Why do people say you can't time the market?

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Akkula's picture
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Let's say I was going to recommend that you invest in a stock whose value is declining and I say:
 
1.  The people that are the customers of the company are going to have a hard time buying anything from the company because gas prices are too high and they are also losing their jobs.
 
2.  The company doen't have any new "hot" ideas, markets, or products that will drive sales.  They plan on doing business as usual.
 
3.  Their labor costs and transportation costs are higher than they were a few years ago because of oil costs.
 
Would it be more correct to say that this stock is "on sale" or "it has hit rock bottom and it has nowhere else to go but up?"  Or would it be better to say, "This stock has potential but I want to see some of its business fundamentals improve before I decide to invest."
 
Wouldn't you be considered a "market timer" if you decide to wait to invest in the stock until one of the three things listed above improves?  

troll's picture
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Joined: 2004-11-29

What if it had NOWHERE else to go and up ISN'T going to be an option?

troll's picture
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Why on earth would you recommend a fundamentally bad stock that is declining in value in the first place?

Morphius's picture
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Let's say that you were going to recommend a stock without having a clue as to how to value stocks, and so you really weren't quite sure what factors to consider.  If the stock price was falling, would yellow be bigger than blue?  Or vice versa?And how much could you charge someone for this expertise?

snaggletooth's picture
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Joined: 2007-07-13

Akkula,
I don't think your assertions suggest you are a market timer.  You may be waiting until you believe the value is more in line with what you think it should be.  But this is all very suggestive.  Analysts may have an idea, but they don't know what something will do for sure.  Neither do you.
 
If you begin to get into market timing issues that you are suggesting, you will open a whole can of worms...

anonymous's picture
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Joined: 2005-09-29

"This stock has potential but I want to see some of its business fundamentals improve before I decide to invest."

 
How about, "This stock has potential to go down further or go up. I want to see some of its business fundamentals improve before I decide to invest, but once we see the fundamentals improve, it will cost more to buy.

newnew's picture
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Joined: 2007-02-23

To do it you would have to:                                                                                              1. believe the market in question is not efficient
 2. you know something noone else knows
 
"asset class investing is consistent with what we know about how free and fair markets function. Active management is not. Asset class investing is supported by the results of scores of empirical studies of fifty years of professionally managed portfolios. Active management is not. Finally, asset class investing allows reliable planning and implementation of portfolio strategies. It is demonstrably successful and the most prudent way to invest a client's money."

newnew's picture
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Joined: 2007-02-23

So who still believes markets don't work? Apparently it is only the North Koreans, the Cubans and the active managers.

stokwiz's picture
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Joined: 2004-12-04

Your topic is timing the market but your post is about timing a stock. Since 3 out of 4 stocks follow the market, you would have to take that into consideration. If you have conviction on a particular stock, why don't you just use options?
 
Stok

Akkula's picture
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Joined: 2008-02-17

Let's replace the word "stock" that I used above with the S&P 500 or equities in general.  Wouldn't the same logic apply that if the following is true:
 

1.  Consumers, in general, are going to have a hard time buying anything because gas prices are too high and they are also losing their jobs.
 
2.  There are no real "hot" sectors like technology in the 90s or real estate in the last couple of years.
 
3.  Labor costs and transportation costs are higher than they were a few years ago because of oil costs.
 
If these few items are all more or less true at this point in time, wouldn't it be prudent to not be heavily invested in equities at this point regardless of your risk tolerance?  Wouldn't you want to be in different asset classes until you at least see conditions improving in the economy or until there is some kind of new, hot idea, company, service?  Wouldn't you be considered a market timer if you decide to lighten up on equities until you see things start to turn around in the economy? 
 
I have just been getting a bit sick of wholesalers and others trying to sell you on the idea that if you stop investing in equities you are going to totally miss a huge upside correction.  They always say "you can't time the market."  While I agree that it is nearly impossible to buy low and sell high on a daily or weekly basis, can you really say it isn't possible to see the makings of a major economic turnaround based on all the news we get?  GDP, unemployment, CPI should at least be showing me something positive to signify a turn around before I get too excited, right?
 
I always get a lame statistic about how missing the biggest "up" days in the market will put you behind the 8 ball.  To me, this stat seems like it could be very deceptive.  This stat makes it seem like these "up" days happen in a vacuum and they don't really tie those up days with the events that caused them.  
 
