Market Timing???

[chinaco]

Well, I've said it before and I'll say it again. I realize I'm swimming upstream against the approved forum doctrine.

I agree that it is very difficult to "beat the market" in absolute terms using market timing. But that is not always the goal. Sometimes the goal is to reduce risk.

If I can garner 80% of the additional gains above cash by being in the market 50% of the time, have I not come out ahead on a risk adjusted basis?

Timing is difficult due to the all or nothing approach. But many of those on this forum who speak negative about timing seem to engage in it themselves, but just call it something else. What do you call it when the market makes you nervous and you practice "asset allocation" at a time that is not on a predetermined schedule?

The bottom line, to me, is to find the system that allows you to sleep at night and that is a written-down plan. This helps keep emotion out of it. When I was practicing market timing (I no longer do), I stuck to systems that I had the algorithm for--don't like relying on gurus. I won't say it was wildly successful, but neither was it disastrous. I think I slightly underperformed the market, but was only in about 60% of the time or so.

Finally, there are reputable timers with long-term respectable results. One that I watch (but don't use) is

Mojena Market Timing

I am certainly NOT advocating market timing. But I don't believe that the bottom line of whether or not it works is if it beats the market. After all, a diversified portfolio with a dollop of bonds won't beat it either. What's the difference if you allocate using the time axis versus allocating versus the "asset class" axis? Either way is a method to attempt to smooth volitility and risk.

Yeah. I read Marty Zwieg's book "Book Winning on Wall Street". He called the 1987 crash and gained much notoriety. He is a smart guy, He went to top notch schools MBA, PHD runs or ran some mutual funds. I do not think his funds out performed for any sustained period of time. He has a new letter. Martin Zweig, Stock Investing Guru

He touts the strategy of not being overly exposed to market risk. It is a form of timing. He uses a combo of fundamental and technical analysis. His book is interesting (I have read others that have similar info... not new). But applying it is complicated and takes much discipline. He would advise you to buy his news letter.

Anyway... You can quantify your gain or loss against the market benchmarks easy enough. If you have less, consider that you paid insurance premiums for the difference in "opportunity cost".

I personally believe that rebalancing a diversified portfolio (e.g. stocks, bonds, other asset classes) is a form of timing. But it is not based on traditional technical indicators... rather it is based on one asset class outperforming others. It is the safest (buy low - sell high) mechanical approach around. And it is proven academically and in practice.

Oh... I forgot to mention... in most of those timing models, the indicators are sometimes wrong. Plus, one can miss the indicator by a few days of weeks and miss significant gains. The models can be very confusing.

 

[bosco]

Anyway... You can quantify your gain or loss against the market benchmarks easy enough. If you have less, consider that you paid insurance premiums for the difference in "opportunity cost".

I personally believe that rebalancing a diversified portfolio (e.g. stocks, bonds, other asset classes) is a form of timing. But it is not based on traditional technical indicators... rather it is based on one asset class outperforming others. It is the safest (buy low - sell high) mechanical approach around. And it is proven academically and in practice.

Oh... I forgot to mention... in most of those timing models, the indicators are sometimes wrong. Plus, one can miss the indicator by a few days of weeks and miss significant gains. The models can be very confusing.

I basically agree with everything said here although I don't know if rebalancing is the "safest" mechanical approach around. It certainly is one of the simplest, and fairly effective.

I really think that some of this discussion revolves around whether one's primary purpose is growth or preservation of capital. If you have the time and want primarily growth, market timing may be a waste of time and a loss of opportunity. But if your goal is preservation, it can conceivably be useful. I think this is what HaHa was saying.

 

[unclemick]

Well - if Mr Gus keeps those Vanguard computers properly programed and humming away - my Target Retirement fund is dirty market timing as we speak - buying low selling high, heh heh heh heh heh heh.

Of course some call it rebalancing, asset allocation or other silly names.

Over on the side with my mad money questing for the Holy Grail - I commit all sins - trade, chase performance, reinvest dividends, etc, have DRIP plans in file cabinets - you name it.

heh heh heh . Kayaks, stock trading, fishing, gardening - and whatever ever else floats my boat in retirement.

 

[chinaco]

I basically agree with everything said here although I don't know if rebalancing is the "safest" mechanical approach around. It certainly is one of the simplest, and fairly effective.

I really think that some of this discussion revolves around whether one's primary purpose is growth or preservation of capital. If you have the time and want primarily growth, market timing may be a waste of time and a loss of opportunity. But if your goal is preservation, it can conceivably be useful. I think this is what HaHa was saying.

