pauliec84, I tend to agree with you. I just don't buy the idea that you can time the market deliberately to lose, and that naïve investors can do this consistently.
My feeling is that what naïve investors do is more subtle. Their attempts to time don't win or lose on the average, but they greatly increase risk without increasing return. "Manager risk" in fact. They make good and bad bets randomly, and the random effects of their betting activity pile up extra fluctuations for the same return.
But then on top of this you have some kind of gambler's-ruin-like endpoint phenomenon. In this case, not ruin, but the panic sale. Again, that can't change the average, but it can reshape
the distribution of outcomes. The interesting thing is that given that you've already
decided to up your risk level and increase your dispersion of returns by trying to time the market, panic-selling during 2008-2009 is actually a rational move. It's a kind of hedging, in fact. A very big stop-loss order. And it is protective.
So what happens overall is that by trying to time the market you widen the curve, and by "deciding" to panic-sell at some "get me out" point you skew it. So you get what you always get. You are trading a lot of small losses for a few big wins. It doesn't look that way because the losses are not small, but they are always smaller than they would have been without the strategy (because few are so gifted as to panic-sell at the exact bottom). My work colleague, of mine, for example, sold out his all-stocks 401(k) portfolio in October of 2008, well above the very bottom.
Why would people do it? It is in fact shaping the distribution curve in a lottery-like manner. By trying to time the market they get the potential
for bigger gains if they are right.
So let's say this behavior creates an distribution of outcomes with not-so-rare big losses and much rarer humongous wins. Where do the humongous wins occur? I think the answer must be, "in 2000." That is, there were probably any number of naïve investors who were lucky. They would have experienced great returns just by picking a moderate asset allocation and staying the course. But by piling in during the 1990s and luckily (because I don't believe it was
skill) bailing in 2000, they experienced glorious, stratospheric returns. Such an investor would have done so well as to motivate others to emulate him.
The familiar slogan that can be used to justify this behavior is "cut your losses and let your profits run."
Here's the big point. Even assuming the naïve investors lack any ability to predict the future and pessimize outcomes, an external observer will see the not-so-rare big losses of the naïve panicky market timer, miss
the even rarer humongous wins that counterbalance them, and say "those idiots consistently
I'm not too sure about any of this. But here's one of those garbage hand-waving sketches to show the concept, the not-very-baked idea. The blue line is the virtuous Boglehead stay-the-courser. The red and green lines are people who prefer to try to time the market because there is
an upside to be had whether by skill or by luck--in reality it's luck but they think it's skill, but as with the lottery if you don't play you don't win and there are, visibly, people winning. The red line is the naïve investor who panic-sells as a stop-loss edge, and thereby has more frequent
losses. The green line is someone with the courage of his convictions who fails less often because he rides the curve below the panicky guy's "get me out point" and often comes back, but fails more spectacularly when he does fail.
If true, it would mean that naïve investors are
usually wrong, but you don't win with a contrarian strategy. You just get the other side of the deal. They get not-so-rare big losses and much rarer humongous wins. You get not-so-rare big wins and much rarer humongous losses.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.