From what I have seen, most of the big up days as far as the broad market happen when there is good news about inflation, GDP, interest rates, unemployment, consumer confidence, or oil prices. 
 
Should I really be too worried about missing a few "up" days if I was able to prevent a massive erosion of wealth by being away from equities on some of the biggest down days for equities?
 
To me it seems like some act like the stock market goes up and down like magic and it is not tied to anything.  While there can be circumstances when the market reacts irrationally, it seems to react very rationally to different news that comes out. 
 
If I can't provide some type of expertise, why would I have a job?  Everyone could just get into a target date fund with a standard allocation of equities, fixed, and cash.    

anonymous's picture
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Joined: 2005-09-29

If these few items are all more or less true at this point in time, wouldn't it be prudent to not be heavily invested in equities at this point regardless of your risk tolerance?
 
No.   Keep in mind that all of those things that you mentioned are already factored into the price of the stock which is why the price is 20% less than it was 18 months ago.  If we had all of those factors and the stock price was the same that it was in the past, you would probably have a point. 
 
If I can't provide some type of expertise, why would I have a job?  Everyone could just get into a target date fund with a standard allocation of equities, fixed, and cash. 

 
If your expertise is in picking the right investments at the right time, you don't need any clients.    You do need to provide expertise, but expertise is not about picking the right investment.

Borker Boy's picture
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Joined: 2006-12-09

Akkula wrote: 

...If I can't provide some type of expertise, why would I have a job?  Everyone could just get into a target date fund with a standard allocation of equities, fixed, and cash.    
 
After a year or so in this business, I had the same question. It became apparent that I was simply putting people into a "model" portfolio and charging them a big upfront fee.
 
Ninety-nine percent of what I sale is mutual funds, and I felt I was acting much like an insurance salesman: standing between the customer and the company and taking a big cut for doing little more than putting the check in the mail and giving them a quick overview of what mutual funds and IRAs are. (Neither of which involve rocket science.)
 
To get back on topic, I was at a meeting last week and had a vet tell me he has most of his clients in cash and will put them back in the market at 10800. I told him I felt nowhere near adequate enough in my abilities to time the market, and knew little more than to sell my folks American Funds and tell them to "hang in there."  
 
I'm always impressed when I come across an advisor who has enough confidence in his abilities to take his clients in and out of asset classes based on his convictions. But over a five to seven year period, will my folks do better by staying the course than his?
 
 

troll's picture
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Joined: 2004-11-29

Akkula wrote:Let's replace the word "stock" that I used above with the S&P 500 or equities in general.  Wouldn't the same logic apply that if the following is true:
 

1.  Consumers, in general, are going to have a hard time buying anything because gas prices are too high and they are also losing their jobs.  "Consumers in general" are not our clients.
 
2.  There are no real "hot" sectors like technology in the 90s or real estate in the last couple of years.  Oil??  Precious metals??  Commodities??  Global bonds?? 
 
3.  Labor costs and transportation costs are higher than they were a few years ago because of oil costs.  So what.  If it wasn't because of oil, it would be because of unions, interest rates, the cost of steel, whatever.  This is called inflation.  Get used to it.
 
If these few items are all more or less true at this point in time, wouldn't it be prudent to not be heavily invested in equities at this point regardless of your risk tolerance?  Wouldn't you want to be in different asset classes until you at least see conditions improving in the economy or until there is some kind of new, hot idea, company, service?  Wouldn't you be considered a market timer if you decide to lighten up on equities until you see things start to turn around in the economy? 
 
I have just been getting a bit sick of wholesalers and others trying to sell you on the idea that if you stop investing in equities you are going to totally miss a huge upside correction.  They always say "you can't time the market."  While I agree that it is nearly impossible to buy low and sell high on a daily or weekly basis, can you really say it isn't possible to see the makings of a major economic turnaround based on all the news we get?  GDP, unemployment, CPI should at least be showing me something positive to signify a turn around before I get too excited, right?
 
I always get a lame statistic about how missing the biggest "up" days in the market will put you behind the 8 ball.  To me, this stat seems like it could be very deceptive.  This stat makes it seem like these "up" days happen in a vacuum and they don't really tie those up days with the events that caused them.  
 
From what I have seen, most of the big up days as far as the broad market happen when there is good news about inflation, GDP, interest rates, unemployment, consumer confidence, or oil prices. 
 
