Does Market Timing Work?

https://www.schwab.com/learn/story/does-market-timing-work

by alihm • 3 years ago

164 280 3 years ago

schwab.com

irjustin• 3 years ago

Yes but only for a select few. For the rest of us... Nope

medellin2• 3 years ago

And the select few are those making the policies because no one else knows whats going to happen

quickthrower23• 3 years ago

Which is why better late than never I am overpaying into pension and chucking that on a far/wide international index. My calcs say I won’t retire rich but I will still most likely have the money and beat inflation. And not spend it lol!

The real issue for the average Jo seeking alpha is you often need to pay the house (your government!) for the privilege.

In Australia you trigger capital gains tax when you sell. And if you buy and sell alot they may audit you and consider it income from professional trading!

golemiprague• 3 years ago

The problem in Australia is that they still tax you if you rent your house to someone and then use the money to rent for yourself. So if you need to move or change house size you must sell and buy. However if you buy an investment house you can get tax deduction on the interest of the mortgage. They basically tax people with one house but give deductions to people with multiple houses.

quickthrower23• 3 years ago

Yes. I think that is silly as they should encourage freedom to move. You should just get taxed on the “profit” you make if you find somewhere cheaper to rent than what you get. The workaround is buy to rent out a property you never live in then just rent and move around as normal. But then you lose out on the primary residence capital gains exemption. A work around to that is to never sell and use the death trust to pass that on to your kids. All this stuff takes a lot of planning and thinking about.

Another weird thing: transfer your house to your spouse and pay stamp duty! Stamp duty itself is regressive and should be replaced by a smaller annual property tax or just another form of tax (but given that property ownership tends to create wealth inequality probably good to tax ownership rather than add more income tax)

reedf12• 3 years ago

You are probably not finding alpha as a retail investor - probably just some form of beta.

quickthrower23• 3 years ago

Yes - what I am saying is I prefer my E(X) of beta over maybe-alpha minus additional taxes.

(Assuming you meant indexes = beta... ?)

wizofaus• 3 years ago

Surely if you know exactly when the market will reach a low point you can buy put options to capitalise on that? Or at least ensure that you use times where you're expecting the market to fall to spend money on non-appreciating essentials (cars, house renovations etc.)?

greatpostman5• 3 years ago

For people with the intellect to understand the economy it does. Just very few of those people

worik• 3 years ago

people with the intellect to understand the economy

Those people (we people) know not to try.

greatpostman5• 3 years ago

No there are people that can time the market.

medellin2• 3 years ago

If this was true wouldn’t you have many more economists with multiple mullions just from market timing? Even if you can predict the market and you are correct it can stay irrational so i think this comment is completely incorrect

greatpostman5• 3 years ago

No becabuse academic credentials don’t mean anything

reedf12• 3 years ago

Yes, and they do work for fixed income hedge funds.

lend0003• 3 years ago

That's more of an indictment of the field of economics than anything else. The most talented leave to make better money in markets and hedge funds and the remaining academics get to set our public policy. There are plenty of consistently performing funds. Successful "applied economists" include Ray Dalio and Jim Simons.

nyssos2• 3 years ago

Maybe the economists who study asset pricing in financial markets should, but that's just one subfield among many. No one is beating the S&P with their knowledge of Japanese labor market dynamics or the 19th century Spanish wool industry.

shric2• 3 years ago

Those who understand the economy know it's a poor predictor of market returns.

greatpostman5• 3 years ago

They don’t understand the economy then, they just know how to analyze it in hindsight

neogodless• 3 years ago

This statement is (likely) unfalsifiable. That is, it would have to come from someone who does this successfully, and could offer up some evidence of having done it, and what system and logic they use to understand the economy and thus know when equities are high and low, when to sit on the sidelines, etc.

Few people doing so well would share such a process, but in theory, if they did, and it worked, it would likely trigger a flood of followers, and the behavior of the markets would shift alongside it.

Presumably someone making this claim is a billionaire. Or they've being doing well in stocks for a short enough time that it's yet to be proven if they are as good at timing the markets as they think they are.

greatpostman5• 3 years ago

People like George soros, bill gross, a bunch of them

shrimpx3• 3 years ago

Although when the s&p dropped 20% in a few days in March 2020 — that was clearly a buy signal. And when tech stocks dropped by 70-90% in Nov 2022. Those stocks are now up 2x/3x from bottom. Sure, long term it probably doesn’t work out to time the market but sometimes it’s pretty obvious what’s happening.

vikingerik2• 3 years ago

The March 2020 drop was from the pandemic lockdowns. In that moment, nobody knew that was a buy signal. Nobody knew then when economic activity would recover, if the pandemic would pass in two weeks or several months or many years.

herval• 3 years ago

"nobody knew" doesn't mean nobody acted. The rational actors that act only on information "everybody knows" are usually late to the game

corey_moncure• 3 years ago

For every sell, there is a buy

lend0003• 3 years ago

The difficult part was knowing where to sell so you could have money on the sidelines before the market dropped. Was it right when lockdowns started? In that case, you already lost a fair amount from the top.

I do believe that markets can be beat, but by definition, you need to be "smarter" than the average capital, where more than half of the capital in the market on a given day is controlled by somewhat sophisticated investors. I don't think it's worthwhile for a retail trader to try their hand unless they are putting considerable effort into developing their alpha and either have automation skills or exceptional discipline.

kqr• 3 years ago

where more than half of the capital in the market on a given day is controlled by somewhat sophisticated investors.

