coworkers utters any phrase along the lines “If I only would have bought stock in (Company XYZ) a while back”, or any related coulda/woulda/shoulda phrase. I’d have a fully funded retirement.

  7. Anonymous

    I do think that market timing is possible. The problem is that it works only part of the time.
    As for Dow being 2,000,000 by 2100, i would say, why not? What’s the problem with that?
    I think that this quote first appeared in one of Berkshire Hathaways annual letters. If you have read Warren’s letters from his early partnership letters up till now you will notice a trend where he always forecasts that the market will have lower returns – 7% an year or so. Fortunately for him, he is in the business of buying solid growing companies on the cheap. Otherwise he would not be as successfull as now.

    I do agree that long-term returns might be lower than 11%. Dividends have historically accounted for 33-40% of total returns. So with current yields at 2% for the SPY, that brings the equation to about 6% total returns annually.

  8. Anonymous

    @stngy1: “Leave it to the pros”

    @Undertrader: “Real ‘timers’ (and I’d rather use the term trader), real traders study stocks and learn where they rest.”

    “Many, many people invest in mutual funds. Sure, you are holding those, but what is the fund manager doing? That’s right, they’re buying this and selling that constantly. That’s how they get returns. If they were just buying and holding, wouldn’t need a manager, that would be called an ETF.”

    Actually, it would be called an Index Fund. I just finished reading “A Random Walk Down Wall Street”. 3/4 of actively traded mutual funds fail to MATCH the S&P 500, let alone beat it.

    Armies of analysts have been trying to figure out how to predict market or individual stock moves for 100 years and have not made any progress. The “problem” is that the market is efficient and arbitrage opportunities do not pop up very often, and when they do, they are quickly exploited out of existence.

    Have fun timing the market, I’ll be happy matching the Wilshire 5000 with my Vanguard Total Stock Market Index Fund. It won’t be exciting conversation at a cocktail party, but I’ll bet that I’ll have a bigger percentage of my net worth in gains than those who actively trade and/or try to time the market.

  9. I’m not saying that you’re wrong about the 12% days being over, because I suspect that you’re right. That being said, surely you can come up with a better argument than saying that it won’t happen because that would mean the Dow would reach 2,000,000 and that just seems unreasonable. It’s all a matter of scale. Surely a Dow value of 13,000 seemed totally absurb to investors back in the early 1900s when the market was below 100. And yet… Here we are. There’s nothing about the actual value of the Dow that’s going to limit things. What will limit things is productivity of the underlying companies.

  10. Anonymous

    Unfortunately, people better start getting used to market timing and buying and selling like crazy because the Stock Market that everyone quotes as ‘12% gains annually’ isn’t going to last much longer. If the market were to continue that return, it would be at 2,000,000 in the not too distant future, which is never going to happen, sorry. (thanks compounding!)

    What people need to separate, in my opinion, is ‘successful’ from ‘greed.’ Sure, you COULD have left cash in the market and made 20% a few years ago, however, if you had sold out and taken 12% is that bad? Not at all. Not to mention that you lowered risk by selling.

    Another thing people fail to understand is that it’s not really how much a stock goes up that makes you money, but the number of shares. You could trade Disney between $20 and $35 forever and make a killing and the buy and holder would make $15 a share at the most. A nice return, sure, but if you always bought when it was at $25 and always sold when it was at $30, you would kill the buy and holder.

    The problem most people who ‘time’ the market have is that they go all or nothing. They put all of their eggs in one basket and make a huge gamble. That’s not the way to do it. Real ‘timers’ (and I’d rather use the term trader), real traders study stocks and learn where they rest. Disney over the last decade or so is a $30ish stock. If it goes below that, I invest in it. When it gets in the $35ish range, I sell half my shares to get cash. It drops back down, I buy more.

    Apple dropped from $200 to $120. You can time that. Apple at $120 was a great time to buy. Even if you just rode it to $130, I think $10 a share return is pretty darn good. Especially if you had 10,000 shares.

    Many, many people invest in mutual funds. Sure, you are holding those, but what is the fund manager doing? That’s right, they’re buying this and selling that constantly. That’s how they get returns. If they were just buying and holding, wouldn’t need a manager, that would be called an ETF.

    In any event, the key is to develop a strategy and then be consistent and have a return that you are after. Don’t be greedy. Especially with individual stocks. For all of the great stories out there, there are literally thousands of losers that people bought and held. K-mart, Montgomery Wards, Enron, etc…

    Invest in peace…

  11. Anonymous

    Drives me crazy: “market timing”. Sure, buy low, but buy for the long term. Every time you sell, you pay taxes, and it ain’t pretty! Particularly if you’re trying to be cute and try to buy/sell over a few months with profit being your only goal. Leave it to the pros, sheesh. Kinda reminds me of the current housing crisis….

  12. Anonymous

    Market timing is the equivalent of gamblers telling me that they have a system to beat the casino. Gambling is a negative sum game (due to tips, table rakes, etc) which seems similar to trading/timing the markets consistently (ie. investment fees, taxes). Both can have wide fluctuations or betas. I’m sure there is that 1% of people who can ‘beat the house’ over the long haul but I certainly don’t know anyone like that…

  13. Anonymous

    Even so, about the best you can do is try to discipline yourself to stick with a certain allocation. This causes you to constantly buy low.

    With the Boglehead index fire-and-forget-for-the-rest-of-your-life stuff, I *really* dig it. But whenever I try to bring it up with my actively-managed Fidelity-type friends, they get offended. I have less resources than they do, so they’re less inclined to consider my opinions.

  14. “I would have done even better if I had taken some profit, sat on it, and then reinvested now with the markets being 10% lower.”

    And you would’ve done worse if the market had continued to go up… You didn’t sell back then because you didn’t know what was about to happen, and that’s the whole point. It’s very easy to look back now and know what you should have done.

  15. Anonymous

    My idea of market timing is “buy low, sell high”. In other words I have benchmarks I set. Currently we are very low – if I had some extra money to invest or my Roth money to invest I’d seriously consider putting it in right now. The market may go down some more, it may not. But it is certainly lower than it was 6 months ago.

    I remember sitting at home last summer saying “Boy, my stocks are high.” I should have said, “I need to sell some and take the profit and pay some on my mortgage.” I would have done even better if I had taken some profit, sat on it, and then reinvested now with the markets being 10% lower.

    It is market timing, but its more like common sense. Enter the market after a drop or a pull back. If you have $1000 to invest would you put it in the market on a day it went up 1.5% or on a day it dropped 1.5%?

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