About Market Timing and Stock / ETF Picking
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|About Stock Market and ETF Timing
Market timing" is just investment jargon that means trying to decide where a market or a particular security currently is, where it may be going, and when. Trying is the key word here.
Market timing, including all forms of charting, waves, and "technical analysis," doesn't work because nobody can predict the future, period.
The future prices of stocks, asset classes, or any market (e.g., interest rates), cannot be predicted from charts of past prices, wave theories, econometric models, historical trends, oscillators, computer programs, statistical relationships that worked in the past, nor any other method.
All financial markets move in response to millions of participants acting upon random daily news, by trading securities; none of which can be predicted at all.
Here's an old newsletter about the very long-term results of market timing
To win at the market timing game, one needs to be correct more than 75% of the time to break even with mistakes, transaction costs, and taxes1.
Because few people have shown a consistent track record of being correct even more than they are incorrect, this practice is just an exercise in futility.
Only one in four timers beats the market two years in a row, and only one in eight three years in a row2. Results of empirical studies also show that only one in 37 mutual funds showed any benefit from market timing.3
1: The New Finance, Robert A. Haugen, page 13
The main reason market timing doesn't work is because you have to make four decisions every time it's used. You would have to be correct in three calls on average to make high enough of a return to justify the costs and risks of being wrong in just one of the four calls.
First, you have to pick what's "up" (and will go down in the future, or why sell?) for the sell decision to raise the money to buy what you think will go up in the future.
Then you need to know when to sell it (so you don't sell when it's down).
Then you need to know what's "down" (and will go up in the future, or why buy it?), and then when to buy it (so you don't buy when it's up).
All it takes is to be wrong on one of these four calls to wipe out the profits from other three calls. The chances of all of this netting out to a profit on average, after taxes and trading costs, are slim to none (and Slim left town).
If someone could market time with as little as 50% accuracy, they'd be on the front page of every newspaper every day, and there would be more than just a handful of firms practicing market timing. Everyone you see on TV, or in magazines / newspapers, predicting the future is just guessing.
The reason there's only a small handful of market timing firms at any point in time, is because they fold up and go under at roughly the same rate as new firms are formed.
Some are just trying to convince you to buy the stocks, ETFs, or asset classes they just bought so they'll go up, and they can then sell out at a profit. Why else would their clients, who are paying stiff fees, tolerate their money manager going on TV and giving away free advice they have to pay for?
It's their job to convince you they can predict the future so they can move their products and sell their services. But over time, their "mistakes" will lose you much more money than their periodic lucky calls will make you money.
Instead, the market timer that was right last week is on TV until their luck runs out, then they're replaced by the next one that was right the last week. It's rarely the same ones because when they're right, it's totally because of a random lucky guess. Their luck usually only lasts a month or so, then they're fired and replaced (gotta keep those ratings up!).
I've been playing with this stuff since the mid-80's and have found that all market timing signal indicators are mostly useless and thus have little-to-no short- medium- or long-term predictive value (e.g., all forms of massaged data from past prices and therefore all forms of "charting," wave theories, econometric models, moving averages, momentum theories, oscillators, historical trends, all computer programs, statistical relationships that worked in the past, correlation coefficients, this that the other, and all of the totally useless technobabble tools technicians, day traders, and other market timers use).
None of that works because the results of using them are not repeatable - it's just as simple and easy to understand as that.
All of that is just investor's attempts to quantify things that are random, and thus totally unquantifiable. They think if they can quantity things, then they can predict outcomes when similar things occur in the future. This has not even happened yet - not once ever (which is a reason why it's called a "dismal science").
BTW: If anyone uses any of these tools for money management, then by default, they're a market timer (even if they swear on a stack of Bibles that they're not).
If any of the above nonsense worked even in the slightest, there would be the same market timers on TV daily being praised as miracle-working gurus because they'd be consistently "making more easy money than God." They also wouldn't be giving their extremely valuable trading strategies away for free on TV either (when their clients are paying stiff fees for them).
Everything they have would be as safely guarded a secret as the formula for Coca Cola. This is because if it actually worked, then any sheeple could use it themselves, so there would be no need to hire the TV timer.
