What If You Only Invested at Market Peaks?

http://awealthofcommonsense.com/worlds-worst-market-timer

by gighi • 12 years ago

21 20 12 years ago

notastartup4• 12 years ago

Very interesting. Could it be that the most successful investors have this in common? They never second guess themselves and they never sell. However, they are wary and picky of the company they dump their money in. Buying in when the market underprices a security and holding on to it. Only selling when you see fundamentals of a security as flawed and the market still thinks its overvalued.

gighi3• 12 years ago

Except that in this case, the guy bought the whole market by indexing, so he wasn't very wary and picky, although the index itself took care of getting rid of bad performers (because they went out of business).

notastartup4• 12 years ago

that's what makes this even more beautiful. you don't need to drive down to the balance sheets of each company you want to invest, he bought a representation of a basket of companies.

What's the likelihood of another market crash like the one in the 80s?

What's the likelihood of 2008 housing market crash?

I reckon that the latter is more predictable and omnious, while a sudden market crash without any signs like the one in the 1980s is less likely.

The theory that market is already efficient over a long stretch of time must be true. It reverts to its mean which is a continued bull as long as the economy can fit it.

However, this must be a tough concept to sell. "Hey I just lost 60% of your money because I bought in right at the peak recently, but please don't pull out your money yet, it will recover for sure in 5 years." Again, this example shows the difference between Bob and the average investor. Bob would've said okay, while the average investor would've taken his/her money out and getting ready to sue you for fraud, "but you promised 20% return on my money". "YES, you will get 20% compound interest on your money if you wait another 10 years, believe me the stock market always goes up".

But unlike Bob, you can definitely time your market entry.

    1. Wait for market crash.
 
    2. Buy.
 
    3. Check in a couple of years.

And people who buy after a major market meltdown, when everybody shudders at the word 'stock', the wise ones buy in. When everybody is talking about it, you run. Contrarian investing.

You can also apply this bullish bias in markets outside of stocks. Forget daytrading noise, just buy & hold.

    1. Buy Crude Oil mini futures.

    2. Hold on to it.

    3. Check back every few months instead of every few 
       minutes provided you still can meet the margin calls.

What a great article. This really have resparked my interest in investing and trading.

gjmulhol3• 12 years ago

Loved this article, mostly because of the fact that it turns much of the normal perspective on markets on its head. Rather than looking at a best case or a simulated median case, looking at a worst case is pretty cool.

What would make this more interesting would be to look at a constantly rebalanced portfolio that is a blend of stocks and bonds. That would have performed even better.

@notastartup -- "the best investors" is a complicated statement. Usually investors are graded on an annual basis compared to the market. If you outperform the market and justify your fee (if your fee is 1%, you had better outperform by a lot more than that, or else an index fund would have been a safer way to go), you keep your job, are able to get more capital into your fund, and generally are more highly regarded as an investor. So while I think there is a ton of merit to using an approach like this (or using the rebalancing approach I mention above), this is not what makes successful professional investors successful. That can be ascribed to luck, a ton of luck, skill, nefarious dealings, or any other number of other good or not-so-good reasons.

gighi3• 12 years ago

What would make this more interesting for me would be a pretty accurate answer to the question: "what are the chances that this could happen again if the guy started in 2014"? :)

tormeh• 12 years ago

Or better yet, what would have happened if he invested in inner-city property? Short of investing in Detroit that would probably go pretty well.

gjmulhol3• 12 years ago

Provided the overall market and economy continue to grow in spite of short term volatility, it would happen again. If one honestly believes that the whole market is going to go down over time, then probably best to look at bonds or precious metals.

porlw• 12 years ago

Interesting. I wonder how does this compare to:

1) Buying every month

2) Only buying at some set period after each correction (e.g. market drops x% over 7 days).

Are there any online tools that make it simple to work out these ideas?

splike• 12 years ago

You could simulate this at quantopian.com or use their backtesting library, Zipline.

sopooneo• 12 years ago

What would the best strategy be to lose money in the stock market? If we ignore fees, would it be any easier to time market purchases to optimize for loss than it would be to optimize for gain? And I don't mean picking dates after the fact.

fnbr• 12 years ago

It wouldn't be any easier, because losing money & gaining money are actually the same thing- if you can predict which stocks will decrease, then you can short those equities (essentially buying negative amounts of the stocks), and then make a profit equal to the amount of the decrease.

dllthomas• 12 years ago

Not so, because you can always transact to lose money. Just cross the market to buy, cross the market to sell what you just bought, as fast as you can. You can blow off an arbitrary amount of money in an arbitrarily short amount of time. It's basically true that you can't make money by picking losing stocks any easier.

What If You Only Invested at Market Peaks?

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