Enterprising Investor Forum

Rant on Timing the Market Thursday, June 28, 2007

Can anyone call the top or bottom of the market? Well, for a true value investor, the answer is quite clear: No. Naturally, some people do make the right call but can they do it consistently? Probably not.

You’ll always come across someone who tells you that the market is going to crash or about to hit new highs but how do they know? What do they base their assumption on? Anyway, if you keep on saying “up” or “down” for long enough, you’re bound to be right sooner or later. Furthermore, be wary of people who tell you that their methodology would have worked in the past… anyone can be a master stock-picker with the benefit of hindsight or that they have back-tested their module (as George Stigler wrote: “Theories that are right only 50% of the time are less economical than coin-flipping”).

An academic study conducted at the University of Calgary shows that – as a longterm strategy – staying invested in the market instead of trying to move in and out produces better returns. Your gains during the bull markets would far outweigh the losses in bear markets. They conclude that if a market timer wanted to outperform an investor with a buy and hold strategy, he/she would have to make correct calls 70% of the time. Moreover, we are sure than you have all seen the statistics showing that, the most active accounts held at internet brokerage firms tend to underperform the ones with the least activity.

As usual, we favor an approach consisting in research, due diligence and a buy and hold strategy. Of course, you are free to trade as activly as you like … we wish you the best of luck … we are sure your brokers thank you for all the commissions!