Stock Smarts: Market Timing? Look Elsewhere

The best anyone can do as far as market predictions are concerned is to look at current trends, analyze fundamentals, and place them in the context of the overall economic picture.

I always welcome reader comments on my articles. Every writer wants feedback, good or bad, for the simple reason that it shows the content is being read. What’s the point of saying something if no one is paying attention? It’s like the proverbial tree falling in the forest.

Some of the comments I receive are articulate and well reasoned, some give the impression the person didn’t read the story very carefully, and some are downright hurtful (it comes with the territory).

Then there are the comments that simply leave me confused, such as one I received recently in response to a column I wrote about how the U.S. stock market appeared to be running ahead of itself in the face of rather discouraging news on the global economic growth front. At the time it was written, the Dow and the S&P 500 had both just touched new record highs. They’ve since hit a major downdraft.

The reader comment read as follows: “Having subscribed to (your) electronic newsletters for a number of years, I can say from experience that (you are) no better at market timing than the rest of us.”

That’s absolutely correct. What puzzled me about it is that I have never claimed to be an expert at market timing. In fact, I don’t believe that consistent market timing is possible and have repeatedly warned against trying it. While long-term market trends are often discernable, short-term movements are unpredictable and can be heavily influenced by the release of an isolated set of economic numbers or the daily headlines.

Market timing is the attempt to profit from short-term movements in the general prices of stocks or bonds to increase profits and cut or eliminate losses. For example, a market timer who believes we will experience a 10%+ correction in stocks within a few weeks might sell most or all of his/her equity portfolio and sit in cash, waiting to buy back in at lower prices. Of course, if the markets don’t co-operate that can be an expensive mistake.

Many of the world’s greatest investors have dismissed the whole idea of market timing as unrealistic and dangerous. Here are some interesting quotes, compiled by Larry Swedroe on CBS Moneywatch.

“My favorite time frame is forever.” – Warren Buffett

“I can’t recall ever once having seen the name of a market timer on Forbes’ annual list of the richest people in the world. If it were truly possible to predict corrections, you’d think somebody would have made billions by doing it.” – Peter Lynch

“Whenever some analyst seems to know what he’s talking about, remember that pigs will fly before he’ll ever release a full list of his past forecasts, including the bloopers.” – Jason Zweig

“Market timing is unappealing to long-term investors. As in hunting deer or fishing for rainbow trout, investors have learned the importance of ‘being there’ and using patient persistence – so they are there when opportunity knocks.” – Charles Ellis

“Only liars manage to always be out during bad times and in during good times.” – Bernard Baruch

I agree with all of them. And in the article in question I quoted Alan Greenspan’s famous “irrational exuberance” remark and noted that it came about four years early.

The best anyone can do as far as market predictions are concerned is to look at current trends, analyze fundamentals, and place them in the context of the overall economic picture. On the basis of the situation at the time the original column was written, my conclusion was that stocks had shot up too far too fast. I wasn’t predicting an immediate correction in the markets, although that in fact did happen. I was simply stating the obvious disconnect between stock performance and economic reality.

My main purpose in offering long-term views on where markets are going is to remind readers to be vigilant about their portfolios. Never assume current patterns will continue indefinitely – they won’t. That’s why it’s necessary to review your asset mix on a regular basis and to ensure you haven’t fallen victim to portfolio drift, where your actual asset allocation is out of whack with your targets. That can easily happen during strong bull markets.

As for advice on short-term market timing, if that’s what you want, look elsewhere. You won’t find it here. And if you do find someone who claims to have mastered the art, go back and read the above quotes again. That person is almost certainly a fake, a liar, or both.


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