The Holy Grail of timing the market

Individual investors are generally utterly useless, says Roland Jones of www.msnbc.com. Despite their best efforts, they tend to lag the market's movements - selling low and buying high over and over again. The average investor netted only a measly 2.6% gain between 1984 and 2002, even as the S&P 500 rose at an average annualised rate of 12.2%. This means that the current trend away from traditional buy and hold investing towards "market timing", where investors work to second guess market moves in order to buy low and sell high is not for everyone.

Even for the highly skilled, it "practically requires a crystal ball", so the odds of laymen getting it right is minimal. Indeed it is, says David Rynecki in Fortune. Note that even 70% of hedge funds - for whom market timing should be a core skill - are trailing the S&P 500 so far this year. Not only is timing the market famously impossible, but the trading costs of constantly dipping in and out of the market "can eat up profits faster than a turn at the roulette table".

Perhaps, says Dan Oakley in the Investors Chronicle. But not all timing is nonsense. In fact, all investors should take it into consideration to a degree. Look at Warren Buffet: he is famous for saying that "the right time to sell a great company is never'", but that hasn't stopped him trading in and out of Gillette and Coca-Cola several times. And if you have decided you want to own a company's shares, who would argue that picking a price to buy at, then waiting for an email alert to tell you when it reaches that price, is a bad strategy? More controversial are theories that generate buy or sell signals based on trading volumes, share price patterns, director dealings, macro statistics, or pure momentum. Investors need to ask themselves the following three questions before they buy. "Are you sure the data that seems to justify a timing rule is the result of a stable and enduring trend? Even random data presents patterns. How much money are you willing to invest in buying timing advice, and how much would you need to spend to be sure the system had worked (or not)? Finally, why is someone selling you this knowledge when - if it is really valuable - they could make more by keeping it to themselves?" Note that the best investors use timing systems only after deciding on the fundamentals of an investment.

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That said, a system that works is a Holy Grail worth pursuing, says Peter Coy in Businessweek Investor. Consider this: an MIT economist has calculated that someone who invested $1,000 in the S&P 500 or Treasury Bills, and correctly selected the one that would go up the most month by month from 1926, would have earned $14trn by 2002. That's "mind boggling". .