Editor’s Note: It can be tough to know what direction to look in a market as topsy-turvy as this one.
And as Alexander Green notes in today’s article, no one can accurately and consistently time the market.
That’s why you have to be ultra-selective with investment ideas these days…
Consider dividends, for example. Studies have shown that dividend stocks have outperformed the broad market by 222% over the past 60 years. Despite that, many high-quality dividend-paying stocks are trading at a discount.
And right now Chief Income Strategist Marc Lichtenfeld is giving away his FREE Ultimate Dividend Package. Not only does it teach you how to lock in an ultra-safe 9% yield, but it also reveals the safest 8% dividend in the world – and so much more… Go here now.
– Nicole Labra, Senior Managing Editor
In my last column, I discussed my recent market timing debate with Mike Turner of Turner Capital Investments at FreedomFest in Las Vegas.
Turner spoke first and claimed that his proprietary “trend trading” system – with no long-term track record – allows investors to capture the positive performance of bull markets without enduring the negative performance of bear markets.
He said he’d been out of the market for most of the year and making good money in inverse ETFs.
He chastised investors who had foolishly endured lower share prices this year.
That includes not just the vast majority of equity investors but investment greats like Warren Buffett, whose returns Turner claims to have doubled.
(Now you know why every prospectus states that “Oral representations cannot be relied upon.”)
When it was my turn to speak, I laid out the case against market timing, beginning with a definition.
“Market timing is not asset allocation or sector rotation or security selection,” I reminded the audience. “It is the attempt to be in the stock market for the good times and out during the bad.”
It’s natural for an investor to want exactly that, of course. But is it realistic?
No. History shows that investors outperform by selecting securities that beat the benchmark, not by guessing whether the market is about to go up or down.
I told the audience that if I asked them to name the greatest stock picker of all time, some would say Warren Buffett (the chairman of Berkshire Hathaway) or Peter Lynch (the former all-star manager of the Fidelity Magellan Fund) or John Templeton (the former world-beating manager of the Templeton Growth Fund) or some other successful business analyst.
But if I suggested that they name the best market timer, they would draw a blank.
To be sure we were on the same page, I asked the audience if anyone knew a successful market timer.
Only one hand in the crowded room went up. Predictably, it was Mike Turner’s. (Humility is not his strong suit.)
Anyone can make a good market call occasionally. But no one can accurately and consistently time the market.
Why? Two reasons.
The first is that rational, self-interested investors quickly incorporate all publicly available information – from inflation and interest rates to GDP growth to business developments – into share prices.
As the old saying goes, “If it’s in the papers, it’s in the price.”
No one is going to sell their stocks tomorrow because of last week’s inflation numbers or jobs report.
Information gets incorporated into share prices immediately.
The second reason is that the stock market is a forward indicator. Investors are continually discounting the most likely developments, both good and bad.
The stock and bond markets, for example, have already priced in two more half-point interest rate increases by the Federal Reserve this year.
So those – if they happen – will not by themselves upset the market.
What would upset the market is persistent inflation that raises the likelihood of interest rates going higher still.
Conversely, evidence that those hikes or others won’t be necessary would cause the market to rally.
Why? Because higher rates make it more expensive for consumers, businesses and governments to borrow.
And because higher interest rates offer an attractive alternative to equities.
When someone claims to have a system that rides each market upturn (or most of it) while avoiding each market downturn (or most of it), they are claiming to have a crystal ball.
Not metaphorically but literally.
No one has any such thing, of course.
That is why market timers – despite their good intentions, state-of-the-art software and proprietary algorithms – eventually end up with nothing more than subpar returns and a boatload of short-term capital gains tax liabilities.
(Remember, all that switching in and out of the market comes at a cost that the IRS is only too happy to collect.)
Short-term gains are taxed at the same rate as earned income, which can be as high as 37% at the federal level. That’s before tacking on state levies.
However, there’s an even bigger reason market timing doesn’t work – and is guaranteed to cost you time and money over the long haul.
And in my next column, I’ll explain what it is.