Trying to get TV investors (AKA sheeple) to give them money to invest is the sole reason for being on TV - because most TV and radio shows charge them huge money for it).
But since none of what they do works at all, they spew what they use on TV as much as they can to the world for free. The point is if it had any value at all, then it wouldn't be anywhere near free.
Timers love to dazzle sheeple with their technobabble, because it's the easiest way to convince them that their unique version of stock market timing can best quantify something to the point that they know where it's heading.
But in reality, just like a bad magician, it's just the stage props they use to do that job. These props basically deflect attention away from the fact that this is usually just one tard predicting the future ad hoc.
So technobabble is just the mechanical tools of hype selling someone's random guesses. Just saying you can profit by predicting the future isn't near enough, so spewing technobabble that nobody understands is just about the only way to sell it.
That's why most all timers love to, and need to, spew their useless incomprehensible technobabble. They do it because it's their one and only prop.
It's also a balancing act - if they abuse it, then people that actually know what the words mean will call them on it; and if what they spew is understandable to the average sheeple, then it will be obvious they either don't know what they're doing, or what they're proposing has no chance of working.
Also the size of firm, how fancy their ivory tower penthouses are, how much and/or well they advertise, who they know, how well-connected they are, how much money they have or make, how famous good-looking or well-dressed they are - ALL of that has NOTHING to do with how well they can forecast the future with market timing.
In fact, there's a high correlation between how rich and famous they are, relative to how always wrong they are (the bigger the firm they're with usually has the worst record of predicting the future, and the more poor and unknown someone is, the better their track record).
Also there's the same correlation between the quantity of signal indicators they use with how bad their track records are (the more they use, the worse their returns are).
If the "fat cat Wall Streeters" were any better than Joe Blow market timer in a tiny office down the block, then Lehman Brothers would still be around, Goldman Sachs would not be in hot water constantly for ripping their customers off, and JPMorgan wouldn't have been on Capitol Hill trying to explain how their extremely overpaid brilliant market timing traders lost over $2 BILLION in just one quarter in 2012 (you can read about this common type of colossal market timing trading blunder on the Word docx from the link in the next sentence).
Basically it's the sheeple's mass belief (by hiring them) that these Wall Street tards can predict the future, that helped cause the great recession and financial meltdown.
Just get over it, they can't. They couldn't predict anything worthwhile in the past, they aren't predicting anything useful now, and they won't predict anything of value in the future. That's just the way it is, so get over it!
If any of this technical analysis charting technobabble stuff had any shot at working, then one of these genius Master of the Universe too-big-too-fail Wall Street firms would have figured out the magic combination of props that can predict the future by now.
They've been at it for over 200 years, and still, just nada and bupkiss. Billions of people-hours have been spent trying to find ANYTHING that can predict the future well enough to make more money than it loses, and so far 100% of it all has been nothing short of a colossal failure.
The one and only reason it still keeps going is because the sheeple en mass continue to ignore this reality, and continue to overpay them. So they'll keep doing this until the sheeple wake up and stop feeding them.
That won't happen, so there will always be a stock market timing industry. It's like the game of Whac-A-Mole: One pops up until the sheeple realize their returns are so bad they should be run out of town by an angry mob with burning pitchforks, then they disappear and go into hiding. Then another pops up to take their place, until the sheeple realize their returns are so bad they should be run out of town by an angry mob with burning pitchforks, then they disappear and go into hiding. Then the first one thinks enough time has passed, so everyone forgot about them, so they're back. Repeat, and that's the timing industry in a nutshell.
For example, just about the one and only professional market timer that had the cojones to actually label and market himself a market timer for decades, finally gave it up and now shies away from being called a "timer." He says it's because it confuses his clients. His website used to go on and on about market timing, but now nada. I job interviewed with Paul Merriman in the late 90's and have always been fascinated with his firm because he wasn't afraid to be called a timer. Year after year he grew his asset base with bad to mediocre returns, and I could never figure out how he did that.