It's worse than that! The average estimation performs on the level of superforecasters, thanks to the wisdom of the crowd.

The priced-in evaluation beats even most sophisticated investors! ("How is that mathematically possible?" About half of the investors are on the lucky side, but not consistently.)

idontwantthis• 3 years ago

But the problem is that if you are waiting now, is that massive buy signal going to come next year or in 10 years? And if you keep cash for 10 years and then buy at the right time, is that going to be better than having been invested for the whole ten years already?

mr_mitm• 3 years ago

I bought when it dropped 5% because I thought it was "a clear buy signal". Then it dropped even more and I couldn't spare any cash to buy more. How could you have known at the time that 20% was the bottom?

roland35• 3 years ago

Exactly the problem! When talking about market timing you can't just be correct in the direction but also be close to exact on the time!

fauigerzigerk• 3 years ago

I don't believe in buy signals. You never know whether any particular level is the bottom. But that doesn't mean the opportunity is the same when the market is down 5%, 20%, 40% and 60% respectively. Of course a massive crash is a greater opportunity than a small correction regardless of how much further prices fall.

But the real question is whether it makes sense to keep cash on the side in order to wait for one of these relatively rare crashes. The answer is probably no.

shrimpx3• 3 years ago

Anything on the way down in a steep selloff is a good buy, so you did good. Also WRT the pandemic it was pretty clear that there was going to be panic selling, as soon as a pandemic was announced. What wasn’t clear was where the bottom was and how long the recovery would be. Some waited for a deeper bottom and missed out on the vertical recovery.

neilv2• 3 years ago

They didn't discuss Peter Perfect's sister, Petra Perfect, who -- rather than just wait for the one bottom day for the year -- instead buys and sells repeatedly, throughout the year, at more local lows and highs.

Is that also considered market timing?

rwmj• 3 years ago

At a guess they'd lose all their money in transaction costs.

thakoppno2• 3 years ago

Transaction cost is little O of most significant trading strategies, imho.

abm532• 3 years ago

How do you know that you’re currently at a local low/high?

neilv2• 3 years ago

In the article, Peter Perfect has perfect market timing, but only buys once.

Petra Perfect also has perfect market timing, but can buy and sell repeatedly.

kleene_op• 3 years ago

That sure counts as market timing.

Pulling out such a strategy would make you insanely rich.

ttyprintk2• 3 years ago

To quantify “insanely”,

$1 in the 1900 stock market would be $52000 today. In the 1900 T-bill market, $58. If you knew how to perfectly rebalance every Jan 1, $22.3m.

anonu4• 3 years ago

I'll tell you the result: Petra would blow all the results out of the water with massive returns. But Peters results are theoretically somewhat more believable because he only needs to be lucky on one trade a year.

Centigonal2• 3 years ago

IMO, this is a much more comprehensive article on the same topic: https://www.aqr.com/-/media/AQR/Documents/Insights/White-Pap...

For unsophisticated investors, timing the market tends to keep money on the sidelines during growth periods, eroding long-term returns. This is part of why it's considered an investing sin - "time in the market beats timing the market." Sophisticated systematic investors can probably get good results with certain momentum-based market timing strategies, but most of us aren't sophisticated systematic investors.

veqq2• 3 years ago

To go into further detail about systemic investing:

There have been experiments like the turtle traders ^ 1 who applied "trend following", used today by many CTAs on exotic markets. For this, an investor taught some people his strategy/rules, gave them his money and they've shined for 40 years. The fundamental strategy still works today (updated). Fundamentally, it's a method to ride momentum in different ways (e.g. crossectional.) Hedge fund managers like Rzepczynski, Cem Karsan, Alan Beer... Richard Brennan is the most insightful of them who shares his methods freely. N.b. trend following doesn't work well in stock markets, but flourishes in Mexican rate swaps, orange juice futures, London sugar... combined in ensembles.

Traditional value investors, building on the Intelligent Investor, have always done well over samples above a few years. (N.b. Warren Buffet hasn't been a value investor for a long time, because he has too much to manage. He was strongly inspired by Fisher's Common Stocks and Uncommon Profits, which gave us the concept of "growth stocks".) (N.b. 2, value investing ETFs are mostly terrible, fundamentally not investing in value stocks due to their structures.)

Carisle's Acquierer's Multiple is the most recent development in systemic value investing (he also runs an ETF or two along these lines). "Magic formula investing" even holds up too!

In the mining space, you also get discretionary (not purely systematic) investors like Rick Rule openly discussing their methodologies, successful for decades and decades.

Here’s an interesting paper ^ 2 (exec summary pages 5-6). Note that 70% of underperformance is due to investors withdrawing funds during times of market crisis. Fund fees also drive the majority of underperformance. N.b. most wealth managers can't legally follow such strategies because of the prudent person rule. They are legally forced to underperform typical indices - and the majority of research has focused on them, distorting the data pool.

[1] https://www.investopedia.com/articles/trading/08/turtle-trad...

[2] https://wealthwatchadvisors.com/wp-content/uploads/2020/03/Q...

lend0003• 3 years ago

The fact that you're being downvoted for factual contributions kind of explains why it's possible to beat the markets. Most people refuse to believe it.

