Stock Market Secrets: Timing is Everything

I received an email from a financial adviser once. The email went along the lines that “If you can show me that market timing has produced superior results compared to something as simplistic as buy and hold over a 10 plus year time frame I’ll be shocked and very impressed. Should you have such results you might also wish to share them with Professor Burton Malkiel from Princeton who wrote the book “A Random Walk on Wall Street”. One of his many astute points was that no-one gets market timing right consistently. But I’ll be happy to be proven wrong!” My reply went something along these lines.

It is all too convenient for finance professionals to buy into the concept that you can’t time the market but of course the industry grabs onto anything that suggests that you can’t because it absolves them from ever trying to time the market, ever having to lift a finger, ever having to monitor anything and from ever giving any hard advice on “when”.

Without the responsibility of saying "when" all the industry has to do is sell products and continue to brainwash the people who have bought their products (funds) that “it always goes up in the end”. If you can’t time the market there is nothing left to do but continuously patronise existing clients with the message that "it'll be alright in the end" and use all your spare time to sell investment products.

But with an annual return of just 5.64% and inflation of 4.7% over the last 75 years (yes it's lower now) all the stock market has given you in real terms is 1% plus dividends, less dealing costs, tax, financial planner fees, fund manager fees and the index fudge. Basically a real return that averages somewhere around “not a lot”.

Because equity returns after costs and inflation are marginal for set and forgetters, investors looking for transformation or growth, and advisers looking to add any value, have to do something else. For them, the stock market is about “which stocks” and “when” not “all stocks” and “all the time”.

This means that advisers who aren't doing this, who are relying on long term returns alone, whose customers lie in the “Matrix” relying on historic returns to repeat and repeat, are operating a huge lie which charges fees to a client for little to no value add. You may have read the press recently about large funds being revealed for charging premium fees for no activity. It is one of the worst kept secrets in the industry.

The opportunity is to do better and if we have zero interest rates, implying zero growth and zero inflation for the next decade, the buy and hold wisdom will fail more conspicuously and the need to time stocks and the market becomes more critical.

Professor Malkiel is simply feeding us what the industry wants us to hear and if you buy into the concept that you can’t time the market you will only ever produce returns in a bull market, you will lose money in a falling market and after costs you will not be matching the index in the long term.

You have to do better than that and the advice industry has to do better than that. If it can’t then every financial adviser and broker will retire dissatisfied that they marketed a lie the whole of their lives and no-one really benefitted from their services.

Timing is everything, and anyone telling you otherwise is selling you a lie, is hiding in mediocrity, is advocating laziness and is avoiding responsibility for the investment outcome.

So we’ll continue trying to time stocks and the market, which means buying and selling and timing stocks and I suggest you do the same, Value anyone, any newsletter, any broker and any analyst that spends their time in the pursuit of saying not just what, but when. Because if it turns out that zero interest rates means zero growth, the average return is going to be woeful. Someone has to watch out for that and you won’t do it with your head in the sand listening to people preaching to you that it’ll be alright in the end.

Footnote: It staggers me that the slavish Benjamin Graham and Warren Buffett disciples do all this great work finding the best stocks then throw up their hands and declare that they can’t time the market. Well if they are truly some of the brightest people in the industry why don’t they at least try? Instead, they continue to pedal anachronistic 1950’s lines like don’t buy a company unless you would be happy if they closed the market for ten years. Utter crap because if Professor Malkiel is truly right we should close the stock market altogether because after costs, with all that risk, it’s not worth investing in it. Its purpose is to provide capital to companies and fees for an industry – providing you with a reliable return is not part of the equation.