Should I really be too worried about missing a few "up" days if I was able to prevent a massive erosion of wealth by being away from equities on some of the biggest down days for equities?
 
To me it seems like some act like the stock market goes up and down like magic and it is not tied to anything.  While there can be circumstances when the market reacts irrationally, it seems to react very rationally to different news that comes out. 
 
If I can't provide some type of expertise, why would I have a job?  Everyone could just get into a target date fund with a standard allocation of equities, fixed, and cash.   I am frightened on behalf of your clients.

Morphius's picture
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Joined: 2007-07-21

Akkula wrote:If I can't provide some type of expertise, why would I have a job?  Everyone could just get into a target date fund with a standard allocation of equities, fixed, and cash.    This, at least, is a better question to ask yourself.  If you truly
explore this line of reasoning you'll finally realize that successful
long term investing requires a discipline that is counter intuitive and
very difficult to stick to.  Buying low and selling high sure sounds
obvious, but it requires both an ability to recognize whether now is
low or high, and the discipline and nerve to act in a way that is
almost always contrary to most people's natural instincts.

The real value added that we can bring to most people is NOT to think
we can predict the future or time the market, but to give them the confidence that successful
long term investing often involves having the courage to tolerate short
term noise, NOT by accommodating their natural tendencies to sell when
times are tough and buy when everything seems great.

I'm glad to see you asking questions, Akkula, but if you survive in
this business you will have learned that the right thing to do is
usually the thing that comes hardest to most people: going against the
grain.

Keep asking the questions, but recognize that the biggest value add you
can bring to most clients is NOT a crystal ball, but the balls to go
against the grain and not follow the sheeple.

I think there's plenty of hope for you yet, so long as you don't begin
to believe you possess the foresight that everyone else lacks.  It's simple, but it's not at all easy!

snaggletooth's picture
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Joined: 2007-07-13

Borker Boy wrote: 
To get back on topic, I was at a meeting last week and had a vet tell me he has most of his clients in cash and will put them back in the market at 10800. I told him I felt nowhere near adequate enough in my abilities to time the market, and knew little more than to sell my folks American Funds and tell them to "hang in there."  
 
I'm always impressed when I come across an advisor who has enough confidence in his abilities to take his clients in and out of asset classes based on his convictions. But over a five to seven year period, will my folks do better by staying the course than his?
 
 
 
Borker Boy,
 
I know you're aware of this, but even for this vet it's not just as easy as in and out of the market.
 
If this vet's book is made up of people 50+, then he may feel the need to be more proactive on moving to and from cash.  It might not make sense for you if you have a book of business of 30 somethings that should stay invested.
 
No one wants to lose money.  But the thing that is becoming more and more of an issue is that for someone who wants to retire in their late 50's/early 60's, if you're planning a 30+ year retirement, they need to have the majority of their money in the market.  This is very scary for people right now.
 
Hindsight will always be 20/20.  For my typical retirement planning client, I'd like to have 1-2 years in cash.  (I probably should have 3), but in most cases they have enough cash in their bank accounts.  They have long term investments and more intermediate term as well.  From there, it's just adjusting to/from cash and intermediate depending on what appears to be reasonable based on the client's needs.
 
It hurts to lose money right now, but we know we have to be invested for these clients with a good portion of their money.  As much as one tries, good luck on picking the tops and bottoms consistently.

Akkula's picture
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Joined: 2008-02-17

Morphius wrote: Akkula wrote:
If I can't provide some type of expertise, why would I have a job?  Everyone could just get into a target date fund with a standard allocation of equities, fixed, and cash.    I'm glad to see you asking questions, Akkula, but if you survive in this business you will have learned that the right thing to do is usually the thing that comes hardest to most people: going against the grain.Keep asking the questions, but recognize that the biggest value add you can bring to most clients is NOT a crystal ball, but the balls to go against the grain and not follow the sheeple.I think there's plenty of hope for you yet, so long as you don't begin to believe you possess the foresight that everyone else lacks.  It's simple, but it's not at all easy!
 
Going against the grain is right!  I feel like that has been my whole, short career to this point. 
 
My observations thus far:
 
1. Becoming "standard mutual fund broker" which seems to be how training is geared doesn't seem to make much sense to me, especially with wirehouse production goals.
2. If you ask the same fact based question to multiple people in the office, you will get multple answers.
3.  The more successful brokers are the less dogmatic and formulaic on what approach breads success relative to the "company line" model.
 
