I am timing the market. Why am I wrong?

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Olibri
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I am timing the market. Why am I wrong?

Post by Olibri » Fri Jan 06, 2017 12:46 pm

I'm looking for someone to explain why I am wrong. I am totally putting myself out here, so if I'm wrong, I'm wrong, but I wanted to explain my thinking to get out of my own head and find the truth. Please don't simply quote the million articles that explain how/why market timing is wrong. I need to understand why I am wrong in this particular case. Anyway, it's a bit of a story, so I hope that you bear with me:

I'm in my mid-40s and have been an avid saver for many years. From a savings perspective I have done very well and have quite the nest egg already. Since the beginning, as soon as I got out of college debt, I maximized my 401k. I've had investments go well and investments go poorly. Generally I have invested my money blindly and randomly into whatever mutual fund is available in the plan and in my taxable accounts whatever stock I think is good or fund. Again, it's been a pretty uneducated journey. During the last recession I just left everything in the market and let it ride. My returns have not been impressive, but as above, I've performed OK. Then a little over a year ago, I noticed my accumulation and started to come to the realization that I am approaching a point where the yields from my net assets would start approaching my work salary. So, I decided to dig in and start learning.

In Q3 2015 I subscribed to the WSJ and then Barrons to start learning. In addition I started lurking and sometimes contributing in online forums. What I have learned is extremely disturbing and started to make me anxious. Soon, instead of seeing the stock market as a magical beast that sometimes gives money and sometimes takes it away, I formulated a belief that day to day movements are actually irrelevant and semi-random, but that the underlying value of any stock (or bond) is relative to the health of the company. Duh, right? From there I started looking at PE ratios and understanding that over a long time period, different classes of stocks have an average PE that they oscillate around. Overall the market also has an average PE ratio which, according to everything I see is above this average. Now, how far above this average is part of the question. I have decided to use the trailing PE ratio because from my perspective the forward PEs that I see published are "liars numbers" created to try to game the market.

Last April, deciding that the market was in a significantly overvalued state I decided to go from nearly 100% invested to nearly 0% invested. Every day since, except for the 2 days after the brexit vote, I have questioned whether I have made the wrong decision or not. I have made some targeted purchases since April for sectors that I think are a good value (such as banking), but I am still in roughly 85% cash. My basic theory is that when values return to more reasonable valuations, then I will jump back in. I am timing the market.

Am I wrong? This seems wrong, but if I am wrong, I don't know why. I argued that stocks are overvalued, but since making this decision I have missed out on a lot of gains. I can't help but feel that the day that I cave in and buy will be the market top. Please help.
Last edited by Olibri on Fri Jan 06, 2017 4:31 pm, edited 1 time in total.

boglephreak
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Re: I am timing the market. Why am I wrong?

Post by boglephreak » Fri Jan 06, 2017 3:37 pm

how are you going to determine when to put your money back in to the market?

also, you say that you started learning in Q3 2016. what makes you think you are better at timing the market than all of the people who have failed to do so for decades?

livesoft
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Re: I am timing the market. Why am I wrong?

Post by livesoft » Fri Jan 06, 2017 3:44 pm

It is OK to time the market if you make more money doing it than a simple buy-and-hold-and-rebalance strategy.

So it is simple to see if you are wrong: Just look to see if your portfolio had a higher return than a buy-and-hold-and-rebalance portfolio. From what we've seen published a typical portfolio made between 7% and 11% for 2016. How did your portfolio perform?
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CoAndy
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Re: I am timing the market. Why am I wrong?

Post by CoAndy » Fri Jan 06, 2017 3:45 pm

Since it is not possible to know the market top, it is best to just develop a plan, figure out your AA, and then just invest. Twice in the past I thought I knew better and twice in the past, I have been burned.
Since I learned the hard way, my investments have been enjoying a great run. That being said, emotions do play a part. You may want to DCA over the next 4-6 months. You may also want to pick a conservative asset allocation as your seem to be approaching your number. Nothing wrong with that at all.

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Re: I am timing the market. Why am I wrong?

Post by Ice-9 » Fri Jan 06, 2017 3:46 pm

Olibri wrote: I can't help but feel that the day that I cave in and buy will be the market top. Please help.


A common response to this psychological dilemma, as you may have read already, is to stagger your money back in the market at a rate that makes you less uncomfortable about this. This year could be just as big a disappointment to be out of the market as 2016, or it could turn out to be a good year to have avoided the market.

Perhaps put a certain amount back in equities every three months until you're entirely back in to your desired allocation. If June 2017 turns out to be the next crash, at least you didn't just put EVERYTHING in there the day before. If 2017 turns out to be better than 2016 for stocks, at least you weren't entirely out.

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Toons
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Re: I am timing the market. Why am I wrong?

Post by Toons » Fri Jan 06, 2017 3:51 pm

What is the point?
Just stay invested(according to your asset allocation) and grow your capital,
along with the Economy.
Don't have to think about buying and selling. :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Re: I am timing the market. Why am I wrong?

Post by surfstar » Fri Jan 06, 2017 3:53 pm

Didn't a normal index portfolio return almost 10%, +/- based on AA, last year?

You're wrong. We're not smart enough to think we can beat the market, but smart enough to know that. That's the sweet spot ;)
Last edited by surfstar on Fri Jan 06, 2017 3:54 pm, edited 1 time in total.

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buccimane
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Re: I am timing the market. Why am I wrong?

Post by buccimane » Fri Jan 06, 2017 3:53 pm

Haven't you answered your own question?

Olibri wrote:but since making this decision I have missed out on a lot of gains.


Olibri wrote:I can't help but feel that the day that I cave in and buy will be the market top.
A man convinced against his will is of the same opinion still

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Re: I am timing the market. Why am I wrong?

Post by Tamalak » Fri Jan 06, 2017 3:54 pm

OP, the part where you're wrong is that expected returns are LOWER when P/E ratios are high, but they're still above 0%. By pulling out, you've lowered expected returns to 0%.

You were, ironically, a better investor and closer to the truth when you thought of the market as a magical, whimsical beast.

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Pajamas
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Re: I am timing the market. Why am I wrong?

Post by Pajamas » Fri Jan 06, 2017 3:56 pm

Olibri wrote:I argued that stocks are overvalued, but since making this decision I have missed out on a lot of gains. I can't help but feel that the day that I cave in and buy will be the market top.


You yourself just made the primary argument against trying to time the market.

If you could time the market, there would be nothing wrong with doing so. However, you can't.

One alternative is to accept the market return and invest in low-expense index funds.

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Re: I am timing the market. Why am I wrong?

Post by qwertyjazz » Fri Jan 06, 2017 3:58 pm

You will never know for sure if any strategy you pick was wrong. Let us say you have a system that in a theoretical world is right only 1/3 times. The individual time you look might still be right even though if you play long enough you will lose. Some people make money in a casino playing roulette. It is really hard to tell if your strategy is like that. I just imagine the millions of people competing against me buying and selling stocks. The billions of dollars spent to get an upper hand in doing it. I do not think I am better than they are. If you do, then you might be correct. I would not bet on it though.
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goingup
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Re: I am timing the market. Why am I wrong?

Post by goingup » Fri Jan 06, 2017 4:01 pm

Perhaps the market is overvalued. There's not much to be done except set up a solid Asset Allocation and soldier on. Invest we must, as Jack Bogle has said.