Bob Brinker is probably still at it, even though his track record has been terrible since the 80's. I've called him "Always wrong Brinker" since the 80's, and I still say, "If you want to get rich market timing, just listen to Bob Brinker and Fred Bergstein, and then do the exact opposite!". They're both outstanding contrary indicators because they have an extremely good record of having the exact opposite thing happen that they forecast.
I went to Brinker's site to poke him and ask for his track record, but there's no e-mail address and apparently he's too cool to answer the phone too.
I looked at a few other timer's websites, and it's the same thing - no answers, no track record of returns, no contact e-mail, no answering of the phone, nada.
So all of these moles apparently have been whacked back into their holes and have been in hiding even since.
Basically, nothing economic or financial to any significant degree, can be predicted by using charts or models derived from past data. Life and the markets change minute-by-minute based solely on the aggregate reaction of millions of investors reacting in their own way to daily news, which is all totally random and can in no way be predicted at all by anyone, period.
Since all of the usual technobabble that timers and technicians use rely mostly on how things moved before (past data), there is nothing anyone is doing, past present or future, that can predict the future.
Investments never move like they did in the past, therefore this type of market timing just doesn't work. It hasn't worked in the past, it's not working now, and it will not work in the future. All you need to do is check their track records (and the long-term track record of any hedge fund) to see for yourself. If they don't have one (because it sucks too bad to show anyone), then that's all the bottom-line answer you should need when it comes to deciding to hire the usual lot of market timers.
This is all you need to know about market timing, technical analysis / charting, and what to believe from the financial media (when it comes to predicting the future) to be a successful investor. It's just as simple as that.
"Security selection" is investment jargon that means choosing one investment over another. Stock and ETF picking is the most well-known form of security selection.
The most-common example of security selection is just thinking that something will "go up."
Most thoughtful security selection decisions are made within the same asset class - in other words, deciding which stock, bond, or mutual fund to purchase compared to others of the same type.
But most are random guesses based just on intuition and wishful thinking of quick and easy profits. This works better than market timing, but still on average, it doesn't work (it only "works" when the whole market or that asset class is going up).
Here's the difference between security selection and asset allocation: Deciding to have 10% in large-cap U.S. growth stocks is an asset allocation decision. Choosing AMD over Intel, to represent this 10%, would be a security selection decision.
Security selection (e.g., stock picking) can only be done effectively by large institutions, like mutual fund managers, who concentrate all of their efforts on a small segment of a market (like tech stocks). Even then, most have marginal records, unless you know how to find the good ones by screening mutual funds.
Also mutual funds can only do it well if they stay focused on one asset class. That's why mutual fund objectives like Blend, Global, Balanced, All-cap, Target, Life Style, Life Cycle, Income, Hybrid, and Growth & Income, seldom get good results. They just can't maintain the focus needed to be superior stock pickers because they're trying to do too much at once (by working with more than one asset class).
There are just too many stocks, too much news, and it all happens way too fast to cope with. Company news comes out of nowhere and could bring a stock down by half in days - before anything can be done about it.
That's much too risky, so individuals, and financial advisors that manage money for clients, should not waste time trying to pick stocks (or ETFs). But they love to do it because it's fun to be a "player on Wall Street." It's just the one and only fun part of an otherwise boring and tedious job.
We practice only a little bit of security selection by using Morningstar database software to screen mutual funds. This helps us find ones we like and eliminate those that we don't like.
We use security selection techniques here because mutual funds that are consistently highly-ranked in their category over short, intermediate, and long periods of time tend to remain highly ranked over time. In other words, our elaborate mutual fund screening process has evolved since the late 80's to the point where we can find adequate predictive value of about a year and an half.
The managers of mutual funds that pass our screens just had (and hopefully will continue to have) a superior way of selecting securities and deciding when to buy and sell them (market timing). These managers devote their full attention to security selection and market timing in a narrow segment of a market.
We feel keeping this narrow focus is about the only way security selection and market timing can produce benefits after transaction costs.
Here's examples of some infamous blunders:
Enron. CSFB's analyst had a strong buy recommendation on Enron just five days before it declared bankruptcy on 2 December 2001. JP Morgan - just four days. JP Morgan and Lehman Brothers analysts were both "locked into their buy ratings" because they were involved in the Dynegy merger (investment banking relationship conflict of interest). All three major bond rating services (Moodys, Fitch, and S&P) had above investment grade ratings on Enron's bonds, also just four days before they declared bankruptcy.
