Timing The Market Is A Sucker’s Game

timing the market is a suckers game May The Force Be With You


Have you ever met that person who just can’t stop gloating?

I have.  And I don’t like them one bit.

Humility to me far outpaces, without a doubt, those that want to tell me all they have accomplished.

Because in reality, if what they have accomplished is really great then we will ultimately find out about them… without them telling us.

What the hell does this have to do with investing and finance?

To me?  A lot.  Because one thing that eats at me the most is when I meet the people who like to tell me they predicted the Great Recession.  Or that they knew housing was going to collapse.  Or that they predicted the most recent market decline.

Or maybe that they knew Apple was going to go from $100 to $700+ before splitting.

All of it is bullshit in my mind.  The reason is because although they may believe they called one of these events, that’s only one side to a “market call.”

Each “market call” has two parts:  when to buy and when to sell.  Maybe they got the sell or buy part right, but did they get the other side right as well?

For instance, those who predicted the great recession, did they get back into the markets March 9, 2009 or even April 1, 2009?  If not, then their call is basically worthless.

The reason is because they missed some of the best days for the market that year.  And if you miss just five of the best days of the market, returns can be significantly impacted.

Don’t believe me?!  Index Fund Advisors had a great article that showed a study similar to one we have done before.  Looking from 1994 to 2013 (20 years), the market returned an average 9.22% each year.  Take out the five best days and you only got 7%.  Take out the best 20 days and your return is 3.02% per year.

Here is the point:  timing the market is a loser’s game.  And those who say they have done it in the past have only done half of it.

The point of today’s blog is to convince you that we can’t time the market… and if you believe you can, well may the force be with you.


Intentional versus unintentional

An article in Forbes a little while back, which was written by Rick Ferri, was talking about this exact topic:  market timing and the intentional versus unintentional market timer.

He talked about how the intentional market timer is the portfolio manager.  Trying to time the market based on technical and fundamental factors.

Then you have the unintended market timer.  This timing is behavioral.  It is spurred by “natural fear and greed mechanism.”

This just hit home to me.  Because it nails the whole market timing argument on the head.

But the thing is that neither of them is good… and neither of them is better than the other.

Back in 1975, a Nobel Laureate William Sharpe (I put the Nobel Laureate part to show he is smart) did a study to see how often a market timer would need to be right to outpace, basically, the buy and hold guy.

What he found:  they would have to outperform 74% of the time.

Ok, great.

Now think of this.  Every decision has a 50/50 chance of being right.  The law of numbers just shows that it is nearly impossible to reach that number.  And based on the professional investors Sharpe looked at, none of them reached this level.

Just think about all the average investors who think they can time the market.  Given the 50/50 decision thought.  In order to get two decisions right, you only have a 25% chance (50%*50%).  Now try for three in a row… well it’s only 12.5% of the time.

You get the point.  In order to be successful at market timing, you have to make a lot of correct decisions in a row.  And the odds are just not in your favor.


Odds are stacked (highly) against you

Benjamin Graham, Warren Buffett’s mentor, once said the following:

“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 to the stock market.” 

Let’s do an exercise here.

Write down who will be sending you the next email.

Now pull up your email, either on your computer or on your phone.   And wait until the next email comes in.

Were you correct?  If yes, move to the next two sentences; if not, skip over the next four sentences.

Ok, now write down who the next email will be from.  Were you correct?

If yes, repeat that until you are wrong.  Once you get a wrong answer keep reading.

Some of you may have been like “that’s just ridiculous, why would I ever do that?!”

Well, those are the same odds and same predictability (maybe even better predictability) as trying to predict what the markets are going to do today, tomorrow or even one week or year from now.

But I bet if I said, tell me someone that you will receive an email from in the next two years you could probably answer that.  Because you know who sends you emails, usually, and they do it often.

That’s again the same thing as the markets.  Longer term, we have an understanding of what they can do and what they have done.

Trying to predict who your next email is from IS ridiculous.  But you have nothing at risk when you do this.

So why the hell would you try and predict the market when you have your financial future on the line?


Education or experience

The saying goes that you get wiser with experience (or age).

Which, although there are some brilliant young folks out there, is usually true.

When it comes to timing the market, experience doesn’t help anyone.  I actually think it hurts people.

As people start to invest and begin to try and understand the market, they seem to think they can now time the market.  They gain this false self-confidence.

I respect all those who take a desire in trying to understand the markets.  I pity those who think they can outsmart the market.

John Bogle, the founder of the behemoth Vanguard, once said:

“Sure, it’d be great to get out of stocks at the high and jump back in at the low, [but] in 55 years in the business, I not only have never met anybody who knew how to do it, I’ve never met anybody who had met anybody who knew how to do it.” 

That dude is 85 years old!  And he is an icon in the industry.  He also probably knows all the “theoretically” best investors to come and go.

For a man with that many connections to not know anyone successful at timing the market within two degrees of separation is enough for me.

I do think that whether to try timing the market or not is one aspect where education does trump experience.

Educating oneself about the cons of market timing should keep one from entering this type of investing (or should I say gambling) strategy.  In fact, the education should help one make more informed investments that are focused on the long term.

If that is done, then a solid financial foundation should be in the individual’s future.


It’s time IN the market, not tim’IN the market

Although I hope this blog convinces people to never try to time the market.  I’m no dummy.

A day will come sooner than later when you will have the feeling where it’s your time to beat the market.

All I can stress is maybe keep this blog in your back pocket, and at least read it before making any of those decisions.

Because maybe, just maybe… this blog will serve as the educational piece, talking you off the ledge and keeping you from such a decision.

If not, then I will hope the best for you.  I will hope that you make enough money to offset your losses.  Ultimately, hopefully, you get to a point of financial strength.

Just remember that the key to successful investing is the amount of time you are in the market.  It isn’t about timing the market.

The longer you are in the market the better off your financial future will be.

As we end this blog, I want to leave you with one more thing to ponder:

A professor from the University of Michigan looked at the market returns over 31 years (1963 to 1993). That’s 7,802 trading days for those counting. But over this time period just 90 days accounted for 95% of all the years’ market gains. Again, for those making calculations, that’s 1.15% of the trading days. 

Good luck to those trying to beat those odds. May the force be with you!