My pointing to the rebalance as a form of timing is a stretch... I will admit. It is a little different than what most of us call timing.

I follow on the cap pres vs growth. At one time I drank the cool-aid. But I no longer prescribe to this thinking even with the reason of preservation of capital. The timers' primary goal is to achieve investment return (no question about that... they are looking to grow the money), but they claim they have a lower risk approach that preserves capital by limiting exposure to the stock market by going to cash. Some of them are momentum style investors (to focus on growth stocks). My take is that cap pres is a rationalization for timing. They are trying to avoid the fluctuations, corrections, and bear markets or leverage it by shorting. They believe that they can come out ahead compared to other approaches.

If their timing is off (a human judgment call), they may not preserve capital. Zwieg times the market in the name of capital preservation. Zwieg's mutual fund (ZF) has underperformed the S&P 500 index except for a brief period late 80's early 90's. He did thrive during the 87 crash. His noteriety was calling the crash. That is why he was on [SIZE=-1]Louis Rukeyser[/SIZE]'s Wall Street Week for years. I think his success at timing the 87 crash help his fund's performance number for awhile. But during the late 90's the market continued to climb and outpaced his fund. (No doubt, he is a very smart guy).

I cannot say that timing does not work. What I have read has had credible analysis behind it (back testing) that shows it can work. Of course those studies often have the benefit of a rearview mirror for the study (looking at the past after the fact). Doing it with the future is more difficult.

From a practical point of view, I do not believe that I (personally) can consistently pull it off (timing).

But I do believe I can achieve acceptable and consistent results holding a diversified portfolio (several asset classes) and rebalancing. Managing the allocations level in different asset classes enables one tune the results to yield an acceptable level of risk and reward.


What I find a bit curious is that certain academics and professional shun timing and point to it being inferior by comparing the sub-par timing performance to a market index. On the other side of the argument, the timers claim they were preserving capital by limiting exposure (the value add). I guess it depends on which theory one prescribes to.

 

[Alex]

Chinaco, It sure seems to me that the only market timing scheme that works is the one that looks backwards (AKA - DATA MINING). Good luck though! If you do elect to try it, may I suggest you only use a small portion of your assets? Do us a favor too, report your moves before hand and we can see how it works.

 

[chinaco]

Chinaco, It sure seems to me that the only market timing scheme that works is the one that looks backwards (AKA - DATA MINING). Good luck though! If you do elect to try it, may I suggest you only use a small portion of your assets? Do us a favor too, report your moves before hand and we can see how it works.

Reread my post... I stated just the opposite.

 

[Alex]

Reread my post... I stated just the opposite.

. This what threw me.....

I cannot say that timing does not work. What I have read has had credible analysis behind it (back testing) that shows it can work.

 

[Nords]

Market timing works. Look at the results of all the dirty market timers who bought low and sold high-- Buffett, Fischer, Schloss, Ruane, Miller, Lynch, Simpson, [insert another dozen Hall of Famers here], Brewer, HaHa, Cute Fuzzy Bunny, and so on. The success of guys like these is why it's still an "Efficient Market Hypothesis". Heck, it can't get even get upgraded to "Theory", let alone "Rule".

The problem is that Hulbert's newsletter tracking has demonstrated that the vast majority of the timers are idiots. Idiot market timers, anyway-- they seem to be great newsletter sellers.

Another example that should be studied by all aspiring market timers is Gary "How I Trade For A Living" Smith. He's ER'd now in his 50s, I believe, but his biography leaves an awesome trail of human wreckage.

I think there are only a few criteria necessary to join the Great Market Timer ranks:
1. A predisposition (hard-wired) for gathering and sifting huge volumes of information,
2. A handy facility with remembering facts & manipulating numbers,
3. A breathtaking contrarian faith in their ability to break from the crowd that would make even George W. Bush blush with envy,
4. The mental discipline to keep it up for at least two decades.

I guess #4 downgrades Lynch to "lucky". (But his post-Magellan record isn't public info.) I, for one, am too lazy and too easily distracted to get past #1. I suspect that most of the rest of the world's investors are the same way.

But that doesn't keep them from trying.

 

[unclemick]

Back in the day - when I was young and less of a Vanguard Diehard - I used to ponder: am I a value investor or market timer?

Duh - if it's individual stocks buying the 'cheap' Ben Graham/intrinsic value stuff and selling the 'overvalued' stocks and keeping some fixed positions ala Ben is value not timing - Right?

