Market Timing

“We’ve often felt that the only value of forecasters
is to make fortune tellers look good.”

- Warren Buffett, from the Warren Buffett Story

Market timing, long term, just doesn’t work! Countless studies have proven that no one is able to time the market effectively. A Dalbar study, ‘Quantitative analysis of Investor Behaviour, Jan ‘84 to Dec ‘95', showed that the buy and hold strategy beat the average investor by more than 3 to 1 over that 10 year period. The average investor tries to be a market timer (speculator) and almost always fails. People who exit the stock market to avoid a decline are odds-on-favourites to miss the next rally.

Many studies confirm that market timers actually end up with lower returns than those who simply buy and hold. To win as a market timer you must be right twice - when to exit and when to get back in. It is important to understand that the markets move up in short bursts. A study by Ibbottson Associates shows that over the 20 years ending in 1995, an equity investment of U.S.$1 grew to $1,114. But for investors (market timers?) who missed the best 35 months during that 840 month stretch, the same U.S. $1 grew to only $10. Put differently, 99% of the gains occurred during only 4% of the time! The temptation to try to outsmart the market is sometimes very strong. Resist the urge! Apply discipline and stick to what works - long term ownership of quality businesses in growth industries.

What do the masters say?

"Recently Forbes published its hit parade of the richest people in the world, and I was reminded that there's never been a market timer on the list. If it were truly possible to predict corrections, you'd think somebody would have made billions by doing it. The fact that nobody has done so ought to tell us something about our chances of dodging the drops. Warren Buffett weighs in at No. 2 on the list. He got there by picking stocks and not by switching in and out of them.

"ar more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves. Ultimately, to be an investor in stocks, you have to believe that American (and worldwide) business has a decent future and that corporations will continue to increase their profits. If you are as convinced of this as I am, then you'll never panic in a correction.”

- Peter Lynch, Worth Magazine - September 1995

"We don't have, never have had, and never will have an opinion about where the stock market, interest rates, or business activity will be a year from now.”

- Warren Buffett

"Ignore fluctuations. Do not try to outguess the stock market. Buy a quality portfolio, and invest for the long term."

- Sir John Templeton