Continue your education by reading books by Jack Bogle, William Bernstein, Rick Ferri and others. Here's the reading list from the forum's Wiki: https://www.bogleheads.org/RecommendedReading.php

delamer
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Re: I am timing the market. Why am I wrong?

Post by delamer » Fri Jan 06, 2017 4:06 pm

My perspective is that timing the market is a bad idea because that means you are treating stocks as a short-term investment, when in fact you should only invest in them for the long-term.

Also, the point should be maximizing returns for the level of risk you are willing to except. Is that what your strategy is doing?

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Taylor Larimore
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Post by Taylor Larimore » Fri Jan 06, 2017 4:13 pm

Olibri:

Welcome to the Bogleheads Forum!

In Q3 2016 I subscribed to the WSJ and then Barrons to start learning.


Please do your learning elsewhere. These publications are primarily designed to increase circulation with attention-grabbing headlines and to obtaining advertisements so the industry can make more money (from you).

A good place to start learning is HERE.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: I am timing the market. Why am I wrong?

Post by Saphomd » Fri Jan 06, 2017 4:22 pm

If you time the market correctly, its only luck. Thats all I have to say.

monsterid
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Re: I am timing the market. Why am I wrong?

Post by monsterid » Fri Jan 06, 2017 4:29 pm

Change the setting and see if you agree with this:

- Assume instead of the stock market you are sitting at a Blackjack table
- Assume instead of 49.5/50.5 odds at that table in favor of the house the overall advantage to a player is 52/48 implying that if you just kept playing over the long term the law of averages would mean you win (similar to long term market returns of c.7%)
- Assume that you could "count cards" (time the market) and if you did it perfectly you'd have 55/45 but if you screwed it up you'd lose 45/55.

You are trying to count cards at the Blackjack table. If done perfectly do you make more money? Ofcourse. But very few people can consistently and over the long term do it perfectly. Are you really that good? Or are you ok taking a 7% return on the law of averages (virtually no risk when multiple out over a long time period).

That's the bottom line here. How good do you think you are?

I have degrees in finance, I was a former investment banker, all my friends work on trading desks, hedge funds, private equity funds, I still don't think I'm good enough to count the cards..
Last edited by monsterid on Fri Jan 06, 2017 4:31 pm, edited 1 time in total.

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Flymore
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Re: I am timing the market. Why am I wrong?

Post by Flymore » Fri Jan 06, 2017 4:30 pm

I'm timing the market when I'm chasing the market, rather than being in front of the market and catching it as it goes by.
This is what you need to do, get in front of the market not chase it!
One gets in front of the market by asset allocation, rebalancing and lots of painful waiting and not listening to the news.
This is hard to do but you can learn to do it.

sharpjm
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Re: I am timing the market. Why am I wrong?

Post by sharpjm » Fri Jan 06, 2017 4:34 pm

A better question is, why are you right?

It sounds like you read some persuasive articles and convinced yourself that you are right.

Gropes & Ray
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Re: I am timing the market. Why am I wrong?

Post by Gropes & Ray » Fri Jan 06, 2017 4:36 pm

I was hoping this post was a troll daring us to defend passive investing. To my disappointment, it was a rather humble post by a person who is uncertain. So, stop reading financial media. If you must back test a theory, then back test the performance of the S&P 500 index since 1976. It will give some warm and fuzzies.

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DaftInvestor
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Re: I am timing the market. Why am I wrong?

Post by DaftInvestor » Fri Jan 06, 2017 4:37 pm

There are many books and articles written on why you are wrong but since you stated that you don't want those references I won't provide them. (Instead you are believing in the predictions you are reading in the WSJ and Barons - this will be very dangerous for you!). You talk about Trailing PEs, versus Forward PEs - yes there are lots of numbers that you can look at that will make you THINK you can predict what will come - you may have to find out the hard way (like many of the rest of us) that its a fool's game. Whatever numbers you are looking at you must realize that computer algorithms and analysts have FAR more data they are shifting through and they also fail to predict the winners and timings correctly.

You say if you are wrong you don't know why and then you follow up with a statement that you've mostly been out of the market since last April and have missed all the market gains since then. So - do you think your market timing is working thus far?
What did you make in the last 12 months versus what the market returned? This alone should tell you why you are wrong.

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Re: I am timing the market. Why am I wrong?

Post by saltycaper » Fri Jan 06, 2017 4:39 pm

Olibri wrote:
From there I started looking at PE ratios and understanding that over a long time period, different classes of stocks have an average PE that they oscillate around. Overall the market also has an average PE ratio which, according to everything I see is above this average. Now, how far above this average is part of the question. I have decided to use the trailing PE ratio because from my perspective the forward PEs that I see published are "liars numbers" created to try to game the market.


Even though there has been some merit to using PE ratios to forecast future returns (CAPE 10), it's still not that great of a predictor, and it doesn't suggest you should make the types of moves you made. One easy way to see why a higher PE ratio doesn't mean the market (or a single stock) will decline is that it is possible for earnings to go up and for the price to remain relatively flat, thus lowering the PE ratio. In other words, just because the ratio is high doesn't mean the price will ever be lower than it is today.

Also, you use the term "overvalued". That suggests you calculated what the value ought to be and noted your result was lower than what the market thinks it should be. It pays to be humble here. Perhaps you didn't actually calculate anything, and you just looked at historic PE ratios. In that case, you didn't calculate that the market was overvalued, but rather, you simply noted it was valued more highly than it has been in the past. There may be reasons for this, from accounting-related changes to interest rates, so you shouldn't assume highly valued equals overvalued.
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Re: I am timing the market. Why am I wrong?

Post by investnoob » Fri Jan 06, 2017 4:40 pm

You seem to have an investment plan that tells you not to invest. That seems wrong to me. Unless you actually don't want to invest.

minimalistmarc
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Re: I am timing the market. Why am I wrong?

Post by minimalistmarc » Fri Jan 06, 2017 4:45 pm

Don't think, just invest. Thinking will only harm your returns. If you don't think equities will make you money over 10/20/30 years then don't bother investing at all.

This board is chock full of extremely intelligent people, who have learned that they cannot beat the market and it is pointless to try.

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Re: I am timing the market. Why am I wrong?

Post by Theoretical » Fri Jan 06, 2017 4:46 pm

Last April, deciding that the market was in a significantly overvalued state I decided to go from nearly 100% invested to nearly 0% invested.


This is not investing. This is gambling on the roulette wheel where you are putting everything on Red 53.

I see lots of these threads and marvel at the ping-ponging between all stocks (usually just US) and cash. It's trying to get the returns of Equities without the risks, and you end up getting neither. Tweak the allocation a bit if you must (sin a little - say go from 60/40 to 50/50 or 70/30 if you absolutely must).

Also, stop solely relying on P/E. Look at leas manupulable figures like Gross Sales, Cash Flows and Shareholder Yield if you're going to be making decisions like these.

Echoing Taylor, Barron's and WSJ are not the article's to read for an education that will make you money.

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MEA
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Re: I am timing the market. Why am I wrong?

Post by MEA » Fri Jan 06, 2017 4:48 pm

Olibri wrote:I'm looking for someone to explain why I am wrong.


Back in the 90s I read a article in Morningstar magazine. It said that the stock market goes up 70% of the time and it goes down 30% of the time. Anytime you take your money out you have a 70% chance it's going up and a 30% chance it's going down.

