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Stock Market Timing: The World’s Best Investors Weigh In On Market Forecasting
by Alexander Green, Chairman, Investment U; Investment Director, The Oxford Club
Friday, August 24, 2007: Issue # 705
My two columns on “Why the Perma-Bears Are Wrong Even When They’re Right” generated more mail than anything else I’ve written this year.
The responses ran the gamut from “you’re dead wrong and boy are you going to pay the price” to “these people are loons why bother to acknowledge them?”
Other respondents laughed off the illogic of the perma-bears, but chose to take me to task for arguing that stock market timing is a losing strategy.
“This looks like an attempt to justify your own inability to predict the twists and turns of the market,” wrote B. Chikvash.
How right he is. I can’t begin to tell you what the market will do next week or next month. What Mr. Chikvash hasn’t learned, apparently, is that no one can completely master stock market timing.
He writes that “in the last 100 years the GOLD to DOW ratio went between 1 and 35 three times. If you could time, even imperfectly, the ratio changes you would have made billions in the market, alternating between gold and stocks.”
Interesting. However, I checked the Forbes 400 list and not one of the billionaires found there made their fortune this way. Although they could have done so, apparently, even if they timed it (ahem) “imperfectly.”
Stock Market Timing… There’s A Reason For My Cynicism
At dozens of financial conferences over the years, I’ve asked attendees to name the most successful market timer of all time. No one has ever raised a hand or even offered a name in private.
Why? Because great market timers exist only in the land of garden fairies and elves that live in hollow trees. Superior stock market performance is the result of security selection, not trying to pick the next rally or correction.
If you’re skeptical, lend an ear to the most successful investors of all time. They’ve all expressed their thoughts on market timing on many occasions. Here’s just a brief sampling:
- Benjamin Graham, the father of value investing: “If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what’s going to happen to the stock market.”
- Warren Buffett, chairman of Berkshire Hathaway: “We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”
- John Templeton, pioneer of global investing and legendary manager of the Templeton Growth Fund: “I never ask if the market is going to go up or down next year. I know there is nobody who can tell me that.”
- Peter Lynch, the best performing mutual fund manager of all time, in his book, “One Up on Wall Street”: “Thousands of experts study overbought indicators, oversold indicators, head-and-shoulder patterns, put-call ratios, the Fed’s policy on money supply, foreign investment, the movement of the constellations through the heavens, and the moss on oak trees, and they can’t predict the markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack.”
He ends his book by telling readers, “What the market is going to do ought to be irrelevant. If I could convince you of this one thing, I’d feel this book had done its job.”
I know this message goes against the instincts – not to mention the hyper-charged emotions – of most investors. But it boils down to this: You can listen to an investment advisor or stock market guru who has a market timing system to sell. (Or the know-it-all at the next cocktail party.) Or you can listen to the greatest investors of all time.
The choice is yours.
Good Investing,
Alex
Editor’s Note: Our special report, Secrets of the Masters, explains the approaches of Templeton and Graham in more detail. It also shows you how Bill Gross, Jim Rogers, Jeremy Grantham and dozens of other premier money managers consistently beat the market. Learn more.
Today’s Investment U Crib Sheet
So if timing the market is futile, how do you know it’s time to sell your stock?
“There are a number of theories about when to cash in your chips,” Alex said in a recent column. “But most of them are misguided. And some are completely wrongheaded.”
The #1 way to know it’s time to sell – and protect both your principal and your profits – is by using a trailing stop. A trailing stop is just a stop-loss order set at a certain percentage below the market, and then adjusted as the price rises. And if you aren’t using them on your open stock positions, you should be.
- The Friedman Effect: Is Another Bear Market Around the Corner?
- Value Investing: Following in The Footsteps of Sir John Templeton
- Market Timing: What All Great Investors Have in Common
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Alexander Green is the Investment Director of The Oxford Club. A Wall Street veteran, he has over 20 years experience as a research analyst, investment advisor, financial writer and portfolio manager.
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