Market Timing vs. Conventional Wisdom

We recently did a search for "Market Timing" on several of the most widely used search engines. Some of the market timing results posted are staggering:

We have one question:

If you could make 1400% every few years (or 18000%, or 900%), guaranteed, would you sell the formula for $20 or $30 or $40 a month? Not us. We would use it for five or six years, and then buy an island, complete with mansion and servants, and retire forever.

These phony numbers are a large part of what gives market timing a dubious reputation.

Market timing is NOT about huge gains. It is about capitalizing on trends and avoiding huge losses !

Such marketing scams as we listed above, and believe us they are nothing but fake numbers, play on an investor's greed. You know it can't be true.... but... just maybe...

One of the two emotions which cause the largest financial losses is "greed." And these ads play into that emotion perfectly. The other emotion is fear.

Market timing is NOT about instant gratification. It is about winning over the long haul. It is about withstanding the test of time. Profiting over the years while others go back and forth, from scam to scam, looking for the holy grail to quick riches. Or trading by emotions, news events, and the next door neighbor's secret tips.

Successful timing is about discipline. Following a strategy that will catch the major trends so that your are "in" for the advances and "out" for the declines. Most traders and investors are in for the declines and out for the advances. It is the disciplined following of a timing strategy that separates successful timers, from everyone else.

Fool’s Game?

Conventional wisdom says trying to time the stock market is a fool’s game. And if you look at market timing very narrowly, defining it as a strategy that nobody really practices, then obviously conventional wisdom must be right.

Market timing critics have said that, if timing took you out of the market during only the very best days, or the very best months, your performance would suffer enormously. They are right of course. " If " that is what market timing did.

"...Missing the worst days is exactly what market timing is all about!"

In 2001, Barrons Magazine published a graph showing the hypothetical results of investing in the Standard & Poor's 500 Index in February 1966 through late October 2001. During that period of almost 36 years, an investment of $1,000 in the index would have grown on a buy-and-hold basis to $11,710.

Then, referring to a study done by Birinyi Associates, (an investment research firm in Connecticut), the article reported that if an investor missed just the five most profitable trading days every calendar year, that $1,000 investment would have shrunk to $150.

Right again! But what an incredible, one sided, misuse of numbers.

To anybody unfamiliar with timing, that statement would be convincing evidence that market timing is truly a fool’s game .

Why would anybody even think of giving up a gain of $10,710 and replacing it with a loss of $850?

True Purpose of Market Timing

Ridiculous though those results are, they are quite damaging to those who do not understand the TRUE purpose of market timing.

Recognizing how one sided an imaginary timing system that kept investors on the sidelines during only the best five days of each year was, Mr. Birinyi took the idea one step further.

What would happen, Mr. Birinyi asked, if a timing system could be invested in all but the five worst trading days days each year?

"...Cut you losses short and let your winners run. That is the very definition of market timing."

He found that a $1,000 investment in the S&P 500 Index that missed only the five worst days each calendar year would have grown to $987,120 .

Nobody, of course, has been able to devise any system that could eliminate only the very worst days of every calendar year, nor the very best days for that matter.

But the contrast between "all-but-the-five-best-days" showing an investment that falls to $150, and "all-but-the-worst-five-days" showing the same investment rising to a whopping $987,120, is very telling.

And the next sentence is the most import one in this article.The article suggests that there are great gains to be made by "missing the worst days."

Wake up!  Missing the worst days is exactly what market timing is all about!

A market timing strategy that gets fund traders onto the sidelines during more bad days than good days inevitably reduces the risk of being in the market .

As subscribers who were with us during the bear market of 2000-2002 found out, missing the bad days not only protects capital, but in the case of our timing strategies that used short positions, it greatly magnified gains.

Don't fall for the scams. Dig in for the long haul, and you will be greatly rewarded over time.

Market timing is the following of successful trading strategies that keep you "in" during long term market advances and get you "out" during long term market declines. The occasional failed trend in-between means little. If you are in during all up trends and out during all downtrends, you will be "in" for most, if not all, of those five-best-days, and out for most, if not all, of those five-worst-days.

Cut you losses short and let your winners run. The very "definition" of market timing.