I don't know if it actually does go up 70% of the time and down 30% of the time, but I do know that 10 years after I read the article it was up seven of those years and it was down three of those years. That article has served me very well over the years. It helps me to stay the course because it gives me a statistical reason to. It has worked for me. I hope it helps you.
It is speculators speculating on other speculators speculations. It is a tale told by an idiot, full of sound and fury signifying nothing.

Olibri
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Re: I am timing the market. Why am I wrong?

Post by Olibri » Fri Jan 06, 2017 4:49 pm

A few notes based on the responses:

I meant Q3 2015 was when I started my subscriptions, not 2016. That was a mistake. WRT the actual content of those publications, it took a little bit but I found a lot of self promotion and blatant dishonesty in some of the articles (not just in the editorial sections). I think that if you are aware of these things and do your own fact checking that they are quite valuable as far as the quality of their content. That said, I don't entirely rely on these as my news sources.

WRT when I would get back in: The "strategy" is to only pay for undervalued assets and always sell overvalued ones. So, in this specific case my evaluation of "the market" as a single asset was that it was/is significantly overvalued, hence sell. Since then I have been looking for those that I deem as reasonable valuations based on both current earnings and expectations for future earnings and have made some buys. This strategy does not assume any expected returns as far as the price of the asset is concerned, just that the underlying asset grows in value. So, the timing is actually primarily looking at average PE ratios over time and only buying those that I value as a good deal. I am aware that PE ratios get pretty out of whack during a recession, so the finesse part would be trying to evaluate which assets are most likely to recover and continue to increase earnings once the bear market ends. One flaw with this approach is that my ability to predict future earnings growth is quite limited. Further, I am uncomfortable going in further because with so many overvalued assets, even if you find a good deal the good assets can get sucked down with the bad ones (as we saw in 2000 and 2008).

Hopefully this helps clarify my perspective. Thank you for your responses. I think that what I am looking for is either an argument that my evaluation of valuations is incorrect or that using valuation as a metric for buying investment assets is incorrect. If either of these were true, then my strategy would have a pretty big hole in it.

Theoretical
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Re: I am timing the market. Why am I wrong?

Post by Theoretical » Fri Jan 06, 2017 4:52 pm

Question:

Were you invested in Emerging Markets starting in November of 2015 or earlier? If not, why not?
Last edited by Theoretical on Fri Jan 06, 2017 4:55 pm, edited 1 time in total.

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Re: I am timing the market. Why am I wrong?

Post by Longdog » Fri Jan 06, 2017 4:53 pm

If you believe that the market goes up in the long term, and that you will be alive long enough to benefit from the long term upward trend, then you should be in the market at some level. If you don't believe the long term trend is upward, then you should have no money in the market. Even in the former case, you should have enough money out of the market to cover short-term needs. In both cases, you should be confident enough in your assessment that you shouldn't question your decisions. The fact that you are questioning your decisions makes me think you are not that confident in your assessment.
Steve

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Re: I am timing the market. Why am I wrong?

Post by hoops777 » Fri Jan 06, 2017 4:57 pm

Most here would say put it all in on Monday.With the Dow at 20000 and all of the uncertainty with a new President,combined with a long bull market,I say good luck.
Unless you are a true expert,which you are not,I would forego trying to analyze sectors or companies because you will never know half as much as you think you know.Funny thing about investing and analysis is that you can be 100 pct right until something happens that makes you wrong.
K.I.S.S........so easy to say so difficult to do.

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DaftInvestor
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Re: I am timing the market. Why am I wrong?

Post by DaftInvestor » Fri Jan 06, 2017 5:02 pm

Olibri wrote: I think that what I am looking for is either an argument that my evaluation of valuations is incorrect or that using valuation as a metric for buying investment assets is incorrect. If either of these were true, then my strategy would have a pretty big hole in it.


Are you using you evaluation of valuations to pick individual stocks/sectors/or-the-entire-market or some combination?

In any case - these two strategies - while proven not to work - aren't even your primary problem in my opinion. Your primary problem isn't that you are using a particular valuation metric to decide when to buy - but also using it to decide when to sell (in entirety). Over the long term you are better off being in the market than out of it as you will miss many market gains over the years with this methodology.

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Re: I am timing the market. Why am I wrong?

Post by Kenkat » Fri Jan 06, 2017 5:07 pm

Evidence has shown that it is very difficult to beat the market. But very difficult does not mean impossible. So - rather than convince you that you are wrong, I will relay a short story about a discussion I had with a couple of co-workers. For some reason. we began talking about investing. None of us knew of the others' true investment background or experience, so in those cases, I tend to start off listening a lot and saying little - mostly questions. The other two parties quickly agreed that you have got to move in and out of funds to make any money. When I dug a little more into how exactly they do that, I got the typical voodoo and black magic BS of people, who in my experience, bluntly, mostly don't know what the hell they are doing.

Of course, I couldn't tell them that and they were absolutely convinced they had it all figured out, so I just asked them this: do you track your performance against a benchmark? Puzzled stares. You know, like if you are buying stocks, do you track against something like an S&P 500 fund, or a Total Stock Market Index or a Small Cap Index? I then said that evidence, huge evidence, indicates that you cannot time the market like this long term and they should really track themselves to determine if all this work they are doing is helping them or hurting them. I told them I have been tracking my returns since 1999 - and i don't even time the market, I just slant a little to small and value.

So, I would tell you to do the same thing. What are your 1 year, 3 year, 5 year, etc. returns against a benchmark you picked in advance? This will tell you whether you personally can time the market. I am pretty sure I know what the answer will be, but maybe I am wrong.

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Re: I am timing the market. Why am I wrong?

Post by Saphomd » Fri Jan 06, 2017 5:11 pm

From the " Bogleheads Guide to investing":

" Market timing is an obsession in the world of investing."

" Its futile to pick winning funds based on past returns, but that certainly doesn't stop investors from trying"

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Re: I am timing the market. Why am I wrong?

Post by NotWhoYouThink » Fri Jan 06, 2017 5:15 pm

You may be right. The stock market might start a slide Monday morning, and drop 20% by the end of the year. Or it could go the other way. No one on this board knows, and we don't think you do either.

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Re: I am timing the market. Why am I wrong?

Post by KyleAAA » Fri Jan 06, 2017 5:16 pm

Nobody can predict the market. Even if you were right that the market is overvalued, there's no guarantee the market will behave accordingly. I don't know what the market will do this year or the next 10, which is why I don't try to time it. I think the "why am I wrong?" question is fundamentally unanswerable. The real question is, what makes you so sure you're right?

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Re: I am timing the market. Why am I wrong?

Post by pkcrafter » Fri Jan 06, 2017 5:22 pm

Welcome, Olibri, heck of a first post! And you are market timing.
Olibri wrote:I'm looking for someone to explain why I am wrong. I am totally putting myself out here, so if I'm wrong, I'm wrong, but I wanted to explain my thinking to get out of my own head and find the truth. Please don't simply quote the million articles that explain how/why market timing is wrong. I need to understand why I am wrong in this particular case.

My first response, and one that's obvious is, you aren't good at it. :happy But don't let that get you down. Mr. Bogle has said:
"I do not know of anybody who has done market timing successfully. I don't even know anybody who knows anybody who has done it successfully and consistently.