No public strategies are going to beat the market by a huge amount, and having the discipline to execute them manually isn't easy, but it has been clearly shown to be possible.

mettamage• 3 years ago

Fun! I'll save your comment (and upvoted it). Curious to see where this rabbit whole goes. On another point, I'd like to suggest you reference as follows [1]. I found that syntax to be more prevalent on HN than ^ [2]. It's easier to parse, since you know it's separate from the sentence. Whereas if I write that I have a reference like ^ 3 then it is harder to see that ^ 3 is apart from the sentence or part of it.

[1] This part you did do that way, haha.

[2] I haven't done a formal count, but I'm sure some regex search engine will give you many hits if you search for \[[0-9]\].

[3] That last sentence still confuses me.

throw0101c4• 3 years ago

Traditional value investors, building on the Intelligent Investor, have always done well over samples above a few years.

From the last published interview with Benjamin Graham, author of II ("A Conversation with Benjamin Graham", Financial Analysts Journal, September-October 1976)

> In selecting the common stock portfolio, do you advise careful study of and selectivity among different issues?
In general, no. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook "Graham and Dodd" was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I'm on the side of the "efficient market" school of thought now generally accepted by the professors.

* http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Ben...

porknubbins2• 3 years ago

This has been my experience too, I missed out more by being sidlined during good times than I saved. Personally as an engineering mindset person I am good at identifying likely failure modes of companies (i.e. reality) but rarely anticipate how much things will go up during good times which is more of a social phenomenon (hype).

henry2023• 3 years ago

It seems like identifying failure modes could work if you could model the likelihood of the company going bankrupt in a certain amount of time because even if the enterprise is working on failure mode, public markets have been popularity contests for a really long time.

tomatocracy• 3 years ago

Understanding potential failure modes for companies is a much more important part of credit investing (this is what I do for a living these days, though I've done equity investing as well).

Unfortunately a very large part of the credit universe is very difficult to access if you're a non-professional investor though.

PeterStuer2• 3 years ago

The idea with any Ponzi scheme is to get in as early as possible and get out before the inevitable collapse. Though if it is your meta-governement propping up the Ponzi come hell or high water, not sure where you would get out to that would not be sucked into the collapse unless you are part of the 0.000001% that would potentially have an option to watch the world burn from a distance.

fsckboy• 3 years ago

The idea with a Ponzi is to create one and make money from the get-go.

There is no good idea with a Ponzi if you didn't create it.

PeterStuer2• 3 years ago

Getting in early on a succesfull Ponzi can be very profitable. If only the creator made out the Ponzi would fail to get traction.

maddynator• 3 years ago

While I agree with the general principle of the post, I am skeptical of the fact that schwab published it. If it was done third party research, I would trust it more.

(Internet has made me skeptical)

However, the only incentive I can think of schwab is to encourage people to invest ASAP they have cash so schwab can get that money in their system so they can charge fees/still services.

But that’s just normal business

anonu4• 3 years ago

Schwab would rather you have cash in your account than be invested in securities. This is how their cash sweep works.

The article is educational and generally stands up to the research on the topic. It is designed to build trust with clients so they invest in Schwab.

TacticalCoder3• 3 years ago

Schwab would rather you have cash in your account than be invested in securities

Compared to IBKR which gives "benchmark - 0.5%" on your NAV in USD, what does Schwab give for your USD sitting idle?

rocqua• 3 years ago

I wonder if there is a fixed buy date that outperforms dollar cost averaging. Something like "around new years lots of people get money they invest, so prices tend to pop, so buy in november'

There just needs to be some kind of yearly pattern for such a strategy to exist. I even recall reading about it on money-stuff. But I can't remember the months.

veqq2• 3 years ago

There are a lot of these. Nowadays, gamma flows are discussed a lot in public spaces. Ignoring most of the topic, combining options expiry dates with typical fund rebalancing dates is simple. (Buy in the last week of the month, basically.)

Historically, April, July, November are the best, while January, June and September are the worst. "Sell in may" and go away used to be a common phrase too.

But if you are purely DCAing, such points don't make much sense. Following the interest rate cycle or business cycle is straight forward, or cycles in your own industry. Oil, shipping and microprocessor companies for example forecast years out when their profitable and unprofitable periods will be, so you can move your capital in and out for much higher performance.

ttyprintk2• 3 years ago

I’d rather see a study where September and November are chosen for gold bullion, and other months for equities. I’ve heard this coincides with the wedding season in India —- maybe someone can confirm.

PaulDavisThe1st3• 3 years ago

If there was such a pattern, and then a strategy to exploit it, the pattern would change.

dzink• 3 years ago

To time the market, you need visibility into it down fine intervals and tools not available to anyone without a 3 digit investment. Common tools obfuscate data. A typical movement of the market that is obvious on a detailed chart, is explained haphazardly by likely automated financial press. The jobs data was strong on Friday, leading to likelihood of higher interest rates for longer, yet the market jumped up that day? Was that a Dead cat bounce? Short-sellers exiting their positions before a long weekend? A move to drum up retail investor interest in a last ditch effort before the S&P crosses the 4200 point of no return? The beginning of the next bull market?

