When 32 market timing newsletters were compared to the S&P 500 Index over a 10-year period, not one of them bested the broad market index. The primary reason for this inability to time the market is the high concentration of returns and losses that occur each year in just a few days. In a recent 10-year period, 100% of the total stock market gain occurred over just 20 days. It is impossible to predict such short periods in advance. Professors studied 15,000 predictions by 237 market timers and concluded that, "There is no evidence that [market timing] newsletters can time the market."
also known as market timers, mistakenly think they can predict the future
direction of the market. In their effort to time the market, they attempt
to be invested in stocks when the markets going up, and shelter investments
in safe cash, treasury bills or bonds when the markets going down. Nobel
Laureate Robert Merton wanted to estimate what a clairvoyant time picker
would earn, so he calculated the value of being invested in the market
at the right time and escaping the market declines by hiding in Treasury
Bills. If an investor were to stay invested in T-Bills from 1927 through
1978, $1,000 would have grown to $3,600. In the broad market of the New
York Stock Exchange Index, $1,000 would have been worth $67,500. However,
a time picker with the vision to forecast all the months that the NYSE
outperformed T-Bills during the 52-year period would naturally invest
in the market at the beginning of each of these months. According to this
timing system, $1,000 would have grown to $5.36 billion
. Now that
is a real incentive to figure out how to pick the right times to invest.
It also tells you that if timers really had these psychic powers to see
next month's market trends, they would be all over the cover of Forbes
and the Wall Street Journal
. But they are not. Is it
possible that there might be a few visionary timers out there? Sorry,
but they just don't exist. In 1978, the wealthiest individual on record
didn't come close to these numbers. Wealth is not created by purposeful
market timing. There may be cases where one got lucky for a while, but
that is not a reliable strategy for long-term investors.
There are numerous time-picking purveyors who offer their visions of tomorrow
through telemarketing, fax broadcasting, newsletters, e-mails, and websites.
However, investors should be aware that these market timing newsletters
are not regulated by the SEC, whose job it is to protect investors. Ironically,
we estimate that millions of dollars are lost every month by investors
who flock like sheep to follow the so-called expert timers' guesses as
to the next direction of the market. The landmark
and definitive study of time pickers was conducted by John Graham at the
University of Utah and Campbell Harvey at Duke University. The professors
painstakingly tracked and analyzed over 15,000 predictions
market timing investment newsletters from June, 1980 through December,
1992. By the end of the 12.5 year period, 94.5% of the newsletters had
gone out of business, with an average length of operations of about four
The conclusion of this 51 page (see page 25) analysis could not have been stated more clearly. "There is no evidence that newsletters can time the market. Consistent with mutual fund studies, 'winners' rarely win again and 'losers' often lose again." This clearly indicates that the market’s signals are inaudible to the thousands of time pickers claiming to clearly hear them. Any investment professional who speculates on the market’s future should be relegated to the fortune telling parlor. The three charts below show the following: first, the predictive value of market-timing newsletter forecasts is equal to the flip of a coin; second, over the period studied, the average performance of the newsletters seriously lagged a simple market index; third, the number of newsletters that delivered a higher return than the market was disappointingly small.
Lauderman wrote a BusinessWeek article titled Market Timing: A Perilous Ploy, dispelling the myth of market timing,
which he called a guessing game. His 1998 analysis
included an interview with Mark Hulbert, who monitors the time pickers
recommendations. Hulbert's conclusion provided a knockout blow to all
25 newsletters he tracked. None of the newsletter timers beat the market. For the 10 year period ending 1988 to 1997, the time pickers' average
return was 11.06% annually, while the S&P 500 stock index earned 18.06%
annually and the Wilshire 5000 earned 17.57% annually.
The figure below
tells the story.
In another article, the timing system of Douglas Fabian was analyzed by Mark Hulbert. The conclusion: "As a
result, this hypothetical timing-only portfolio over the past 15 years has lagged a simple buy-and-hold
strategy by a full percentage point per year on an annualized basis
." By the way, this was once of the best records of market timing services tracked by Hulbert from 1980 to 1995.
Time pickers vacillate
from near zero risk to high risk and then back to zero risk again. A more
rational approach for investors is to match their risk exposure to their
Risk Capacity™, an approach that is further explained in Steps 10
and 11. Once that match is established, the right time to be in the market
is when an investor has money, and the right time to
get out of the market is when an investor needs the money.
"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."
- Benjamin Graham, "An Hour with Mr. Graham," 1976
"Market Timing is a wicked idea. Don't try it --- ever." and
"Contrary to their oft articulated goal of outperforming the market averages, investment managers are not beating the market: The market is beating them." - The Loser's Game, 1975.
- Charles D. Ellis, author of Winning the Loser's Game and The Loser's Game, 1975.
"Hulbert's conclusion: None of the newsletter timers beat the market [over a ten year period]. The average return was 11.06%. During the same period, the Standard & Poor's 500-stock index earned 18.06% annually..."
"There are two kinds of investors, be they large or small: those who don't know where the market is headed, and those who don't know that they don't know. Then again, there is a third type of investor - the investment professional, who indeed knows that he or she doesn't know, but whose livelihood depends upon appearing to know.
William Bernstein, The Intelligent Asset Allocator
"Statistical research has shown that, to a close approximation, stock prices seem to follow a random walk with no discernible predictable patterns that investors can exploit. Such findings are now taken to be evidence of market efficiency, that is, evidence that market prices reflect all currently available information. Only new information will move stock prices, and this information is equally likely to be good or bad news."
Investments, Fifth Edition, p. 374, Zvi Bodie, Professor of Finance, Boston University School of Management, Ph.D. MIT. Co-authors include Alex Kane and Alan Marcus. Investments is the leading investment text at business schools. It is used at the nation's top 30 business schools including Harvard, MIT, Chicago, Wharton, and Northwestern and has been translated into several foreign languages.
"O Fortuna! Like the moon ever-changing, rising first then declining."
"It is always the right time to invest the right way. The right time to get in the market is when you have money to invest, and the right time to get out of the market is when you need the money. Just make sure that when you invest, your risk exposure matches your Risk Capacity™."
- Mark Hebner, Founder, Index Fund Advisors, Inc.
"October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February."