Anyway, it's a bit of a story, so I hope that you bear with me:

I'm in my mid-40s and have been an avid saver for many years. From a savings perspective I have done very well and have quite the nest egg already. Since the beginning, as soon as I got out of college debt, I maximized my 401k. I've had investments go well and investments go poorly.

Yes, normal.

Generally I have invested my money blindly and randomly into whatever mutual fund is available in the plan and in my taxable accounts whatever stock I think is good or fund.

A bad strategy
.

Again, it's been a pretty uneducated journey. During the last recession I just left everything in the market and let it ride. My returns have not been impressive, but as above, I've performed OK. Then a little over a year ago, I noticed my accumulation and started to come to the realization that I am approaching a point where the yields from my net assets would start approaching my work salary. So, I decided to dig in and start learning.

In Q3 2016 I subscribed to the WSJ and then Barrons to start learning.

A bad strategy.

In addition I started lurking and sometimes contributing in online forums. What I have learned is extremely disturbing and started to make me anxious. Soon, instead of seeing the stock market as a magical beast that sometimes gives money and sometimes takes it away, I formulated a belief that day to day movements are actually irrelevant and semi-random, but that the underlying value of any stock (or bond) is relative to the health of the company. Duh, right? From there I started looking at PE ratios and understanding that over a long time period, different classes of stocks have an average PE that they oscillate around. Overall the market also has an average PE ratio which, according to everything I see is above this average.

Your education is correct. Everyone knows the PE and PE10 ratios are high.

Now, how far above this average is part of the question. I have decided to use the trailing PE ratio because from my perspective the forward PEs that I see published are "liars numbers" created to try to game the market.

Fine, but past performance does not accurately forecast future performance, as you've discovered. I would say there will be a correction at the least, but when and how can't be determined.

Last April, deciding that the market was in a significantly overvalued state I decided to go from nearly 100% invested to nearly 0% invested. Every day since, except for the 2 days after the brexit vote, I have questioned whether I have made the wrong decision or not.

As well as you should
.

I have made some targeted purchases since April for sectors that I think are a good value (such as banking), but I am still in roughly 85% cash. My basic theory is that when values return to more reasonable valuations, then I will jump back in. I am timing the market.

Yes, you are definitely timing the market. Market was up 16% in 2016 and you've missed most of it. Now you are faced with a situation where the market is even more overvalued, so I'm sure you have misgivings about getting back in.

Am I wrong? This seems wrong, but if I am wrong, I don't know why. I argued that stocks are overvalued, but since making this decision I have missed out on a lot of gains. I can't help but feel that the day that I cave in and buy will be the market top. Please help.

Some of what you said suggested when you were in the market your allocation to equities was too high and above your emotional risk tolerance. What was your AA? Another flag is you don't fully understand volatility. It happens all the time and is of no consequence unless you are approaching the time when you will need the money. Your best option now is to probably dollar cost average back into the market over some predetermined time

What to do now? Well, if you are still convinced that market timing is good, then I'm sure you have a plan. Or, you could admit you really messed up and will continue to do so if you stick with timing
.

In the end, I don't think you need someone to tell you you were wrong. You now need to learn common sense investing.

Paul
.


When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: I am timing the market. Why am I wrong?

Post by Crow Hunter » Fri Jan 06, 2017 5:24 pm

Olibri wrote:A few notes based on the responses:

I meant Q3 2015 was when I started my subscriptions, not 2016. That was a mistake. WRT the actual content of those publications, it took a little bit but I found a lot of self promotion and blatant dishonesty in some of the articles (not just in the editorial sections). I think that if you are aware of these things and do your own fact checking that they are quite valuable as far as the quality of their content. That said, I don't entirely rely on these as my news sources.

WRT when I would get back in: The "strategy" is to only pay for undervalued assets and always sell overvalued ones. So, in this specific case my evaluation of "the market" as a single asset was that it was/is significantly overvalued, hence sell. Since then I have been looking for those that I deem as reasonable valuations based on both current earnings and expectations for future earnings and have made some buys. This strategy does not assume any expected returns as far as the price of the asset is concerned, just that the underlying asset grows in value. So, the timing is actually primarily looking at average PE ratios over time and only buying those that I value as a good deal. I am aware that PE ratios get pretty out of whack during a recession, so the finesse part would be trying to evaluate which assets are most likely to recover and continue to increase earnings once the bear market ends. One flaw with this approach is that my ability to predict future earnings growth is quite limited. Further, I am uncomfortable going in further because with so many overvalued assets, even if you find a good deal the good assets can get sucked down with the bad ones (as we saw in 2000 and 2008).

Hopefully this helps clarify my perspective. Thank you for your responses. I think that what I am looking for is either an argument that my evaluation of valuations is incorrect or that using valuation as a metric for buying investment assets is incorrect. If either of these were true, then my strategy would have a pretty big hole in it.


This is not intended to be insulting at all, so please don't take it that way.

What do you do for a living? (You don't have to answer, just think about it)

What tools/insight/voodoo/etc do you have that people who do this for a living that actually drive the market (market makers) that spend millions of dollars a year on quantitative analysts and super computers don't already have or know?

Why do you believe that you will front run them or even keep up with them?

While you are doing your analysis, also look at what you would have if you had just chosen a good asset allocation with a 70/30 stock/bond split with reasonable rebalancing bands and focusing on total return not just asset price appreciation.

If you reflect on this and still feel that you do and can know something that the experts don't, continue to time the market and don't worry about it.

If you get the same answer that I did many years ago, use the tools here in the wiki and construct a nice solid IPS with a reasonable Asset Allocation and focus on enjoying your life.

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Re: I am timing the market. Why am I wrong?

Post by Christine_NM » Fri Jan 06, 2017 5:27 pm

I do not see any mention yet of asset allocation (OK, I see Crow Hunter just above). The market is not a swimming pool that you jump into and then climb out of. If you keep a mix of stocks, bonds, and cash reserves then you will not be so terrified of being wrong and worried about what is right.

Approaching middle age is actually a reasonable time to question what you have been doing. You may have missed out a little bit in 2016, but if it makes you reevaluate your methods now then maybe it will save future losses.

You can't sustainably outthink the market. Sometimes PE seems to work (more likely it's coincidence), but a lot of the time it does not, and speculation wins. Get an asset allocation and stick to it. See the forum wiki.
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Re: I am timing the market. Why am I wrong?

Post by pkcrafter » Fri Jan 06, 2017 5:31 pm

dup - dele...
Last edited by pkcrafter on Sat Jan 07, 2017 12:02 am, edited 1 time in total.
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Re: I am timing the market. Why am I wrong?

Post by letsgobobby » Fri Jan 06, 2017 5:37 pm

Olibri wrote:A few notes based on the responses:

I meant Q3 2015 was when I started my subscriptions, not 2016. That was a mistake. WRT the actual content of those publications, it took a little bit but I found a lot of self promotion and blatant dishonesty in some of the articles (not just in the editorial sections). I think that if you are aware of these things and do your own fact checking that they are quite valuable as far as the quality of their content. That said, I don't entirely rely on these as my news sources.