The retail investor software is designed to take advantage of retail investors left and right. Placing trades is error prone. The spreads can be ridiculous (0.5% at 9:30am). the market zigzags consistently so no stop loss is left un-triggered before a bounce. These conditions are currently leading to a world of take-profit trading. Timing works if you pay attention to it all the time, but most don’t have the time for that. Your retailer software won’t warn you when you are losing profits gained in the past year. That’s why long term investors become complacent after a long stretch of growth and stop paying attention. With bots trading increasingly more and interest rates remaining higher, the market will not look the same as it did since 2010 AT ALL and the data from before then is only a usable in detail to those who can pay. Once retail investors have seen the lines go down. the bounce back won’t be as linear as 2020 or this spring. Treasuries require a lot less sweat.

yieldcrv• 3 years ago

Generic advice gets generic results

lencastre• 3 years ago

A decade or so ago I heard an investments prof liking it to “(…) picking pennies in front of the steam roller” which is fitting I guess. Unless you become a market maker, then by all means you are sitting on the steam roller.

nly• 3 years ago

A catchy blog post on this subject;

Even God Couldn’t Beat Dollar-Cost Averaging

https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...

throw0101c4• 3 years ago

Also from Nick Maggiulli, the author:

For example, any competent basketball coach could tell you whether someone was skilled at shooting within the course of 10 minutes. Yes, it’s possible to get lucky and make a bunch of shots early on, but eventually they will trend toward their actual shooting percentage. The same is true in a technical field like computer programming. Within a short period of time, a good programmer would be able to tell if someone doesn’t know what they are talking about.
But, what about stock picking? How long would it take to determine if someone is a good stock picker?
An hour? A week? A year?
Try multiple years, and even then you still may not know for sure. The issue is that causality is harder to determine with stock picking than with other domains. When you shoot a basketball or write a computer program, the result comes immediately after the action. The ball goes in the hoop or it doesn’t. The program runs correctly or it doesn’t. But, with stock picking, you make a decision now and have to wait for it to pay off. The feedback loop can take years.
And the payoff you do eventually get has to be compared to the payoff of buying an index fund like the S&P 500. So, even if you make money on absolute terms, you can still lose money on relative terms.

* https://ofdollarsanddata.com/why-you-shouldnt-pick-individua...

anonu4• 3 years ago

Totally agree on not timing the market and staying invested. Nonetheless this analysis raises more questions than answers for me.

First, as you often see in these studies, they use the S&P500 which has returned a 9 or 10% annualized rate for decades now. How realistic is it to see someone's entire wealth invested in just this benchmark? Diversification will almost always mean returns lower than than the S&P. Ultimately this erodes at the findings of the study.

Second, there's no mention of yield which is basically the guaranteed portion of the return. This portion alone accounts for a quarter of your annual return making it another compelling reason to be invested early.

vik03• 3 years ago

Ever since I read The Black Swan by Nassim Nicholas Taleb and Thinking, Fast and Slow by Daniel Kahneman, I can't take anything related to the stock market seriously (among other things as well, but this post is related to the stock market, so that's why I'm focusing on it.)

There's very little skill involved, which isn't to say there is no skill involved whatsoever - but at the end of the day it really is just luck

The following excerpts are from Thinking, Fast and Slow:

"The illusion of skill is not only an individual aberration; it is deeply ingrained in the culture of the industry. Facts that challenge such basic assumptions—and thereby threaten people’s livelihood and self-esteem—are simply not absorbed. The mind does not digest them. This is particularly true of statistical studies of performance, which provide base-rate information that people generally ignore when it clashes with their personal impressions from experience."

"Finally, the illusions of validity and skill are supported by a powerful professional culture. We know that people can maintain an unshakable faith in any proposition, however absurd, when they are sustained by a community of like-minded believers. Given the professional culture of the financial community, it is not surprising that large numbers of individuals in that world believe themselves to be among the chosen few who can do what they believe others cannot."

achrono2• 3 years ago

FWIW ever since Kahneman, Ariely and similar company have had some of their theories get discredited (Ariely's taint is worse because it's to do with fabricating research!) I have gone back to simply resorting to common sense and quotidian skepticism.

codethief• 3 years ago

ever since Kahneman […] have had some of their theories get discredited

Could you elaborate?

bluGill2• 3 years ago

A few people have consistently beat the market over many years. I call that skill. I don't know if they really know thier how they do it though

olalonde2• 3 years ago

If there are really just a few, it could be explained by chance. Warren Buffet is often cited in that group and yet, a blindfolded monkey would have done better than him in the past 20 years[0].

[0] https://www.linkedin.com/pulse/warren-buffett-has-underperfo...

StanislavPetrov• 3 years ago

I call it (almost always) being a member of Congress or someone else with inside information!

auxym3• 3 years ago

Sorry for shilling this podcast that I mentioned in another comment in this thread, but they do have very relevant information on this too:

https://rationalreminder.ca/podcast/220

This is an interview with two academic researchers into active fund managers who can indeed beat the market consistently sometimes. One factor why they exist is that they have access to better information than the average individual investor. However, (1) excess returns tend to mostly get absorbed by higher fees and (2) it's very difficult to scale it up, funds who beat the market tend to lose this edge when more funds go into them. Thus, market-beating funds, if they want to maintain their edge, have to severely limit who can invest in the fund and how much they can put into it.

The episode also goes into the effect of security selection (which stocks are picked) vs market timing, which is relevant to TFA.

ytoawwhra92• 3 years ago

"Fooled by Randomness" by Taleb is a good book on this subject.

envsubst8• 3 years ago

Nassim Taleb made his money trading markets.

ozzydave• 3 years ago

This data set should be expanded to include 100 of his peers who started trading at the same time.

vik03• 3 years ago

Yes, I am aware of that

In the Black Swan he talks about his endeavor with the stock market and how lucky he got by chance, and not by using some pseudo scientific formulas and whatnot to "predict" how his stocks would do. He also gave some pretty good advice when it comes to the stock market

The whole book is just awesome, I'd recommend giving it a read

satvikpendem3• 3 years ago

You should also read Adaptive Markets by Andrew Lo. It talks about how behavior psychology affects the markets, as Homo Economicus does not really exist, people are not rational actors individually or even at scale in other domains (see, for example, loss aversion) so there is no reason to think we are rational when dealing with the markets either.

zoomablemind• 3 years ago

"...Each received $2,000 at the beginning of every year for the 20 years ending in 2022 and left the money in the stock market..."