In 2008, the legendary Warren Buffet, supposedly the "World's greatest investor ever," lost about 44% of his Berkshire Hathaway's money in a year. In 2011, news of their unethical and self-enrichment shenanigans came out.
Investing market moves are just the sum of millions of people reacting in their own way to random daily news by trading securities. Because nobody can predict the global news, nobody can predict the future period - regardless of what techniques, strategies, charts, or computer models they use. That's why you'll never see the same investment guru on TV for more than a few years. It's usually the one that got lucky recently. When their luck runs out, they're replaced.
Even "gurus" like Jim Cramer that have their own TV show are just guessing.
On the first week of April 2008, he said to not sell Bear Stearns, after reading a concerned viewer's letter; which read, "Should I be concerned about Bear Stearn's in terms of liquidity problem, and get my money out of there?"
Cramer replied in his usual tirade... "No no no! Bear Stearns is fine.... Don't move your money from Bear, that's just silly...."
The stock went from $80 to $2 overnight one week later (and was $171 a year before).
Five days before this rant, "Bear Stearns is not in trouble! The Bear franchise, you know what, for $69 I'm not going to give up the thing. And I just think that this one has a very big upside and a very limited downside here."
And seven weeks before it went belly-up, "I'm asking people watching this video to buy Bear Stearns. Now Bear Stearns acts much better than it should... now that's just intuition. And I don't want to put much faith into intuition, but I have had good intuition over 29 years of investing."
Shortly after all of that, there was no more Bear Stearns, end of story, full stop.
These are the "best" stock pickers ever, so think how well your local Joe Blow stock picker is going to do with your money! No matter what their "stories" are, the results are all always exactly what you'd expect - terrible and way worse than the markets.
This is also why media gurus are usually mutual fund managers (and are CFA Charterholders). Only large institutions like these have the resources needed to have any chance at profiting on all four trades simultaneously, and have the economies of scale to keep expenses down (then they don't have to care about capital gains taxes).
Everyone else is just misleading by hype, and is making you lose money. This is because these gurus are usually selling soon after making their public recommendations (AKA the "Greater Fool Theory").
They're basically telling you when to buy, but not when to sell. First the guru buys a ton of stock to make it go up a lot. Then to get on TV, they make something up about how its fundamentals or charts (technical analysis babble) indicate it's going to go up much more.
Then they convince fools to buy it on TV. Then it will go up when these fools buy it, allowing the guru to sell it all at much higher prices. This drives the price lower.
All of the fools that bought it from the guru are then left "holding the bag," while the guru locked in large profits. This makes the guru's performance look spectacular, which gets them invited back to the show. Repeat.
So if you're prone to taking a market guru's advice because you agree with what they're saying, and it's working great at the moment, just wait. Most of the time, it will be around a year before their luck runs out, they've lost a lot of money, and have disappeared from the media. The point is you don't know when their lucky streak will expire, and thus you are left holding the bag, with a big bill inside of it.
Try to remember who the big TV financial gurus were a few years ago. How long has it been since they've been on TV? How many were either booted out of the business or went to jail for insider trading or similar infractions? How did their stock tips pan out a year after they recommended them? How is their long-term track record? Like all of the Jim Cramer's of the world, they don't even have one you can look at (because it's so bad that it would just be embarrassing).
Here's what to do about that: Write down the name of the guru, the security they recommended, and what their forecast was in terms of price movement over a certain time frame. Then write on your calendar to review this call. When that day comes, compare with their original call. Then you'll see that 90% of the time, they're just wrong.
These kinds of things alone should be enough to convince people that stock pickers are not to be relied upon for anything but recommending stocks they already own (so they will go up so they can sell at a profit, while non-fee-paying-clients who bought it on their TV recommendations are left holding the bag), and doing everything possible to protect the huge fees earned on investment banking relationships.
They are not always out looking for good stocks for clients to buy, and there's too much conflict of interest, so they should not be relied on to pick your stocks.