Cold calling seems a lot less successful when you come at a business owner with, "I'd like to setup some time to discuss your finances and retirment planning" like "standard mutual fund broker" would say.  I have found leading with a hot product, way to save time, or helping companies prevent liability has worked much better in getting appointments.
 
I have found that some people in the office will discourage you from strategies that differ from "standard mutual fund broker" like employing options strategies, structured investments, etc.  Even if 95% of what you do is mutual funds, to me these strategies make sense in some situations.  
 
It is important to me to try to differentiate myself from the thousands of other brokers out there.  I think that is what is going to really drive my future success and that is why I am trying to break out of the model a bit.    In addition, it has been a bloodbath for the standard mutual fund brokers in my office (mostly the new guys), especially if they don't have anything else in their arsenal.
 
Keeping my head down and my numbers high by doing things my way seems to be the best path forward for me.   

Akkula's picture
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iceco1d wrote:Akkula,
 
I am confident I could write you a novel on the questions you are asking, although, at this point, it may be better for you to get this basic knowledge from an academic search - either online, at the library, or your local university's finance department.  Go do some legwork; research articles & journals, textbooks, whatever floats your boat.
 
Nice!  I am so glad that someone can at least be honest by saying that there are no easy answers to the questions I am asking!
 
I guess I get a bit leery when someone over simplifies a complex problem and that is why I have a problem with short cliches' like, "you can't time the market."
 
In order for me to buy into an idea I need to know:
 
1.  What experts have tried to time ups and downs and failed (we already know the average joe blow will mess this up, so let's not even consider these guys)
2.  What methodology or indicators have they used for their timing of market tops and bottoms
 
I guess I can only answer these questions for myself by finding some data that I can buy into.  The less this data is put out by a company who is dependent on the ups and downs of the market, the better.  

anonymous's picture
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Joined: 2005-09-29

Ninety-nine percent of what I sale is mutual funds, and I felt I was acting much like an insurance salesman: standing between the customer and the company and taking a big cut for doing little more than putting the check in the mail and giving them a quick overview of what mutual funds and IRAs are. (Neither of which involve rocket science.)

 
Borkerboy, how is that like an insurance salesman?
 
Morphius, that's another great post.
 
Akkula, you can get all that data that you would like, but it only tells you about the past.  Let's look at "timing the market" from a selfish perspective.  How will this help you in your career?  Personally, I think that it will hurt you.  If you try to time it and fail, you will lose clients.  You will also get complaints.  If you succeed, you will have happy clients...until the time that you fail.  If you don't try to time the market, you can't fail, and you won't lose clients.   Clients will be happy or unhappy based upon the service that you give to them.   You can successfully time the market and still have unhappy clients.  You remove their money from stocks and put it in cash paying 3.5%.  How much did they just lose because their local bank was paying 4% and giving a toaster?
 
I really think part of the problem is that as a new wirehouse rep, it is very difficult to add value.  The only way to succeed is to bring over assets.  This means, for the most part, you are getting people to take money from their left pocket and put it into the right pocket.  Your success is not contingent on making a difference in their life, but rather gathering their assets.
 
With few exceptions, people don't become successful advisors because they choose the right investments for their clients.  Here's a sure fire way to make sure that your client has more money in the future.  Twist their arm to invest more money.   
 

Morphius's picture
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Akkula wrote:In order for me to buy into an idea I need to know:
 
1.  What experts have tried to time ups and downs and failed (we already know the average joe blow will mess this up, so let's not even consider these guys)
2.  What methodology or indicators have they used for their timing of market tops and bottoms
 
I guess I can only answer these questions for myself by finding some data that I can buy into.  The less this data is put out by a company who is dependent on the ups and downs of the market, the better.  I like the fact that you're really thinking about some of these fundamental issues, Akkula, instead of blindly accepting what you are told.  But be careful about the questions you ask yourself, as you may waste a lot of time trying to answer the wrong question.  More to the point, you are asking someone to prove a negative: what evidence is there that you can't do something?  Turn that around and you may have better luck: what evidence is there that someone CAN do something, i.e. time the market?  A positive premise at least can be tested: if it can be done, look for evidence that someone has or can do it.  The burden of proof of this positive claim, as it were, lies with those who would make that claim - not the other way around.