All of the experiment "participants" must have Lucky in their middle names. They managed to keep their jobs over those 20 years and kept their cool at the economy downturns.

They only Buy (the index shares), except for the one that keeps "cash" aka money market shares. I guess they plan on doing this beyond the 20y, why stop feeding cash into the account, why retire when it can contnue growing?

Lucky ones will also retire in upturn.

Yet the whole transaction needs the Sell part to realize the gains. Surprisingly, the Schwab experiment did not model this for the "participants".

Does one need to "time" the Sells?

throw0101c4• 3 years ago

Does one need to "time" the Sells?

In retirement you need Money more than you need Stocks, so the Sell side of the trade could be someone who is not trying to be clever with trades, but simply needs to pay for their groceries.

TacticalCoder3• 3 years ago

Yet the whole transaction needs the Sell part to realize the gains. Surprisingly, the Schwab experiment did not model this for the "participants".

The FIRE community did model this at great length though. And the example in TFA is just an example: saving $2K a year is basically drinking one or two beers less each day (so I wouldn't look too much into that amount). Most people in the west could save that. At the very least the people at which TFA is aimed could save $2K a year.

Try $20K a year: most working people here could save that.

Here's a nice "rich, broke or dead" FIRE calculator:

https://engaging-data.com/will-money-last-retire-early/

matt3210• 3 years ago

Long game or insider trading is the only reliable strategy.

abcd_f• 3 years ago

RenCap begs to differ.

noslenwerdna• 3 years ago

Yes, of course, building the largest physics and math department in the world to come up with your trading strategy. Yes, there's always that option.

creakingstairs3• 3 years ago

One of my family members is absolutely convinced that they can time the market and it kinda drives me up the wall every time it comes up. They will use all these “techniques” to draw arbitrary lines on the chart to establish a trend in the market while watching the news like a hawk everyday.

Meanwhile I just get on with my day with index funds and get better returns.

Der_Einzige• 3 years ago

Actual “timing the market” does exist but it’s illegal. We call it insider trading.

ignoramous• 3 years ago

Buffett's ultimately successful contention was that, including fees, costs and expenses, an S&P 500 index fund would outperform a hand-picked portfolio of hedge funds over 10 years. The bet pit two basic investing philosophies against each other: passive and active investing.

https://www.investopedia.com/articles/investing/030916/buffe...

bumby18• 3 years ago

Isn’t a large part of the underperformance of the hedge funds due to their fee structure? Investors lose 20%+ of the profits just in fees. While I don’t think stock picking is a great idea for the layman, that fee structure isn’t generalizable to the average Joe picking stocks.

I believe there’s some evidence that low-volatility trading has been shown to beat the market over long periods of time. Although, “picking stocks for volatility” may be different than “timing stock picks”

envsubst8• 3 years ago

Buffett says this kind of stuff publicly. But his own fund moves in and out of investments all the time.

envsubst8• 3 years ago

Why do you feel so convinced they can't?

andsoitis• 3 years ago

because you can't know the future

creakingstairs3• 3 years ago

1. Their reasoning is arbitrary. They pick and choose factors to justify their analysis.

2. They would be much richer if they could.

llelouch2• 3 years ago

The real techniques that give you an edge are behind NDA's. I know someone who makes 100k a day, trading with very low risk. (0.5% risk per trade).

creakingstairs3• 3 years ago

Yeah, I don't doubt that there are real people timing the market successfully. But as you said, those methods are under NDAs, not given by random gurus on YouTubes!

btbuildem• 3 years ago

I feel like this could be explained much more succinctly as the direct corollary of the founding tenet of capitalist society: endless growth.

"The numbers always go up"

That's it.

hash872• 3 years ago

Worth noting that about 30% of active fund managers have beat the S&P 500 going back to 1993 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4096205

They may not do so for their investors- this is before fees. But it does seem significant that they are beating the index on their own, and over a consistent period of time. 30% is not nothing. Seems like a blow to strong-form EMH to me.

As an FYI, I never want to hear a real-life fund or investor compared to a benchmark again. Benchmarks are theoretical investments with a 0.0% expense ratio- once you add in some of the real costs of running a passive fund, you start to get more real numbers

CuriouslyC• 3 years ago

Assuming a random distribution of yearly returns centered on 0 before fees, with enough fund managers you'd see plenty that would beat the market for 30 years. That past performance would also be in no way indicative of future performance given the stated process.

unusualmonkey2• 3 years ago

A blind monkey throwing darts will beat the S&P 500 some of the time.

The problem isn't that it's impossible to beat the S&P 500 (it's actually trivial), the problem is it's hard to predict which portfolio will outperform the S&P 500.

Aachen• 3 years ago

The point they're making is that fewer than 30% of monkeys would still be positive after so many years if it were random chance

Idk if that's true but you're not saying what percentage one would expect to see instead

I also think monkeys are the wrong example here because aren't they at even odds with the index? 50% of them, assuming they take no bananas for their service and assuming they don't get to make more trades than the index does, should have beaten the index, if my currently-half-awake brain is working correctly

hansvm• 3 years ago

That warrants further investigation, but even if the data is flawless it isn't necessarily a blow to EMH.

