Timing the stock market

killeoin said:

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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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.

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.

The implication is that asset allocation is dead

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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.