# Timing the stock market



## Markjbloggs (10 Mar 2006)

Conventional wisdom is that it cannot be done, but can anyone point me to studies / analyses that prove this?

thanks
M


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## DrMoriarty (10 Mar 2006)

It's a corollary of the Efficient Market Hypothesis. But do a Google search for "Timing the stock market" and you'll see loads of books and websites that claim to teach you the secrets...


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## ninsaga (10 Mar 2006)

DrMoriarty said:
			
		

> It's a corollary of the Efficient Market Hypothesis. But do a Google search for "Timing the stock market" and you'll see loads of books and websites that claim to teach you the secrets...



.....I'll take a wild guess here but I guess that most of those people have made their money from selling their books about timing the market ...as opposed to they making their money as due  to timing the market


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## Markjbloggs (10 Mar 2006)

DrMoriarty said:
			
		

> It's a corollary of the Efficient Market Hypothesis. But do a Google search for "Timing the stock market" and you'll see loads of books and websites that claim to teach you the secrets...


 
Google is full of sh**e - I was hoping for something more specific from the collective wisdom here. I am particularly looking for empirical studies, nothing too theoretical.

Thanks for your Wikipedia reference.
M


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## DrMoriarty (10 Mar 2006)

Markjbloggs said:
			
		

> Google is full of sh**e


Google just .

I meant to add a '' at the end of my last sentence, but I must have clicked 'Submit' too quickly...


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## Markjbloggs (10 Mar 2006)

DrMoriarty said:
			
		

> Google just .
> 
> I meant to add a '' at the end of my last sentence, but I must have clicked 'Submit' too quickly...


 
True, Google is only as good as the internet, but it's paid search business model tends to return more of what Ninsaga referred to above.

Below is a quote from one of the links on Efficient Markets and Market Timing - any thoughts, folks?


_Some investors, especially academics, believe it is impossible to time the market. Other investors, notably active traders, believe strongly in market timing. Thus, whether market timing is possible is really a matter of opinion. 

What we can say with certainty is that it's very difficult to be successful at market timing continuously over the long-run. For the average investor who doesn't have the time (or desire) to watch the market on a daily basis, there are good reasons to avoid market timing and focus on investing for the long-run._


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## daveirl (10 Mar 2006)

This is an excellent book to read -  - gives you an excellent feel for how flawed some timing of the markets is.


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## CCOVICH (11 Mar 2006)

Markjbloggs said:
			
		

> _Some investors, especially academics, believe it is impossible to time the market. Other investors, notably active traders, believe strongly in market timing. Thus, whether market timing is possible is really a matter of opinion.
> 
> What we can say with certainty is that it's very difficult to be successful at market timing continuously over the long-run. For the average investor who doesn't have the time (or desire) to watch the market on a daily basis, there are good reasons to avoid market timing and focus on investing for the long-run._


Active traders would have you believe that timing the market is a good startegy because this is what they attempt to do. There were some statistics in the latest issue of The Economist that I may post to support the theory that more often that not it's "a mug's game" ((c) _ClubMan_)


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## bearishbull (11 Mar 2006)

did finance in college and remember reading that empirical studies found it near impossible to time markets accurately in the long term and in short term transaction costs nearly wiped out returns.they found the best way of investing was'nt to put a lump sum into market but to invest every month or every year and this smoothes out chances of buying at excessive prices.


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## tyoung (11 Mar 2006)

This is certainly conventional wisdom less questioned than The Real Presence or Evolution. The implication is that asset allocation is dead, just put all your longterm savings/speculative capital in an index fund. This idea really got widespread acceptance in the US in the mid to late 90s. The US SP500 hasn't done much since although US smallcaps have.
 This leads me to think that as long as this is conventional wisdom, returns on index investing will be disappointing.
 Regards


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## CCOVICH (11 Mar 2006)

tyoung said:
			
		

> This leads me to think that as long as this is conventional wisdom, returns on index investing will be disappointing.



And by definition, all indices will underperform?


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## jpd (11 Mar 2006)

Given that index funds charge a small(?) annual mgt fee to cover the cost of the fund (including the provider's profits or rather the provider's shareholders' returns) then they will underperform the overall market indices but by less than the average actively managed fund. 

Does this mean the returns will be disappointing ? I suppose that depends on what you are/were expecting.


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## markowitzman (11 Mar 2006)

Hope the disappointment continues just like the last 30 years!
Over the long haul the market or slightly below is fine for me.