As a very contrived example (to hopefully illustrate the "risk-adjusted" component of EMH while keeping the math simple), suppose the market consists of many equally sized firms and admits a strategy where each year 0.1% of firms will be uniformly randomly selected to have all their assets wiped out and distributed amongst the rest, and due to social pressures and incentives everyone uses the same strategy. Each year, 99.9% of firms will beat the market [0]. Forward-looking, 97% of funds starting in 1993 will have beaten the market that entire period (backward-looking is less meaningful because it depends on, among other things, how many new entrants to the market there are, not just their performance).

Despite the 97% success rate on a 30-year basis, this is still very plausibly a scheme you wouldn't want to participate in (your relative valuations of different outcomes might still make it desirable, but that's a separate question), but it doesn't violate EMH because of the high risk relative to the small returns being achieved.

Bringing the contrived example back to the real world a bit, that particular failure mode is common whenever a machine-learning person tries to tackle the market on their own. Even after getting over the hump of price -> bid/ask -> order book -> ... in correctly modeling what's happening, they're still prone to doing things like predicting the chance a security will go up or down and assuming that both branches have equal magnitudes. When they throw it at the real world, they find that despite low false positive and false negative rates for predicting when the price will increase, the times they were wrong were all the high-magnitude events, so they lose money on average.

Another way that potentially ties back to the real world, what exactly are the incentives for an active fund manager? When they fail, can they start a new fund? Can they distribute excess losses to a couple of years when the market also did poorly to be able to say something like "every year the S&P 500 went up, we went up more" and still attract new clients? It's not obvious to me that you'd expect behavior which would result in a low chance of beating the S&P 500 over a period of time, even if strong-form EMH holds.

[0] This assumes the "market" is static, but the details aren't meaningfully different when you instead benchmark against something like the S&P 500.

rr8082• 3 years ago

The problem with buy and hold and pretty much every current strategy is that its distorted by the huge 40 year bull market we've seen in the USA. Every American asset has gone up big time - of course "time in the market" is a good thing.

If you look at Japanese or European stock markets they tell a very different story. Similarly the next 40 years in the USA could be a miserable time for investors. I can't believe how much people take for granted that stock markets "usually go up 7% a year" or whatever.

No one really knows but it wont be as good as the last few decades.

samjmck• 3 years ago

Isn't that only a problem if you are only invested in the US? There exists ETFs that are invested in multiple developed countries, such as index funds that track the MSCI World.

rr8082• 3 years ago

Yes. After continued under performance of non-US markets, not many people have a significant exposure to those places.

WXLCKNO• 3 years ago

This is what I think too. Now obviously we're possibly on the verge of another massive change in tech with AI but there's still nothing that guarantees that the market has to go up.

blibble• 3 years ago

Now obviously we're possibly on the verge of another massive change in tech with AI

could easily turn out to be another nft style "boom"

brigadier132• 3 years ago

The market is composed of companies, each of these companies are composed of people trying to better their own lives by working hard. When you buy an index fund you are essentially betting on all these people collectively working hard to improve their lives and if incentives are correctly aligned this should also mean the value of these businesses growing.

1270018080• 3 years ago

No one really knows but it wont be as good as the last few decades.

A little bit contradictory.

If you don’t think the stock market is going to appreciate then it’s not for you. Don’t invest in it at all. You can stick with savings accounts, gold, and crypto scams.

the_gastropod4• 3 years ago

Of course predicting the future is impossible. But there’s a lot more than 40 years of data to support the buy-and-hold idea. The updated Trinity Study spans from 1925 to 2009, so includes the worst economic calamity in US history. It concludes an inflation-adjusted 4% withdrawal rate is safe for 30 years in 95% of historical 30 year periods. An inflation-adjusted 3% withdrawal rate succeeded in every 30-year period.

Devasta• 3 years ago

1 - People should be able to retire.

2 - Their retirement should be financed by 401ks and the like.

3 - Stock Markets can go down as well as up.

You can't have all three, so the government will always ensure that the stock market goes up long term.

PaulDavisThe1st3• 3 years ago

Or you can elect a government that fundamentally doesn't agree with #1.

wolverine8767• 3 years ago

Or governments could insure retirement income.

sandworm101• 3 years ago

> 1 - People should be able to retire.

Why? Retirement is a very recent phenomena. The idea of someone earning enough during their working life to then fund several decades of non-working life is a very modern thing, maybe only the last sixty years or so. Only a very rarified few were ever wealthy enough to actively stop working prior to becoming physically unable to work. And then, for most all of human history, those too old to work lived out their remaining few years being taken care of by their children. I'm would not casually assume any "right" to the modern concept of retirement.

grogers• 3 years ago

With the excessive debt (which is not slowing down) the government is planting the seeds for high inflation in the long term. This historically has been very bad for equities (in real terms).

tlarkworthy• 3 years ago

I believe human ingenuity and power over the elements goes up 7% a year, of which, the stock market is a proxy for. We are a networked organism and good at leveraging innovation at a global scale through supply chains. I see no reason to be pessimistic, we have AI, we have better space flight, we constantly improving energy sources.

wolverine8767• 3 years ago

Then why didn't the markets go up in Japan and Europe (per the GP)? Also, why do the US (and maybe other) securities markets increase when the underlying economy is performing poorly?

