If Market Timing Were Possible We Would All Be Rich

If market timing were possible, wouldn’t we all be rich? If everybody were to be able to market time efficiently how will investors make money?

The stock market by definition is a zero-sum game. When one investor makes money, there has to be another that loses money at the other end of the trade.

The concept of market timing is simple to understand. You sell out of market highs, to buy back at market lows. It is a process where you take out the risks of investing loss, to enjoy the upside gains.

If anything, trying to time the market is nothing but a coin flip to tempt fate. You can most definitely make money from trading in and out of the market.

However, investors who believe they are able to predict the market lose more money than they realise. With every financial action, there is an opportunity cost to be aware of.

There are two types of investors. Those who know they cannot make money from market timing, and those who don’t know that they can’t.

The Logic of Timing the Market

Who does not want to minimise their investment risk from capital loss. In a perfect system, nobody would lose money and everybody would make money.

Market timing sets out just to do that. Buying low and selling high. The concept seems relatively easy, yet the majority of investors fail to do so terribly.

The strategy of market timing sets out to achieve locking in a gain when the market has reached its peak. And then buying back when the market has bottomed out.

In theory this seems like a fool-proof investment strategy. But the flaw is that nobody can pick the top of the market or the bottom of the market. If you manage to do it, lady luck has got your back.

When the worlds best investors acknowledge that they cannot time the market, why do mere investors think they can.

Market Timing or Self-Delusion

Many investors believe that they can time the market, albeit the evidence suggesting the opposite. If I were to have a superpower, I would pick the power of foresight.

However, that will be an ultimate cheat code in the stock market. Warren Buffett has previously stated that in the business world, “the rearview mirror is always clearer than the windshield”.

The stock market will react to news faster than you can think or had the chance to digest the news. It is always one step ahead of you regardless what you think you know.

Let us take the most recent stock market crash in 2020 which saw the ASX lose roughly 35% in value in 4 weeks. This was uncertain times, and many investors sold out of their positions thinking that they will buy back when things were more certain.

In less than 5 months the stock market came roaring back 50% reaching new market highs. This was when the pandemic had only begun and the world was still filled with uncertainty.

These same investors that sold out during the crash, most likely missed buying back during the recovery. Nobody could have picked the market bottom or predicted such a phenomenal recovery.

Those who tell you otherwise are only fooling themselves. This was during a period when business confidence and consumer confidence was at record lows.

Pitfalls of Trying to Time the Market

Trying to protect yourself from a stock market crash can actually do you more harm than good. In respect to the market as an aggregate, historical data has proven that there are more positive days than there are negative.

Financial data shows that 78% of the best market days actually occur during a bear market or the first 2 month of a bull market. The same bear markets that investors sell out of and the beginning of a bull market most miss out on.

You may be thinking that missing out on a few “best days” of the stock market might not make a difference. However, missing out on 10 of these best days from 1992 – 2021 would see your returns cut by half. And missing the best 30 days will reduce your returns by a staggering 80%.

Selling your shares when you think the stock market is overvalued or during a bear market might seem prudent behaviour. If anything the above data should deter you from trying to be too clever for your own sake.

Time in the market is a far better strategy than timing the market.

Key Takeaways

• There are two types of investors. Those who know they cannot make money from market timing, and those who don’t know that they can’t.
• Missing out on the few best days of the stock market, can have detrimental effects on your returns.
• Time in the market is a far better strategy than timing the market.
• Use fundamental analysis and valuations to formulate your investment decisions.

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