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## killeoin (11 Mar 2006)

bearishbull said:
			
		

> did finance in college and remember reading that empirical studies found it near impossible to time markets accurately in the long term and in short term transaction costs nearly wiped out returns.they found the best way of investing was'nt to put a lump sum into market but to invest every month or every year and this smoothes out chances of buying at excessive prices.


 
bearishbull...If you did finance in college you should have also learned about the markets tendency to overshoot on downward price movements...Hence straight away a chance for one to "time the market".

Anyway, if it is impossible to time the market then why bother even trying to value a company, P/E ratio etc...There would be no point as the company is fairly valued in the first place.


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## bearishbull (11 Mar 2006)

killeoin said:
			
		

> bearishbull...If you did finance in college you should have also learned about the markets tendency to overshoot on downward price movements...Hence straight away a chance for one to "time the market".


 
yes but they can also overshoot downwards!(dornbusch)


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## killeoin (11 Mar 2006)

Thats what I just said....


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## bearishbull (11 Mar 2006)

killeoin said:
			
		

> Thats what I just said....


 sorry misread your post.

yeah but you cant know the exact time of such overshoots untill after they happen.


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## killeoin (11 Mar 2006)

bearishbull said:
			
		

> sorry misread your post.
> 
> yeah but you cant know the exact time of such overshoots untill after they happen.


 
yeah but you could have a fairly good idea....

i.e.....9/11
Foot and Mouth
AIB after the Rusnak


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## bearishbull (11 Mar 2006)

killeoin said:
			
		

> yeah but you could have a fairly good idea....
> 
> i.e.....9/11
> Foot and Mouth
> AIB after the Rusnak


 
you could be in a dip rather than a large overshoot,having a fair idea isnt the same as timing the market in the short term. theres a massive body of evidence that you cant time the market in the short term.capital asset prices change for many many reasons as new information enters the market most of which is unpredicatable and difficult to anticipate like investor sentiment for the market as a whole.


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## killeoin (14 Mar 2006)

Sorry about the delay in replying...

just in relation to that, thats assuming that investors are all rational....


And I would personally feel that they were overshoots...another example would be Elan would it not?


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## bearishbull (14 Mar 2006)

killeoin said:
			
		

> Sorry about the delay in replying...
> 
> just in relation to that, thats assuming that investors are all rational....
> 
> ...


 
feel free to post any empirical evidence of consistant succesful short term timing of the markets .you cant know for certain that you are in an overshoot untill after this happens,unless you have insider info maybe.if short term timing of the market was so possible then many people would do it and the chance to profit would almost immediately be wiped out. people buy shares/indexes thinking they will rise and then they rise and they think they timed the market in short term when in fact it was coincidence.


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## demoivre (14 Mar 2006)

Investing and trading are two different beasts altogether. Re trading you don't need to be able to time the market to make money out of it consistantly - you need good money management and perseverance more than anything else. Every trader has losing trades - recognising and accepting these are part of the business. You can make substantial gains from the market with only a 50;50 success rate on trades, or indeed even less - it is the money value of the winning trades versus the losing ones that is crucial. The traders that lose generally all make the same mistakes - not cutting losing trades quickly, trading the wrong instrument, engaging in spread bettting ( the spread on eg FTSE futures is a half to one point with a direct access broker and you get quoted the correct market prices with instant execution !!! Have a look at the prices/spreads offered by spread bet co's and all you can do is rofl. Under capitalisation and lack of perseverance are other reasons for failure. The most recent celebrated case of failure at trading was Rusnak - he was trading the most liquid market in the world ( currencies, about $ 1.8 trillion trade globally daily) and could have closed any of his positions with the click of a button - he ran his loses hoping that they would right themselves, the number one mistake at trading imo.


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## darag (14 Mar 2006)

> The implication is that asset allocation is dead


The implication is actually the opposite.  Asset allocation, in the form of modern portfolio theory, is one of the few rational approaches to investment given a belief in the efficient markets hypothesis.   It's inventors got a Nobel prize but it's actually quite intuitive.  A simple example of it's application would be if you could find two asset classes with negative correlation (i.e. when one goes up, the other goes down and vis-versa) then by investing in both you can get the average return of the two without any of the risk associated with either even if either individually is extremely volatile.  Normally investors are faced with a trade-off between risk and reward - e.g. should I put my 10k into a deposit account with Northern Rock or spend it on shares in a particular company.  MPT, in theory, allows you to get the reward of risky asset classes without the risk.

As for the efficient market hypothesis, there are a number of forms of it.  Some markets seem to display definitely timing patterns - for example the well known January effect.  Some forms of the efficient markets hypothesis would deny the existance of the January effect, others would admit it existance but claim that it is impossible to exploit for profit while others would claim that it's just a temporary blip.  There are probably even more subtle variations.


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