Over the course of the last few columns, I’ve covered my recent market timing debate at FreedomFest in Las Vegas with Mike Turner of Turner Capital Investments in Austin.
Market timing is the attempt to be in the market during upturns and out of the market – or short the market – during downturns.
It would be a fine thing if it worked.
Unfortunately, it does not. Not for long, anyway.
You can take the evidence I’ve offered here. Or you can discover this for yourself and get an education that makes the Ivy Leagues look inexpensive.
The S&P 500 climbed 517% between January 2002 and December 2021. But if the 10 best days are excluded – just 10 days in two decades – the total return would have been just 183%. And guess what? All of the 10 best days occurred during bear markets.
Don’t get me wrong. Anyone can make a good call and be in the market during a rally or out during a correction.
But as I’ve explained over the course of the last three columns, it’s simply not possible to do this accurately and consistently over the long haul.
Don’t just take my word for it, however.
The greatest investors of all time – each of whom beat the market with stock selection, not guessing games – have all gone on the record on this subject.
Warren Buffett’s mentor Benjamin Graham – author of the investment classic Security Analysis – said, “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.”
Buffett himself said, “We’ve long felt that the only value of stock forecasters is to make fortune-tellers look good. Even now, Charlie [Munger] 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.”
Peter Lynch, the greatest equity fund manager of all time, said, “Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves.”
Financier Bernard Baruch – the richest man in the country before John D. Rockefeller took the title – insisted that only one kind of investor is in the market for the good times and out during the bad.
“It can’t be done except by liars,” he said.
After I shared my arguments – and those words – Turner claimed that I had misrepresented his views, that he wasn’t a market timer at all but rather “a trend follower.”
Trend followers don’t try to call the top or bottom. They just follow the trend.
Hmm. Our debate topic was “Can the Market Be Timed?” Turner had already argued the affirmative.
He had just told the audience that his strategy is to go long stocks in market upturns, short stocks in market downturns (with inverse ETFs) and go to cash “during transitions” (i.e., the rest of the time).
Mike Turner is not a market timer the way a guy who likes a couple of cocktails after work and wine with dinner is a “non-drinker.”
In an email exchange after the debate, Turner bragged to me about his algorithms and the system he had “developed over the past 20+ years.”
Does he have a real-world track record that he is willing to share? No, he does not.
But he doesn’t lack confidence.
In one email, Turner said, “Good luck, Alex. If this market keeps going lower, you’ll need it. Today, the market is in your favor, but the trend has not changed… not yet anyway.”
He was wrong about that, as he was about much else.
He sent that email on July 19. Yet stocks had already bottomed five weeks earlier.
He had chastised the audience for being on the wrong side of the market, while his own inverse ETFs were already going against him.
Now the market has unexpectedly rallied – as it often does – and is up 16% from the June lows.
Here the problem with market timing – I mean “trend following” – is laid bare. The market is often well into a new trend before anyone or any “system” recognizes it.
If you miss a substantial portion of the upside, do you get in now and risk getting bruised in the next downturn… or do you stay out and potentially miss even more of the upside?
No algorithm based on historical data can answer that question.
That is why market timing – or “rules-based trend trading” – is likely to be nothing more than an exercise in frustration.
If data from the past could tell you what the market will do in the future, Buffett asserts, “the richest people would be librarians.”
In short, there are two types of market timers. Those who don’t know what they’re doing. And those who don’t know they don’t know what they’re doing.
It’s not even investing in my book. It’s playing a guessing game. One with an entirely predictable result.
P.S. If you’d like to hear my FreedomFest debate with Mike Turner in its entirety, click here.