WRT when I would get back in: The "strategy" is to only pay for undervalued assets and always sell overvalued ones. So, in this specific case my evaluation of "the market" as a single asset was that it was/is significantly overvalued, hence sell. Since then I have been looking for those that I deem as reasonable valuations based on both current earnings and expectations for future earnings and have made some buys. This strategy does not assume any expected returns as far as the price of the asset is concerned, just that the underlying asset grows in value. So, the timing is actually primarily looking at average PE ratios over time and only buying those that I value as a good deal. I am aware that PE ratios get pretty out of whack during a recession, so the finesse part would be trying to evaluate which assets are most likely to recover and continue to increase earnings once the bear market ends. One flaw with this approach is that my ability to predict future earnings growth is quite limited. Further, I am uncomfortable going in further because with so many overvalued assets, even if you find a good deal the good assets can get sucked down with the bad ones (as we saw in 2000 and 2008).

Hopefully this helps clarify my perspective. Thank you for your responses. I think that what I am looking for is either an argument that my evaluation of valuations is incorrect or that using valuation as a metric for buying investment assets is incorrect. If either of these were true, then my strategy would have a pretty big hole in it.

I also believe valuations matter, but they are not predictive enough to market time. They establish some bounds of likely/probable returns; nothing more.

I agree PE10 is high, but my response to that is NOT to lower my stock exposure, but rather to lower my expectations regarding investment returns.

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Re: I am timing the market. Why am I wrong?

Post by boglephreak » Fri Jan 06, 2017 5:52 pm

Olibri wrote:A few notes based on the responses:

I meant Q3 2015 was when I started my subscriptions, not 2016. That was a mistake. WRT the actual content of those publications, it took a little bit but I found a lot of self promotion and blatant dishonesty in some of the articles (not just in the editorial sections). I think that if you are aware of these things and do your own fact checking that they are quite valuable as far as the quality of their content. That said, I don't entirely rely on these as my news sources.

WRT when I would get back in: The "strategy" is to only pay for undervalued assets and always sell overvalued ones. So, in this specific case my evaluation of "the market" as a single asset was that it was/is significantly overvalued, hence sell. Since then I have been looking for those that I deem as reasonable valuations based on both current earnings and expectations for future earnings and have made some buys. This strategy does not assume any expected returns as far as the price of the asset is concerned, just that the underlying asset grows in value. So, the timing is actually primarily looking at average PE ratios over time and only buying those that I value as a good deal. I am aware that PE ratios get pretty out of whack during a recession, so the finesse part would be trying to evaluate which assets are most likely to recover and continue to increase earnings once the bear market ends. One flaw with this approach is that my ability to predict future earnings growth is quite limited. Further, I am uncomfortable going in further because with so many overvalued assets, even if you find a good deal the good assets can get sucked down with the bad ones (as we saw in 2000 and 2008).

Hopefully this helps clarify my perspective. Thank you for your responses. I think that what I am looking for is either an argument that my evaluation of valuations is incorrect or that using valuation as a metric for buying investment assets is incorrect. If either of these were true, then my strategy would have a pretty big hole in it.

Q3 2015 to April 2016 is not a sufficient amount of time in my eyes to learn how to time the market, but whatever.

I dont understand the paragraph on when to get back in. you say you got out of the "market" because it was overvalued, but then you talk about buying "those" that are a reasonable valuation. i assume "those" does not refer to the "market" anymore or you would be fully invested. are you talking about sectors of the market? individual stocks?

nevertheless, i still havent seen your reasoning for why you (after less than a year of educating yourself) believe you can do something based on publicly available information that everyone else is unable to do. why do you feel you are special? if it was as easy as you think it is, do you really think that no one would be doing it?

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Re: I am timing the market. Why am I wrong?

Post by saltycaper » Fri Jan 06, 2017 5:53 pm

Olibri wrote:
I think that what I am looking for is either an argument that my evaluation of valuations is incorrect or that using valuation as a metric for buying investment assets is incorrect. If either of these were true, then my strategy would have a pretty big hole in it.


What evidence do you have that TTM PE ratios (or whatever trailing earnings you are using) are predictive of future short-term price movements?
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What experts say about market timing.

Post by Taylor Larimore » Fri Jan 06, 2017 5:58 pm

Olibri:

One of the best ways to learn about successful investing is to listen to those who know more than you do:
Advisor Perspectives (8-8-2016): "The question is whether any of these (57) tactical allocation mutual funds have shown any ability to outperform a simple, passively managed 60/40 portfolio. The answer, at least for the last five years, is a resounding “no.”

Alliance Bernstein Research: "In 2005 we interviewed more than 500 financial advisors. 83% of the advisors we polled felt that if investors had stuck to their original asset allocation plan prior to 2000, they could have cut their losses by more than half over the following few years."

Frank Armstrong, author and adviser: "Endless tinkering is unlikely to improve performance, and chasing last period's stellar achiever is a losing strategy."

David Babson, co-author of Investing for a Successful Future: "It must be apparent to intelligent investors--if anyone possessed the ability to do so (market time) he would become a billionaire quickly."

Barron's Guide to Making Investment Decisions: "If we haven't said it enough, we'll say it again: Market timing is dangerous."

Bernard Baruch, famed investor: "Only liars manage to always be "out" during bad times and "in' during good times."

Peter Bernstein, author of 10 finance books: "You have to keep reminding yourself. We don't know what's going to happen with anything, ever."

Wm. Bernstein, author and adviser: "There are two kinds of investors, be they large or small: Those who don't know where the market is headed, and those who don't know that they don't know."

Jack Bogle: "After nearly 50 years in this business, I do not know of anybody who has done market timing successfully and consistently. I don't even know anybody who knows anybody who has done it successfully and consistently."

I started the Boglehead Contest in January 2001. Of 99 Diehard guesses that year, only 11 even guessed the direction of the stock market. Boglehead forecasts were worse in 2008. Only 2 out of 284 Bogleheads guessed how low the S&P 500 Index would plunge.

Bogleheads' Guide to Investing: "No one can predict what the stock market will do or which mutual fund will outperform in the future. This is why we diversify -- so that whatever happens we will not have all our money in losing investments."

Jack Brennan, former Vanguard CEO and author of Straight Talk on Investing: "If you're determined to succeed at investing, make it your first priority to become a buy-and-hold investor."

Warren Buffet: “The only value of stock forecasters is to make fortune-tellers look good."

Ben Carlson CPA, author of A Wealth of Common Sense: "Not only is market timing hard, but you incur fees, taxes and market impact costs, as well."

CDA/Wiesenberger: "Market timing is an ineffective strategy for mutual fund investors."

Andrew Clarke, financial adviser: "A successful investor has a good knowledge base, a well-defined investment plan, and nerves of steel to stick with it."

Jonathan Clements, Wall Street Journal columnist: "Take my word for it. Buy-and-hold is still your best long-run strategy."

Consumer Reports: "Dalbar research has found that both stock and bond investors tend to overreact to events, moving money in and out of mutual funds with breathtakingly bad timing."

Dalbar research (2015) "Mutual fund investors who hold on to their investments have been more successful than those who try to time the market."

Dick Davis, publisher of Dick Davis Digest: "No one can time the market on a consistent basis."

Pat Dorsey, former Morningstar Director of Fund Analysis: "Market-timing is bunk."

David Dreman, author of Contrarian Investment Strategies: "The performance of 185 tactical asset allocation mutual funds was compared with buy-and-hold strategies and equity mutual funds over the years 1985-97. Over this period the S&P 500 Index increased 734%, average equity funds increased 598%, and tactical asset allocation funds increased 384%."

Charles Ellis, author of The Loser's Game: "Market timing is a wicked idea. Don't try it-ever."

