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Timing the Market: A Loser’s Game

There are plenty of thought-provoking suggestions that the global economy is slowing down. Growth is decreasing. Certain commodity prices are falling. The yield curve has been flirting with inversion–which, by the way, is still illegal in some regions below the Mason-Dixon line. But despite all these signs and signals, timing the market, e.g. assuming that right now is a good time to sell, is a fool’s errand.

Peter Lynch

To start my thesis, I’m going to present you with a quote. Sure, a quote is not the same as not solid statistics, but it’ll get you in the mindset. Peter Lynch, whose 13 years at Fidelity’s Magellan Fund are considered by some to be the most successful investing streak of all time, once said:

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

A “correction,” by the way, is when the market (or some other asset of value) decreases by 10% or more from its peak.

An example of Lynch’s idea would be someone who saw the market drop in December 2018 and feared that 2019 would continue to be a bear market.

That investor would have missed out on the rampant bullish returns of 2019. Their attempt to time the market was not good.

The Ball-in-Air Metaphor

Imagine a baseball player throwing a ball straight up into the air. It might go 100 feet up, maybe more. About midway through the ball’s flight, we can clearly see that the ball is slowing down. We all know what’s coming. The ball is going to come to a stop and then begin it’s fall back to Earth. But, right at mid-flight, would you feel comfortable betting on exactly how high the ball will go?

If you bet that the ball turns at 80 feet, but instead the ball goes up to 90 feet, then you missed out on the final 12%! While it’s easy to see signs of slowing down, it’s a lot harder to predict the precise turning point. And this ball example is infinitely simpler than the market. Timing the market is tough!

But someone predicts the market correctly

Nevertheless, there’s always someone who correctly predicts a crash, a correction, or some other huge movement in the market. These people, we think, must be special. And perhaps they are! I’m willing to play along with that idea–for now.

But when I turn on the TV or read the Wall Street Journal, I see lots of people saying lots of things. This is like having lots of people taking guesses at my ball-in-air guessing game. If the ball goes up 112 feet, and Betty Sue is the one person who guesses 112 feet, does that make Betty Sue a genius?

Well…maybe. It certainly appears that some individuals have remarkable streaks of accurate investment choices (e.g. Peter Lynch, Warren Buffett). But if lots of people are making lots of guesses, then it becomes hard to differentiate between skill and luck. The strength behind Lynch’s and Buffett’s investing careers is that they were consistent for 13 years and 40+ years, respectively.

Betty Sue showed up to a baseball diamond and made one guess. A monkey could do that, and you know how much I dislike giving monkeys any credit.

Betty Sue gave me one data point. Is it signal i.e. a “true positive?” Or is it noise i.e a “false positive?” One of the only ways to tell is to make Betty Sue guess again. Collecting more data will make our assessment of Betty Sue more accurate.

Burton Malkiel’s take

In A Random Walk Down Wall Street, Burton Malkiel gives a few examples of real life Betty Sues from markets past. These people made headlines, got on TV, wrote books and newsletters. Headlines like, “The woman who called the Crash of 1987 now says watch out for THIS!” Does that kind of sensationalism look familiar?

But in every single case, the real life Betty Sue turned out to be a one-hit wonder. Their second albums, as it were, were complete flops. Perhaps this is why Jane Bryant Quinn once opined, “The market timer’s Hall of Fame is an empty room.”

Not timing the market? What to do instead…

So if we don’t want to time the market ourselves, and we don’t want to listen to Betty Sue, what do we do instead? Here are a few ideas:

  • Buy on a steady basis. This is called dollar cost averaging. If you’re contributing to a 401(k) through work, this is probably what you’re already doing. The same percentage is taken out of every paycheck and put into your account.
  • Hold for the long run. You aren’t trying to buy and sell quickly to make fast cash. You’re waiting for the economy to grow over long periods of time e.g. by the time you retire.
  • Keep your expenses ratios low (e.g. index funds), and keep your fees low (don’t be a day trader).
  • Automate your 401(k) and/or Roth contributions. Make saving money an easy habit.
  • Leverage will make people freak out when the market takes a sudden turn. Don’t freak out like them. Because eventually the market will go through a correction. Those who succeeded in the past were those who stayed the course.

Why don’t more people follow these simple steps? I’ll borrow some words from author Frank Armstrong:

“Buy and hold is a very dull strategy. It lacks pizzazz and doesn’t inspire much admiration at cocktail parties. It has only one little advantage: It works, very profitably and very consistently.” 

The stuff that works is boring. The stuff that works is passive. We’re used to action–the idea that we need to do something in order to achieve success. But in investing, the safest bet is just the opposite. The Bogleheads named their entire investing scheme after this: the Lazy Portfolio.

Time to end this post

At the end of the day, timing the market is up to you. I’m just a chimp-hater spewing opinions on the internet. But I’ll leave you with this quote from Bill Shultheis:

“42% of millionaires of this country make less than one transaction per year in their investments.”

Monkey see, monkey do. I’ll be copying these millionaires. How about you?

Thanks for reading the Best Interest.

-Jesse

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About Jesse Cramer

I’m Jesse. I’m an engineer, a new owner of an old home, and an avid reader/writer. I hope you enjoy my thoughts, numerical breakdowns, and general musings. If you’d like to comment, ask a question, or simply say hi, leave me a message here, on Twitter (@BestInterest_JC) or on Reddit (u/BestInterestDotBlog). Many of my posts have been directly influenced by my readers. It’s the most fun part of writing this blog. And as always, thanks for reading the Best Interest. Jesse
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