ProjectArcturis• 3 years ago

Productivity and GDP, which the stock market is a better proxy for, do not rise 7% a year.

vineyardmike2• 3 years ago

One thing to consider though is that our nation has taken a lot of debt -in many philosophical forms- to fuel that growth.

Government deficit spending of course helping the economy. But we eventually have to pay taxes to cover that.

Citizens debt fueled spending on homes and goods. Corporate debt similarly. Student loans of course. Individuals and companies can only tolerate so much debt.

Our oil dependence never accounted for the cost of global warming and pollution, but we’re about to pay for that soon. This applies to many materials we consume, oil being the most prominent.

Corporations have systematically slowed pay growth while increasing prices, eventually consumers will be unable to afford enough goods to keep the machine spinning at full (growing 7%) capacity.

Our shrinking population from historic highs means each working person will need to contribute a bigger share to reach that 7%, while having more people to support.

theptip3• 3 years ago

No one really knows but it wont be as good as the last few decades.

Such confidence! The first part is of course true, but you’ll make money teaching the market that you are smarter if the latter is true.

Perfectly possible that AI kicks the economy into overdrive in the next few years and growth increases. I wouldn’t bet my house on it, but also wouldn’t bet my house against it either.

rubicon33• 3 years ago

How would AI do that?

Findeton2• 3 years ago

Absolutely no chance that AI is able to do that. Investing decisions are too subjective for the current state of AI. A good value investor knows this… and also knows that you don’t need a bull market to make decent returns.

ais89• 3 years ago

and the 7% is skewed towards a small % of companies that have averaged up the S&P 500, usually big tech companies. If you look at the distribution and median return its actually far less.

kjkjadksj• 3 years ago

Part of the reason for the bull run is that people have 401ks. They have IRAs. They buy index funds. In either case the amount of americans who automatically devote a portion of their pay to buying equites has probably never been higher.

shagmin• 3 years ago

There are probably multiple layers of feedback loops going on, who knows how things will pan out. There's a sufficiently large enough pool of investors out there that will buy broad ETFs like SCHB, SPY, VT, VTI, etc., on any dip or just continue to DCA a little of every paycheck into those just due to its history. The US is geographically isolated from potential threats for the most part unlike Europe and Japan, is relatively self-sufficient, super diversified and lots of international exposure, and no country has as much clout on the international stage as the US for the time being so I think it makes sense the US continues to do much better. Sometimes you have trends like emerging markets, cryptos, etc., but broad US stock market seems like the default choice for high returns so long as there is capital to be allocated.

Interest rates are the thing I think could change things, but who knows. If you can get a guaranteed 5% return that's pretty nice, but it's possible we just slide into being a more corrupt/untrustworthy country for investments or baby boomers suddenly taking a disproportionate amount of money out of the market as they retire, etc.,.

user_named3• 3 years ago

Don't forget the Canadian threat

warner25• 3 years ago

I agree that the American stock market has been an outlier, and most Americans don't realize the extent to which that is true; it's good that you do. But compared to buying and holding a widely diversified and low cost portfolio, what was the better strategy for investors in other markets? What would be the better strategy for Americans over the next 40 years (not knowing if it will be a miserable time or not)?

I think this is a case of "time in the market" being the least worst option. The market may reward it, or it may not, but hard times are hard times and I don't see any obvious way to avoid them without exposing yourself to a lot more risk in other ways.

oceanplexian• 3 years ago

People keep talking down the US but the only advanced economy reliably innovating at scale. Especially in the post-COVID era, as China faces growth collapse.

You don't have to look far to see that all the major tech developments of our species are coming out of the US: Generative AI, Reusable Rockets, self-driving cars, mRNA, Genetic Engineering, NIF Fusion, VR, etc. The US could strike it out on any single item and spark another industrial revolution.

Plus we're still king of the hill in so many other categories (World's largest producer of energy, world's largest agriculture producer, world's largest military, etc.) If you're an investor, the idea that you'd bet against the US economy is a hilariously bad take.

paulddraper• 3 years ago

I can't believe how much people take for granted that stock markets "usually go up 7% a year" or whatever.

Decades of something being true will do that

rakkhi• 3 years ago

Correct. Imagine if you bought and hold in Japan in the 1980's. Buy 2023, maybe you would have broken even [1]

There are 2 problems: 1. Market timing works: a. With inside information e.g. US congress b. Take an outsised risk e.g. Nasem Taleb keep buying/selling deep out of the money options. Lose money every day to make an outsised gain 2. You are Warren Buffet. Which is basically buy stocks like you are buying a company. Have the option of buying preferential shares. And hey 1b monkeys on typewriters...

Still totally agree with the OP. The last 40 years have been ridiculous from a macro perspective: 1. Interest rates, the most important price in the economy, the price of money, has fallen from 18% in the Paul Volker days till after covid close to 0. 2. Money has been printed like never before after the 08 collapse and covid.

It is very difficult to look at 2023, with the US fed cash rate at approx 5%, global interest rates going up, price inflation at 7%+, US national debt at $33T and growing at $1T per month exponentially, and the US paying more on Interest expense (not principal, just Interest) than they spend on the military.