Javier Estrada Research: "The odds against successful market timing are just staggering."

Paul Farrell, CBS MarketWatch: "Forget market timing in any form."

Rick Ferri, adviser and co-author of seven books including The Bogleheads' Guide to Retirement Planning: "The best practice for investors is to design a long-term globally diversified asset allocation plan based on present and future financial needs. Then follow that plan religiously, through all markets good and bad."

Forbes: "Benjamin Graham spent much of his career trying to devise a good formula for when to get into--and out of--the stock market. All formulas, he concluded, failed."

Fortune: "Let's say it clearly: No one knows where the market is going-experts or novices, soothsayers or astrologers. That's the simple truth."

Norman Fosback, author, researcher: "Don't sell out of fear or buy out of greed. Just keep making investments, and let the market take its course over the long-term."

John Kenneth Galbraith, economist: "The only function of economic forecasting is to make astrology look respectful."

Elaine Garzarelli, Wall Street's best known strategist until fired by Lehman Brothers: "I've learned that market timing can ruin you."

Good & Hermansen, authors of Index Your Way to Investment Success: "Staying on course may be just as difficult in bull markets as in bear markets."

Carol Gould, author & New York Times columnist: "For most investors the odds favor a buy-and-hold strategy."

Graham/Campbell Study: "From June 1980 through December 1992, 94.5% of 237 market timing investment newsletters had gone of business."

Benjamin Graham, famed investor: "If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what's going to happen to the stock market."

Louis S. Harvey, President of Dalbar Research: “When investors think short-term and try to time the market, they haven’t done very well. They have been leaving a lot of money on the table.”

Mark Hebner, financial author: "Efficient markets have no trends, so any speculation using trading systems or active investment strategies, such as stock, time, manager, or style selection, will only detract from future market returns."

Chuck Hill, Director of Research at FirstCall/Thomson Financial: "At the peak of the bull market in March of 2000 only 0.7% of all recommendations on stocks issued by Wall Street brokerages and investment banks were to sell."

Morgan Housel, Wall Street Journal and Motley Fool columnist: "The odds that you will achieve long-term success by actively trading or timing the market round to zero."

Mark Hulbert, Editor of the Hulbert Financial Digest (1-18-2001): "Among the 160 or so newsletters the HFD monitors, the market timing recommendations of only 10 have beaten the stock market over the last decade on a risk-adjusted basis."

Daniel Kahneman, Nobel Laureate: "After receiving the Nobel Prize, Daniel Kahneman, was asked by a CNBC anchorman what investment tips he had for viewers. His answer: "Buy and hold.""

Michael Leboeuf, author of The Millionaire in You : "Timing the market is for losers. Time IN the market will get you to the winner's circle, and you'll sleep better at night."

Arthur Levitt, former SEC Chairman: "No one is smart enough to time the market's ups and downs."

Jessie Livermore, famous investor: "It never was my thinking that made the big money for me. It always was my sitting."

Peter Lynch, famed mutual fund manager: "Nobody can predict interest rates, the future direction of the economy or the stock market."

Burton Malkiel, author of the classic Random Walk Down Wall Street: "Buying-and-holding a broad-based market index fund is still the only game in town."

John Markese, PhD, President, American Association of Independent Investors: "Nobody, but nobody, has consistently guessed the direction of the bond or stock market over any meaningful length of time."

Paul Merriman, author of Investing for a lifetime: "I don’t think more than perhaps one in 100 investors will be successful using timing."

Morningstar Course 106: "We're not keen on market-timing. It just doesn't work."

Motley Fools: "We've yet to find anyone who can accurately and consistently predict the market's short-term moves."

Nick Murray, author of eleven financial books: "Timing the market is a fool's game, whereas time in the market is your greatest natural advantage."

"Odean and Barber tested over 66,400 investors between 1991 and 1997. Their findings: "The most active traders earned 7% less annually than buy-and-hold investors."

Gerald Perritt, financial author: "Forget trying to time the market and do something productive instead."

Don Phillips, Managing Director of Morningstar: "I can't point to any mutual fund anywhere in the world that's produced a superior long-term record using market timing as its main investment criteria."

Mike Piper, author of The Oblivious Investor: "When market-beating strategies become known they generally stop working."

Jane Bryant Quinn author and syndicated columnist: "The market timer's Hall of Fame is an empty room."

John Rekenthaler, Vice-President of Research for Morningstar: "Market-timers are circus clowns minus the funny suits. Even when they dodge the bear market, they inevitably miss the ensuing bull. Their track record is terrible."

Mary Roland, author of Best Practices for Financial Advisors: "Countless studies have proved that no one is able to time the market effectively."

Louis Rukeyser, famous (deceased) TV host: "In the long run it doesn't matter much whether your timing is great or lousy. What matters is that you stay invested."

Richard Russell, editor of Dow Theory Letters: "There are no geniuses on Wall Street, only geniuses for a while."

Paul Samuelson, Nobel Laureate: "The evidence is overwhelming that a thousand timer's who try to buy when stocks are low, and sell when they are high, is a damnably awful record."

Jim Schmidt, Editor: "For the 10 years that ended 12-31-2000, only one newsletter out of the 112 that Timers Digest follows managed to beat the S&P 500 Benchmark."

Bill Schultheis, adviser and author of The Coffeehouse Investor : "I have learned the hard way that market timing and trying to pick a fund that will out-perform the market are both losing strategies."

Charles Schwab: "I'm a strong advocate of buying and holding."

Fred Schwed Jr., author of 'Where are the Customers' Yachts?: "It turns out that I should have just bought them (securities), and thereafter I should have just sat on them like a fat, stupid peasant. A peasant however, who is rich beyond his limited dreams of avarice."

Chandan Sengupta author of The Only Proven Road to Investment Success: "Any investment method that relies on predicting the future is doomed to fail."

Jeremy Siegel, author of Stocks for the Long Run: "Winning with stocks requires only patience, not foresight."

W. Scott Simon, author of Index Funds: "Investors should look with a jaundiced eye at any market timing system being peddled by its guru-creator."

Paul Singer, hedge fund billionaire: “The important turning points in markets are never identified with precision in advance by ‘experts’ and policymakers."

James Stewart, Smart Money columnist": It's my belief that it's a waste of time to try to time any market decline, or try to pinpoint a market bottom."

Larry Swedroe, author and adviser: "Believing in the ability of market timers is the equivalent of believing astrologers can predict the future."

David Swensen, Manager of Yale Investments: "People should stop chasing performance and just put together a sensible portfolio regardless of the ups and downs of the market."

Andrew Tobias, author of The Only Investment Guide You Will Ever Need: "Don't waste money subscribing to investment letters or expensive services.

Tweddell & Pierce, financial authors: "Trust in time and forget market timing. Allow time to work its compounding magic for you. Let market timing inflict its miseries on someone else."

Eric Tyson, author of Mutual Funds for Dummies: "No one can predict the future."

Wall Street Journal Lifetime Guide to Money: "Few if any investors manage to be consistently successful in timing markets."

John Waggoner, USA Today financial columnist: "If you're considering doing your own market timing, the best advice is this: Don't."

Jason Zweig, author and Wall Street Journal columnist: "If you buy, and then hold a total-stock-market index fund, it is mathematically certain that you will outperform the vast majority of all other investors in the long run."

