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Market Intelligence

Market Timing……It Rarely Works

Seaver Wang | October 4, 2011

Can you time the market? Maybe, but I don’t know anyone who has done it consistently. No one on the Forbes 400 (richest 400 Americans) is known for practicing market timing. Yes, people do make well timed investments, but those are usually based on long-term trends and because the price is attractive or just due to luck.

There is a prevailing opinion by Main Street that people on Wall Street know when things will go up or down. Lets look at reality. Lehman Brothers and Bear Stearns are no more and basically went out of business because they made the wrong bets on the real estate/mortgage market. These firms hired the best of the best, but no matter. If they saw it coming, then they purposely committed career suicide.

There WAS evidence that there was a real estate bubble in 2004, 2005, and 2006, but then nothing really happened until the end of 2008, and all the people who warned of a possible collapse looked stupid for a few years.

Over a decade ago, lots of people said there was an internet bubble, but many were early. Those people were wrong in 1997, 1998, and 1999. Those are a lot of years to be wrong and you would have missed out on a 50% return during those years in the market, or more. Some people got out at the right time in 2000, but then got back in the market during 2001 or 2002, which would have been too early and would have lost money in those years. This illustrates the difficulty in market timing. You have to be right twice if you are actively practicing the strategy.

What about hedge funds? Market timing isn’t the primary strategy. One of the most prevalent strategies is called Long-Short. Half the portfolio you hope goes up, the other half you hope goes down. This theoretically neutralized the ups and downs of the markets, but there are other risks that I won’t bother to discuss in this article.

How about large institutions like Yale and Harvard University with billions of dollars in their endowment funds? Most endowments apply a strategy commonly known as the “Yale” or “Endowment” model where they use modern portfolio theory and invest in alternative investments with high expected returns. The theory is that a number of risky assets cancels out much of each other’s risks. This method had very good results for over a decade but still succumbed to the economic downturn that began in 2008.

What about Warren Buffet? Buffet is the second richest man in the U.S. He employs a buy and hold strategy. He buys at attractive prices, which often are near market bottoms, and holds for years or in some cases forever. Recently, the media has cited Buffet as one of the biggest losers with his net worth being reduced by about $6 billion this year. There are implications that his methods no longer work, but his $39 billion in net worth (after giving billions away to charity) convinces me otherwise.

As you can see, most sophisticated and successful investors do not employ market timing methods even with their enormous resources. The most common strategy is to side step the market or neutralize the ups and downs of the market. Even if market timing proved profitable initially, high trading costs would likely reduce its efficacy.


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