When I tune in to business channels, it amuses me to find experts debating on what is the best time to enter the market or a specific stock, and what is the best time to exit. There are few topics in investing more controversial than market timing. There are many analysts out there willing to predict the time to buy for you, for a small fee.
Market timing does not work. Even if it may sometimes, timing the market is not a worthwhile exercise for an intelligent investor. Market moves up and down in cycles, and if one understands the general direction of the market, it can help him decide about long-term investing policy, but it cannot offer any help concerning the perfect time to buy or sell his investments. Noble Prize-winning economist Paul Samuelson says an investor who thinks he can move in and out of the market at the right time and who keeps jumping from one scrip to another does not do better than the passive investor who puts 60% of his monies in the stock market and the remaining in bond market.
Investors continue to believe countless websites and experts who claim they know the that the time has come to buy a scrip. It does not work. Shuffling your portfolio again and again hoping to make superior returns out of market timing creates superior returns. Not for you, but for your broker. If your market timing adviser is your broker too, every time you churn your portfolio, it must put a smile on his face, and the commission in his bank account.
Studies after studies have proved that you cannot gain superior returns by timing the market. A recent research by Centre for Retirement Research at Boston College showed that even professional money managers mess it up when they try to time the market. The researchers looked at target-date funds, which are designed to reduce risk as investors age by changing the portfolio’s asset allocation. The target-date funds shift to less-risky stocks closer to the maturity date, and would start moving towards the “glide path”. But when target-date fund managers see an opportunity to time the market, some will temporarily deviate from the glide path. Their expertise is why we pay them the big bucks – they’re the people who should be able to identify a short-term opportunity to profit.
The researchers found that target-date funds that deviated from the glide path under-performed their peers by 14.1 basis points each year when returns are weighted by age of fund. By trying to time the market and seize opportunities, they lost money.
Now, that under-performance wasn’t too severe: If you invested for 30 years in two funds, one of which under-performed the other by 0.141 percentage points annually, you’d see a total difference of about 3.8% in their returns. But the difference was statistically significant, and it shows that even the professionals lose when they try to time the market. It may be worse when retail investors try to time the market. Ass per the 2016 Dalbar Quantitative Analysis of Investor Behaviour Study, investors who try to time the market lost money even when the index rose. The data showed that when the investors react to the news and gossip, they end up making impulsive decisions, and lose money. It observed that the average investor has not stayed invested for a long enough period to reap the rewards that the market can offer more disciplined investors.
Investors behave irrationally making the market pricing also irrational. Any theory to predict the market price however scientific looking must fail. The market movement is not one way. Even if the long-term trend may be positive, the short term may be erratic, the prices going up some days and falling down on the others. It is easy to lose the sense of direction.If you time the market and sell off just before the next fall, it may rise again three days later. Market timing is thus nothing more than an exercise in futility. Trends happen and trends reverse. Trends may last for three and reverse, or they may reverse the next day. The best thing is to ignore the trends. The trend may be a trader’s best friend, but the investor should stay away from it.
There is a big contradiction in market timing. You try to predict the market movement, want to buy or sell before others do it; you want to lead and see others follow, only then you make money. This presupposes you are smarter than the market, so smart you can even predict the total of irrational behaviour of all the varied forces that make up the market.
I have a theory on market timings. And it has invariably worked for me. When you have a strong urge to sell, think of buying. Likewise, when you have a strong impulse to buy, it must be time to sell. I seldom sell, however strong that urge may be, unless there is a fundamental reason to sell, however I evaluate the scrip to buy when the mind is telling me to sell.
Investors often become victims of apophenia, they look for patterns which are not there and try to find confirmation to their pre-existing notion. The solution is to recognise noise as noise, and to learn to filter out noise. Long-term fundamentals do not change overnight, the event may not affect the long term assumptions of a stock, even if it does, if you show patience and analyse all facts before you take decisions, you are not likely to err. My personal solution to the problem is: watch less CNBC and Zee Business news. Especially the programmes where they give you intra-day trading ideas.
Remember that intuition, common sense and a bit of luck may make timing work for you – at least on some occasions. Just know the dangers, the statistics and the experiences of all those who have tried and failed. Do not time the market, develop a bottom up approach, if a share is good at the current price buy it, no matter what the trend is.
©Dr. Tejinder Singh Rawal
M. Com, MA (Economics), MA (Public Administration), MA (Urdu), LLB, FCA, ISA, CISA, CISM, PhD
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This discussion will be a part of the forthcoming book by me “The Smart Long Term Investor: Common Sense Strategies for Wealth Creation” Suggestions are welcome and will be appreciated