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: I am timing the market. Why am I wrong?

Post by blueblock » Fri Jan 06, 2017 6:13 pm

I sounds like you are smack in the middle of the ages-old marketing timing problem, that you have to be right twice: knowing when to get out and knowing when to get back in. You got out in April, so you now know that was a mistake. And now you're concerned that you're going to be wrong again by getting back in, which may or may not be the case, at least for the near term.

I'm a bit mystified as to why you still need convincing that your method is not a good one. You took your best shot in April and look at the pickle it's got you in. Why would you think you'll do better the next time with such a poor experience? Wouldn't the more rational response be, "Wow, I won't do that again!"?

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Re: I am timing the market. Why am I wrong?

Post by Mij » Fri Jan 06, 2017 6:27 pm

If you change your age from 40 to 67 then you have pretty much described me. I too got out of the market last year partly because I felt the market was so high and partly fear of the election. Boy was I wrong. But I realized that and got back in just after the election and realized some of the gains. While I am kicking myself for trying to time the market I at least got back in and got some of the gains. I am using a 4 Vanguard fund portfolio and will not try to time it again. I learned my lesson. I AM NOT SMARTER THAN THE MARKET.

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Re: I am timing the market. Why am I wrong?

Post by nedsaid » Fri Jan 06, 2017 6:32 pm

Olibri wrote:I'm looking for someone to explain why I am wrong. I am totally putting myself out here, so if I'm wrong, I'm wrong, but I wanted to explain my thinking to get out of my own head and find the truth.

Nedsaid: You are very brave. Market timing is pretty much verboten around here. I just know that various market timers have wound up with egg splattered all over their faces when the markets did something they did not anticipate. Timers rely upon forecasts, so you have one dismal science relying upon another. Timers have poor performance records as do forecasters. Let me see: Bob Brinker, Elaine Garzarelli, Doug Fabian, and others I can't think of right now had embarrassing failures and their recommendations underperformed the market.

Please don't simply quote the million articles that explain how/why market timing is wrong. I need to understand why I am wrong in this particular case. Anyway, it's a bit of a story, so I hope that you bear with me:

Nedsaid: I will say that many of us have done market timing in its milder forms. Perhaps lightening up on an asset class when it looks very expensive. I have also tried to buy assets when they appear cheap. So perhaps a Valuation driven strategic asset allocation. Even rebalancing a portfolio is a mild version of strategic asset allocation. Others have trimmed their stocks during times of euphoria and added to them in times of despair. I know I have done this but only at the margins. I would not bet my portfolio upon an economic or market forecast. Perhaps timing on the margins based upon valuation and sentiment.

I'm in my mid-40s and have been an avid saver for many years. From a savings perspective I have done very well and have quite the nest egg already. Since the beginning, as soon as I got out of college debt, I maximized my 401k. I've had investments go well and investments go poorly. Generally I have invested my money blindly and randomly into whatever mutual fund is available in the plan and in my taxable accounts whatever stock I think is good or fund. Again, it's been a pretty uneducated journey. During the last recession I just left everything in the market and let it ride. My returns have not been impressive, but as above, I've performed OK. Then a little over a year ago, I noticed my accumulation and started to come to the realization that I am approaching a point where the yields from my net assets would start approaching my work salary. So, I decided to dig in and start learning.

Nedsaid: If your yearly income and capital gains from your portfolio are approaching your salary, you have saved a whole lot. You are close to the territory where you can start thinking about early retirement. You have done something right.

In Q3 2015 I subscribed to the WSJ and then Barrons to start learning. In addition I started lurking and sometimes contributing in online forums. What I have learned is extremely disturbing and started to make me anxious. Soon, instead of seeing the stock market as a magical beast that sometimes gives money and sometimes takes it away, I formulated a belief that day to day movements are actually irrelevant and semi-random, but that the underlying value of any stock (or bond) is relative to the health of the company. Duh, right? From there I started looking at PE ratios and understanding that over a long time period, different classes of stocks have an average PE that they oscillate around. Overall the market also has an average PE ratio which, according to everything I see is above this average. Now, how far above this average is part of the question. I have decided to use the trailing PE ratio because from my perspective the forward PEs that I see published are "liars numbers" created to try to game the market.

Nedsaid: Keep in mind that the stock market looks forward and not back. Forward P/E numbers to me are a better indicator than trailing P/E's for that reason. Forecasts are imperfect but they are what we have.

Last April, deciding that the market was in a significantly overvalued state I decided to go from nearly 100% invested to nearly 0% invested. Every day since, except for the 2 days after the brexit vote, I have questioned whether I have made the wrong decision or not. I have made some targeted purchases since April for sectors that I think are a good value (such as banking), but I am still in roughly 85% cash. My basic theory is that when values return to more reasonable valuations, then I will jump back in. I am timing the market.

Nedsaid: There is an old saying that you never go broke taking a profit. There are far dumber things you could have done. At least you sold near a top rather than at the bottom.

The problem with your analysis is that stocks go up every 2 to 3 years for every year they are down. On a daily basis, stocks are up 60% of the time. Man oh man, I will take 60% to 75% odds of the market being up any time. The other flaw in your argument is that in a bull market, stocks always look expensive. Aren't higher and higher prices the whole reason that we invest in the first place? Stocks reaching new highs is normal market behavior. Those of us who lived through the 2000-2002 and the 2008-2009 bear markets forgot that.


Am I wrong? This seems wrong, but if I am wrong, I don't know why. I argued that stocks are overvalued, but since making this decision I have missed out on a lot of gains.

Nedsaid: I would say that US Stock valuations are "stretched" but not irrational. Keep in mind we had some years of absolutely fantastic corporate earnings, very low interest rates, and high levels of cash on the balance sheets of US Corporations, all of which tend towards higher P/E's. Keep in mind that Generally Accepting Accounting Standards have become more conservative over the years. Probably a P/E ratio of 15 in 1970 would be more like 19 today. This is one flaw of comparing today's P/E ratios to historical P/E ratios. Accounting standards have changed so comparisons of P/E ratios are like apples to oranges.

I can't help but feel that the day that I cave in and buy will be the market top. Please help.

Nedsaid: It sounds to me like you are close to "critical mass", that is having enough assets to retire. Your need to take risk is lower than it used to be so cutting back on stocks is a rational decision. Perhaps all you need is 40% stocks in your portfolio, I think you have mostly won the game.

Last edited by nedsaid on Sat Jan 07, 2017 11:24 am, edited 4 times in total.
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Re: I am timing the market. Why am I wrong?

Post by bertilak » Fri Jan 06, 2017 6:41 pm

About PE:

Market prices reflect what people think the future will bring. A high PE may get back to "normal" not with lowered prices (the "P" in "PE") but with increased earnings (the "E" in "PE"). While waiting for that future to arrive you could be collecting some nice dividends.

Or, you could decide that you have a better grasp of what the future will bring than the (dollar weighted) average of EVERY OTHER INVESTOR IN THE MARKET and put it all in cash. Even if those other (high-dollar) investors are only so-so at their jobs, they are almost certainly much better at it than you are. They have more going for them than a few months subscriptions to a newspaper and a magazine doing their best to sell advertising space.

Concentrate on what's unique to you personally and what you have control over. That means Asset Allocation as based on your particular need for earnings and ability to take risk. The younger you are the more risk you can take since the young have a) more future income to add to their pile and b) more time for that pile grow of its own accord.