Hollywood's picture
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Joined: 2007-02-23

If you want to assess whether you can time the market with clients money, maybe you should go out and do it with your own capital first and prove to yourself...

deekay's picture
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Joined: 2007-05-15

Akkula wrote:
 
Going against the grain is right!  I feel like that has been my whole, short career to this point. 
 
My observations thus far:
 
1. Becoming "standard mutual fund broker" which seems to be how training is geared doesn't seem to make much sense to me, especially with wirehouse production goals.
 
What is your strategy to meet your goals?  The fact is, as anon has stated, your job is to gather assets.  Period.  How you do it is completely up to you.  It is good you have a healthy amount of skepticism.  However, I'm afraid that if you keep trying to reinvent the wheel, you won't be around to buck the system.            
 
2. If you ask the same fact based question to multiple people in the office, you will get multple answers.
 
Agreed.  Here's the thing - no matter what you say about whether or not timing can work, it still is just an opinion.  In our line of work, it is expected that you have an opinion.  But opinions can be dangerous. 
 
3.  The more successful brokers are the less dogmatic and formulaic on what approach breads success relative to the "company line" model.
 
The most successful reps I know have asked for more business/appointments/referrals than unsuccessful reps.  You can be pitching the least sexy product imaginable but if you pitch it enough times, you will be successful. 
 
Cold calling seems a lot less successful when you come at a business owner with, "I'd like to setup some time to discuss your finances and retirment planning" like "standard mutual fund broker" would say.  I have found leading with a hot product, way to save time, or helping companies prevent liability has worked much better in getting appointments.
 
I agree.  Adding value to a business owner will always lead to more appointments.  However, I'm puzzled about your "leading with a hot product" comment.  Wouldn't that be the definition of a standard fund broker? 
 
I have found that some people in the office will discourage you from strategies that differ from "standard mutual fund broker" like employing options strategies, structured investments, etc.  Even if 95% of what you do is mutual funds, to me these strategies make sense in some situations.  
 
What makes sense when you first start out is doing the things that need to be done to be successful.  Namely, getting in front of enough people.  In the end, the products don't matter.  However, if you are forced to stare at a computer screen during your work day because you're employing options strategies and whatnot, you will lose sight of your primary occupation.  Your primary occupation is as a marketer. 
 
It is important to me to try to differentiate myself from the thousands of other brokers out there.  I think that is what is going to really drive my future success and that is why I am trying to break out of the model a bit.    In addition, it has been a bloodbath for the standard mutual fund brokers in my office (mostly the new guys), especially if they don't have anything else in their arsenal.
 
You keep talking about differentiating yourself.  You will be different because you survived your first three years.  What products you use to do that is up to you.  Frankly, I differentiate myself because I know more about life insurance than a business owner will ever care to know.  Nobody else is able to add value using life insurance than I do.  But I know that I can be the most knowlegable person in the world about life insurance and still fail.  I know that I need to make the contacts every single day.
 
Keeping my head down and my numbers high by doing things my way seems to be the best path forward for me.   
 
Well said.  It is good you have alot of different techniques and products in your back pocket, but you need people to talk to first.  Schedule 5 appointments a day and you will not fail.
 
 

MinimumVariance's picture
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Joined: 2008-08-20

First, I suggest you learn the different definitions of "Efficient Market" - weak, semi-strong, and strong forms.
 
2- Market timing means the overall allocation of the portfolio as it is split between bond and equitites. If you 'time' the market you are basically moving between 100% in stocks or 0% in stocks at any given time. I know this seems extremely counter intuitive, but that is the methodology financie professors use to test various market timing approaches.
 
3- Whether market timing works or not depends on whether you believe that equity prices follow a random walk. All the evidence suggests they in fact do so.
 
4- You can, however, have a 'view' that future returns will be affected by some thing or event that will impact their E(r) based solely on historical returns. Hence, deviation from a strategic allocation to meet more taqctical considertions (e.g. 'over weight' consumer non-discretionaries in a recession -- if you believe they are NOT already priced to reflect the markets expectation of a recession and the fact that every broker in the world is making the same recommendations.
 
In conclusion, both theory and research support the notion that market timing in the long run is a fools errand.  This doenot imply though, that active asset managers have no value added, even recognizing that the measurement of 'alpha' is more complicated than calculating the intercept term of a linear regression.

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