You don't need to spend hundreds of hours researching this - just look at any market timer, technical analyst, lone-wolf stock picker, private money manager, or brokerage firms' long-term track record (over three years) and see for yourself. They may have had a lucky year here and there, but it's the long-term average that matters.
When it comes to individual stock picking outside the environment of large institutional investors that focus on a small segment of a market, like mutual funds, most empirical studies have shown that security selection techniques add little value. Some reasons for this are:
• There are just too many stocks to pick from. With 10,000+ stocks just in the U.S., where do you start?
• There's too little information available from the companies, most are just estimates, and it's quickly outdated. As Enron and WorldCom showed us, even fresh data directly from the firm can be "wrong" for many reasons.
• There's usually not enough time to do an adequate analysis of all of the important facts.
• Things change on a daily basis. News could come from anywhere, anytime, and could change your gains into huge losses in just a few hours. The point is, a stock could turn before you find out and have time to do something about it. Mutual funds typically own so many stocks that even if one got torpedoed into worthlessness overnight, the fund would still have most of its value.
• The only people who have the data needed to forecast a stock's future price are the people who work at, for, or with the company - and they can't tell anyone because they'd go to jail by breaking insider trading laws. Everyone else is just guessing with incomplete pieces of outdated estimated data. Mutual funds don't have inside information, but have the resources to be the best at guessing (just buying a good software package for screening stocks runs around $25,000 a year).
• The main reason the art of security selection is so difficult is because so many qualified people are in the market on a daily basis doing essentially the same things. So in effect, these folks have actually become the market. It's hard to beat yourself over time, so last year's superstar just becomes this year's dog by making a few little mistakes.
• It's humanly impossible to find the time, money, and other resources needed to both manage clients' assets in a way to get the results they need and expect, and keep up with thousands of stocks or ETFs on a daily basis. They may get lucky here and there, but over time the losses of their "mistakes" will greatly outweigh their lucky picks. Successful professional stock pickers either make their own mutual fund, or are hired by mutual funds, because that's where the real fun and money is.
• The biggest problem with security selection is knowing when to sell. Nobody likes selling a "great company." You don't need to be a CFA Charterholder to know when a stock you've been following will go up. Just wait for accelerating earnings growth - stocks usually go up after that. But that's usually when they are at peak prices.
This is usually when people buy because they feel "it's safe now that it's going up." But that's usually when it's time to sell. Nobody wants to sell anything that's going up, so they wait to try to get a few more bucks out of it. That's when it goes back down before they can sell it. Then the investor goes into denial - which usually results in holding it forever because they don't want to take a loss.
So you want to buy stocks when the news is bad, and sell them when the news is good. But this is the exact opposite of what most investors actually do in the Real World.
• Recommendations by "research departments" of major brokerage houses rarely get superior results because their stock picks are frequently biased toward firms they have investment banking relationships with (they are under constant pressure to move stock and bond inventory on the deals their firm underwrote).
• There are also conflicts of interest with analysts who give stock recommendations. They can only give "buy" recommendations, or the company will get mad and stop giving them information. And they're not going to tell you when it's time to sell a stock their firm has other (investment banking) relationships with, because they'd get fired. And they don't like downgrading stocks because it makes them look stupid for recommending it in the first place.
The bottom-line is that even the best stock pickers tend to lag the market over time. The longer the time frame, the more stock pickers (and market timers) lag their benchmark indices and/or the markets.
For these reasons, we don't think security selection should be emphasized in investment portfolio management (either) for sane rational investors investing for critical long-term goals, like retirement planning.
Asset allocation is the only thing that works for investors who manage money either for themselves, or for clients. It's the art and science of determining how much of the dozens of asset classes people should own (based on their life situation). Then one just holds the mix until a major life factor changes.
Then you just find good mutual funds to represent each asset class. Mutual funds are best suited to market time and pick securities (somebody has to do it unless you want to use index funds, which by definition just gets average results).
Yes, asset allocation is very boring, and you're guaranteed to never double your money in one-year, but it will also get the best long-term results.
There is a lot more to read like this in the Money eBook.
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