That said, some people can be successful at market timing and stock picking. You just need to convince yourself that includes you and be aware you are going for that elusive brass ring. And this merry-go-round only goes around so many times.
Listen very carefully. I shall say this only once. (There! I've said it.)

briancof
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Re: I am timing the market. Why am I wrong?

Post by briancof » Fri Jan 06, 2017 7:16 pm

Crow Hunter wrote:What tools/insight/voodoo/etc do you have that people who do this for a living that actually drive the market (market makers) that spend millions of dollars a year on quantitative analysts and super computers don't already have or know?
Why do you believe that you will front run them or even keep up with them?
While you are doing your analysis, also look at what you would have if you had just chosen a good asset allocation with a 70/30 stock/bond split with reasonable rebalancing bands and focusing on total return not just asset price appreciation.
If you reflect on this and still feel that you do and can know something that the experts don't, continue to time the market and don't worry about it.


Crow Hunter gets at the only way I've been able to make sense of this apparent paradox. And it does seem, at face value, a paradox that one can't time the market. After all, we can place logical bounds on P/E ratios, right? They (stock prices, anyway) can't go below zero. Ballparking a ceiling is harder, but at some point the implied return of owning the company would fall below what one could get elsewhere (e.g., treasuries, though those, themselves, wiggle around). Reasonable people would agree that a broad market index is unlikely to realize a P/E of, say, 1000. Whatever that number is, it seems clear that downward pressure must increase as it's approached.

As a newish-to-investing and new-to-Boglism guy, I was struck by two things. First, it seems pretty clear that a lot of thoughtful people (including some in this thread) agreed nearly unanimously that timing does not work. I didn't arrive with enough equities knowledge to believe I could time in the first place - just a guy looking for something nonstupid to do with his extra cash - but I definitely came away feeling as though it ought to be the established null hypothesis. In other words, the burden was on somebody in favor of market timing to demonstrate that it was profitable, and not the other way around. My second takeaway, post arrival in Bogleland, was that satisfying explanations as to why timing does not work were annoyingly hard to find. Often, they were tautological. Market timing doesn't work because you can't time the market and everybody knows that. That's unsatisfying - even if true, it doesn't say anything about why. If P/E gets historically high, why shouldn't we unload until fairer weather ("fair" in this case, confusingly, being a market downturn)? As we reasoned above, P/E can't rise forever.

Here is how I have been able to make sense of it. I have no special qualifications or experience to be concluding here, but like many curious people feel pressure to concoct for myself a minimally satisfying explanation until something better manifests:

1. While P/E can't rise forever, that does not answer the question of whether the opportunity cost (i.e, what else you'd do with your money. Cash? Bonds? Bullion?) would be rosier.

2. The belief that the market has to (and I know I'm walking into the propeller here) be efficient.

This is hotly and rightfully argued over, and I am fine conceding that some people may appear to be doing an ok job of finding diamonds in the rough. Balancing against that concession, a million monkeys playing poker would likely see one of them dealt a royal flush. Was he good? Or lucky? In the case of poker monkeys, it’s clear that the winning monkey was lucky and that he’s probably no likelier than the rest to win future hands.
But that doesn't mean that there aren't good monkeys out there. Jim Simons (of Renaissance Technologies) seems to have mounted a decently credible case. He's got a mathematical theory named after him about something that is, apparently, very important and utterly beyond my understanding, and >$10B to show for his investing career. If smart investing monkeys exist, Simons is a candidate. However:

Ignoring the possibility that he has access to material nonpublic information (which is another topic of serious intrigue to me that I’ll ignore here), he has a small army of full-time math/science PhDs scrapping every day to find diamonds in the rough. It's not that we couldn't eventually have found the proverbial $20 bill on the sidewalk, but to me it seems likely that Simons' ilk, most of the time, would have gotten there first.

P/E ratio is not a secret, and if there is value to be extracted from investing on its basis, I have to believe that most of that value is being extracted by folks with supercomputers and eponymous mathematical theorems.

Moreover, it’s not even clear that being (or employing on one’s behalf) a smart monkey is the answer. There’s a time/money cost to playing that game. It’s not enough to create “alpha” as a smart monkey. The game is only won if you can create more alpha than it costed you to create it. The prevailing observation, now, seems to be that most active managers don’t clear that hurdle. So it’s not even that smart monkeys win, but that only the very smartest do.

For the opportunity cost argument (1 above) and the efficient-ish market belief (2 above) I have resigned to the soft belief that my greatest returns will come from dutifully socking away savings and ignoring the noise. Nobody is, to my knowledge, proving that it's the right choice. Only history will tell. But available evidence, to me, suggests that it's the best route.

The final thought I had while reading OP’s argument is that it seems to at least partially rely on the idea that one person’s investing results are anything more than a small sample. OP doesn’t seem to actually be describing his or her own results as extraordinary. But even to somebody whose were, we’d have to ask whether they were good or lucky. Whether our strategy is market timing or bogleling, the good results don’t mean we’re right and bad results don’t mean we’re wrong. It’s unnerving, I agree, to resign to the fact that we’re basically playing darts blindfolded. Instead of aiming, we’re focused on throwing a lot of them cheaply.

Epilogue: triggered by wondering, after I wrote this, what the highest historical stock P/E ratio actually was. I know there are different ways to measure it, but it looks to have hit a global maximum of about 120 in mid-2009 (obviously, the previous 12 months had not been great for most companies). Someone investing on the basis of P/E may have concluded that this was an extreme outlier and very confidently unloaded the kitchen sink. But in the intervening ~7 years, the market has more than doubled. It is admittedly a cherry-picked, very unscientific example, but to me is suggestive of why P/E or other similarly broad metrics can steer us awry.

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Re: I am timing the market. Why am I wrong?

Post by bottlecap » Fri Jan 06, 2017 8:12 pm

Olibri wrote:I argued that stocks are overvalued, but since making this decision I have missed out on a lot of gains. I can't help but feel that the day that I cave in and buy will be the market top. Please help.


You just answered your own question.

No one knows. Even if you think you're smart, you still don't know.

If it was as simple as buying a subscription to the WSJ and Barron's, then selling when the PE ratio was high and buying when it was low, everyone would be a brilliant investor.

But its not. And that, along with the daily agony you feel right now, is why market timing "isn't right."

JT

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Re: I am timing the market. Why am I wrong?

Post by Fallible » Fri Jan 06, 2017 8:48 pm

Olibri, welcome to the forum.

You ask why you’re wrong in timing the market, yet admit you’ve "invested blindly and randomly" during an "uneducated journey." Plus, you’ve recently tried learning by reading two financial publications and visiting online forums and you disagree with the “million” articles against market timing and therefore don’t want us to quote from them.

Doesn't all this more than answer your own question?
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Re: I am timing the market. Why am I wrong?

Post by Novine » Fri Jan 06, 2017 8:55 pm

I think you need to answer some more fundamental questions - "Why am I investing anyways?" "What's my investment timeline?" For someone in their mid 40s, pulling everything out of the market is an extreme over-reaction if your investment timeline is 25 years until retirement. I can understand someone on the brink of retirement freaking out at the prospect of a major market downturn. But someone who isn't going to be touching those dollars for decades? That doesn't make sense.
Last edited by Novine on Fri Jan 06, 2017 8:57 pm, edited 1 time in total.

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