Market Timing Is Notoriously Difficult - And Is it Really Worth It?
If you look through some the sage nuggets of wisdom through the ages, one theme consistently shines through. The importance of timing. Whether it be industry, comedy or sport you can normally find someone at the peak of those fields emphasising the role of timing in their success.
Whether it be by luck
Buzz Aldrin - Timing has always been a key element in my life. I have been blessed to have been in the right place at the right time.
Or talent, hard work and judgement
Yogi Berra - You don't have to swing hard to hit a home run. If you got the timing, it'll go.
And what about timing markets? As we know, market timing is notoriously difficult – after all, the definition of a stock that has fallen 90% is one that fell 80% and then halved again.
To be successful at market timing, ‘all’ you have to do is spot something that is obvious to you and no-one else, be able to express that view accurately in accordance with your mandate and be proven right in a timeframe which is acceptable to your clients. Cassandra Capital may be just as correct as Hindsight Capital but with much lower assets under management when vindicated.
Advocates of market timing may argue that ‘yes, it is difficult- that’s why those that can get the big bucks’. But is it really worth paying up for market timers? After all, we tend not to know who the market timers are before they demonstrate their skill and it’s a feat that has proven incredibly difficult to repeat.
Are these incremental gains worth the expense? Evidence from Albert Bridge Capital suggests not. A comparison of returns from a strategy of annually investing $1,000 in the S&P 500 at its low for the year every year, with a strategy of buying the S&P at its high each year since 1989. The results show that, after 20 years the less profitable approach left the investor with assets 80% of the perfect approach. This appears to support the notion that not only is not possible to perfectly time the market, the effort from attempting may not adequately reward an investor.
We believe the best way to invest in stock markets is to understand an industry, understand a company and invest when valuations offer a margin of safety from a company’s intrinsic value.
We think it’s time to stop timing.