I like Nassem Taleb. Invest still in index funds but invest in global infrastructure that is recession proof e..g [3]. Be anti-fragile

[1] https://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=143.FM.M.J... [2] https://www.theatlantic.com/business/archive/2011/12/why-doe... [3] https://www.vanguard.com.au/personal/invest-with-us/fund?por...

bob1029• 3 years ago

Timing absolutely doesn't work in my experience. This effectively makes many forms of derivative instrument worthless to me. There are only a few targeted situations where I believe something might happen within a certain window, but I absolutely wouldn't bet more than 1-2% of my portfolio on anything with time decay attached to it.

What works better for me is joining in on earnings calls and reviewing presentation materials. Getting a sense for product roadmap, markets, competition, etc. This is the space where you can actually develop meaningful hypotheses regarding what might happen. Those who are performing time series astrology likely do not have the patience to go about things this way.

If you don't have time to spend about a day per quarter reviewing your portfolio, then you probably shouldn't be playing in traffic with individual stock picks, much less options contracts. If you think this is an unreasonable amount of time to spend playing investor, then perhaps you should just buy a little bit of something like $QQQ every day and focus on those other parts of life that are clearly more important to you.

Or, just contribute max to your 401k and close that distracting Robinhood account. Most people would do better over the long haul if they followed that bit of advice. Monkey brain is much more dangerous than losing a few % APY to fund management fees and sub-par allocations.

Arainach• 3 years ago

Monkey brain is much more dangerous than losing a few % APY

....and you don't even need a few percent to throw it in a target date fund that regularly rebalances for you

satvikpendem3• 3 years ago

Target date funds usually do worse than throwing everything into VTI and holding for 30 years.

bartwr• 3 years ago

I keep telling my friends who get really into stock investment, read some stuff, invent strategies - and end up much worse (sometimes losing money) than me just dumping everything into a few almost random indices: 1. Greed (not as a pejorative or a judgmental term, just this itchy feeling that you want more than you have even if you gain and are not satisfied) is the fastest way to lose money, whether through a poor investment or being scammed. 2. When you decide to play a game of stock investment, who are you playing it against? Being better than average (just market returns) means being better than the average (not median!) player, who in this case is some institutional investor. Do they really think that with a few online courses they can be consistently better than people who do this stuff for a living?

jraby3• 3 years ago

QQQ went like 17 years from its 2001 high till it made it back to the same price. S&P is probably less stressful for the type of investor you are talking about.

wolverine8767• 3 years ago

This effectively makes many forms of derivative instrument worthless to me.

Derivatives have another, much more valuable use: They enable you to hedge your investment, essentially insurance.

For example, if you invest heavily in agriculture in Iowa, you might buy derivatives tied to the weather and to the price of whatever you grow - derivatives that pay if those things go bad. You lose a little if things go well, but that's just the cost of insurance. Similarly, if you invest heavily in electric vehicles, you might by a derivative tied to the price of key inputs, such as metals for batteries.

fortran77• 3 years ago

Yes, if you’re lucky enough to guess correctly. (So it’s a No for me!)

876978095789789• 3 years ago

Ashley Action took a simple, consistent approach: Each year, once she received her cash, she invested her $2,000 in the market on the first trading day of the year

She benefited from the January Effect: https://www.investopedia.com/terms/j/januaryeffect.asp

gtani• 3 years ago

There's nuanced market timing, somebody reads WSJ and Barrons, watches Trade brigade and Tastylive analysts on YT and decides on overall cash/stock/bond %ages, that should have kept you out of bonds and out of the Bogleheads situation in the past year. Also last January you would have been looking at bitcoin, TSLA, NVDA and thinking these are going to have some kind of recovery, V shaped or long and grinding, but some kind...

Then there's the opposite question, how many active/day traders are consistently profitable, i think the answer is less than 5% of everyboedy that tries, the ideal is that somebody realizes they're not going to make it while replay/sim / paper trading, or people get stopped out quickly on substantial positions.

tippytippytango• 3 years ago

The intuition is that low information investment returns are compensation for putting capital at risk. The capital must be at risk to collect the risk premium. You’re an insurance provider as much as an investor. When you are timing the market you are trying to collect in excess of the risk premium while having your capital at risk for less time. This can only work with an information asymmetry or luck.

reiderrider• 3 years ago

Generally good advice but some major investment decisions may not fit the fact pattern. The results can vary substantially, for example:

- Buying real estate before or after the 2008 real estate crash

- YOLO'ing on a specific stock/company/crypto before or after a bull run

I presume their advice becomes more solid the more you trade and the more diversified the investment is.

jgalt212• 3 years ago

One cynical side of me things you can, and on cynical side of me thinks you cannot.

Anecdata: During my banking days, any time I received an outsized bonus it did seem to occur at a local market maxima. I had noticed this, and I was like I should have worked in entertainment as their earnings and thus investment opportunities were largely uncorrelated to the price of the stock market. Of course, this did change a bit when the stock market fueled streamers started spending money like drunken sailors on "content".

alpark3• 3 years ago

Most derivatives traders I know in the industry do some version of buy-and-hold for their personal portfolios, but one of the best I know does something completely different. He sticks to a philosophy of scanning multiple "small" cap companies(<50-100mm mktcap) until he finds one he generally likes, then figures out absolutely everything he can about them. Every piece of information available, down to calling whoever he can in management. Then once he decides he likes it, he commits 20-30% of his portfolio into them, often becoming a small, but notable investor in the company itself.

He's made massive amounts of money from this. He admits that it's basically a second job in terms of time and effort spent, but believes that it's replicable because no institutional investor is actually looking at these stocks, leading to hypothetical mispricings.

Does Market Timing Work?

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