Can You Accurately and Consistently Time the Market?
On the last day of our 2018 Investment U Conference at the beautiful Four Seasons in Las Vegas earlier this month, my friend and colleague Mark Skousen - economist, author, editor of Forecasts & Strategies, and fellow Investment U contributor - squared off against me for what was promoted as “The Ultimate Fight.”
Our debate? Is it really possible to accurately predict the future in financial markets?
Mark took the podium first, arguing the affirmative.
He pointed to his own 40-year track record, noting that he switched out of hard assets in the late 1970s and into stocks and bonds after the election of Ronald Reagan in 1980.
He recommended staying long stocks until the fall of 1987, when he correctly moved his subscribers out of equities just before the market crashed.
He also recommended stocks for most of the long-running bull market of the 1990s and has been bullish since the Great Recession as well.
He noted that he made missteps along the way but further sought to undermine my position by noting that I recommend stocks myself - and with some success.
(The independent Hulbert Financial Digest rated my Oxford Communiqué among the top investment letters in the nation for 16 years until Mark Hulbert stopped publishing the letter at the end of 2016.)
When it came time to rebut Mark, I conceded a few points.
Unlike the permabears and other longtime doom-and-gloomers - you know who they are - he has been on the right side of the market for most of the last four decades.
It’s also true that I recommend individual stocks in my various newsletters and trading services. Doesn’t that mean I’m predicting the market?
No. It doesn’t.
When it comes to the subject of market timing, I call myself a militant agnostic. (I don’t know what the market will do next and neither do you.)
However, there are reasonable conclusions that an investor can make about the future without calling himself a prognosticator. (Or, ahem, a “guru.”)
The first is that all human beings have economic needs: food, clothing, shelter, healthcare, etc.
It’s not government that provides us with these essentials. It’s entrepreneurs and other business people who have found a way to offer the goods and services we want and need at a price greater than what it costs to provide them.
That’s capitalism, the private ownership of the means of production.
The stock market is the quintessence of capitalism. Most of us don't have the time, the expertise or the money to start our own businesses. (And even if we do, it’s a well-known fact that most new businesses fail in the first few years.)
But through the stock market, we can own a fractional interest in virtually any of the world’s thriving public companies - and with very little money.
There is no greater way to create, grow and preserve a fortune than to own a business. Better still, own a whole portfolio of diverse businesses.
Acknowledging this requires no predictive power. It requires only that you understand economic history.
U.S. equities have returned an average of 10% a year for more than 200 years. Small company stocks have averaged 12% a year. And the best-performing stocks have done far better still.
When I recommend individual stocks, I’m not saying I expect the market to go up. I’m suggesting the company will generate a better return than the broad market. (Otherwise, why not just invest in an index fund?)
It’s a whole lot easier to estimate a company’s future earnings than to guess whether the market’s next move will be a zig or a zag.
I don’t recommend stocks because I think the market’s next move will be up. I recommend stocks because I know that equity ownership is the best wealth creator available to the average man or woman - and that certain individual stocks are likely to outperform.
I may be right or wrong in my analysis. But the recommendations themselves have nothing to do with “predicting the future of the market.”
History demonstrates that over the long term (investment horizons measured not in months or years but in decades), the market experiences higher highs and higher lows.
To expect that to continue in the future is not a particularly bold prediction.
The question is really whether you should listen to someone’s short-term predictions about the market - even someone as knowledgeable as Mark - or rely on a system of asset allocation and security selection - like the one The Oxford Club uses - and concede that near-term fluctuations are impossible to forecast accurately and consistently.
A poll at the end of our debate showed that the vast majority of the attendees agreed with me.
However, this was an Oxford Club event.
Knowing Mark, I think this debate will continue in the future... and next time in front of his crowd.
Thoughts on this article? Leave a comment below.