Now buying mutual funds in sectors/areas that are 'cheap' ala W. Bernstein/Efficient Frontier is creative asset allocation - not dirty market timing or performance chasing - right?

Theoretical purity is not one on my strongpoints!

heh heh heh - here's to lifecycle funds in my old age(ER wise) and a few good hobbies/hormones - er I mean stocks.

 

[cute fuzzy bunny]

Do bear in mind that my "market timing" was pretty much limited to two "times"...when I felt the market was grossly over and undervalued. No need for fancy charts, graphs or formulas...just look at the index prices and if you cant avoid shaking your head...its time to make a move.

 

[FinanceDude]

Do bear in mind that my "market timing" was pretty much limited to two "times"...when I felt the market was grossly over and undervalued. No need for fancy charts, graphs or formulas...just look at the index prices and if you cant avoid shaking your head...its time to make a move.

 

[Bikerdude]

Back in 1999 I talked to a long haul truck driver who was "day trading" from his cab and said he was making more doing that than driving. This reminded me of the JP Morgan story of getting a stock tip from a boot black in 1929.

A few weeks later I was at a company party and looked around at all the happy people smoking cigars and talking about how much money they had made in the market. They talked on and on about their tech stock strategy (buy the infrastructure not the dot com's) and I decided it was time to lighten up. Call me a market timer or just lucky.

 

[kcowan]

...Call me a market timer or just lucky.

What are you doing right now? Talked to any truckers lately?

 

[Bikerdude]

What are you doing right now? Talked to any truckers lately?

I'm pretty happy with a 50/50 portfolio right now. Actually outside of this board not too many people I know talk about the market or stocks in general anymore. I sense a lot of worry about the markets and the economy in the financial press and TV. I guess if I see a big bear on the cover of TIME it might make me add to my allocation of stocks a little.

 

[TromboneAl]

Let's say you have seven people who have done extremely well timing the market. How can you tell, objectively, that they weren't just lucky?

That is, how do you know that they weren't just the seven monkeys who happened to throw their darts in the right place?

 

[cute fuzzy bunny]

Hey Al...quit disclosing my secret strategy. I'm gonna try to get people to pay me for that stuff!

Since you've blown my secrets, I guess I'll have to go to the next plan, which involves sharks with frickin laser beams on their heads.

 

[Nords]

Let's say you have seven people who have done extremely well timing the market. How can you tell, objectively, that they weren't just lucky?

That is, how do you know that they weren't just the seven monkeys who happened to throw their darts in the right place?

We used to count the number of mutual fund managers and then figure out how many years it'd take for a coin-flipper (exceed the benchmark or lag it) to rise to the top. If there are 16,000 fund managers then a lucky coin-flipper would take 14 years (2 to the 14th power) to beat out his contemporaries. If he did it on the 15th then he'd be skilled, not lucky.

From that has risen a general perception that if an investor can beat the market (whatever the benchmark is) for 20 years then they're no longer a coin-flipper. 2^^20 is only a million, though, so I guess being truly unique on the planet and skilled would require about 33 years (1 out of 8.5 billion).

But I'm not a statistician. Anyone have a better explanation?

 

[chinaco]

Let's say you have seven people who have done extremely well timing the market. How can you tell, objectively, that they weren't just lucky?

That is, how do you know that they weren't just the seven monkeys who happened to throw their darts in the right place?

HEY Al. I [-]resent[/-] resemble that remark!!! And I object strongly with the use of the word lucky in your description. It is very misleading. I demand a retraction. You need to replace the word lucky with unlucky.

And, by the way... only one of the monkeys got lucky. The other six lost their bananas.

 

[bosco]

We used to count the number of mutual fund managers and then figure out how many years it'd take for a coin-flipper (exceed the benchmark or lag it) to rise to the top. If there are 16,000 fund managers then a lucky coin-flipper would take 14 years (2 to the 14th power) to beat out his contemporaries. If he did it on the 15th then he'd be skilled, not lucky.

From that has risen a general perception that if an investor can beat the market (whatever the benchmark is) for 20 years then they're no longer a coin-flipper. 2^^20 is only a million, though, so I guess being truly unique on the planet and skilled would require about 33 years (1 out of 8.5 billion).

But I'm not a statistician. Anyone have a better explanation?

I'll take the manager in your methodology that washed out at year 2 because he underperformed the market by 1%, but beat the market by 3% every other year....according to your test, he's not skilled. But he would have made me a LOT of money! (now I just need to identify who he is)