“Buy Low, Sell High.”
Perhaps the most persistent fantasy in all of investing is
selling a profitable position at the very top of its market cycle and buying it
back at the bottom. You keep all the
profits, avoid all of the losses and look really smart.
I can’t time the markets like that. I feel a little better that some great
investors have said the same thing.
There are people who can time broad financial markets but none of them
have ever called to tell me how they do it.
When someone does offer to share their proprietary market timing
strategy, we count the silverware.
Over the next three blogs I’m going to explore market
timing; why it’s so hard, why we keep trying and what the average investor
should know. These are just my
experiences and not the definitive work on the subject. I hope you enjoy them and share them with
recovering market timers.
Even I call tops and bottoms once in a while.
Once doesn’t count.
You have to get the “buys” lower than the “sells” and you have to do it
more than half the time. The shorter the
cycle you’re timing, the less you can be wrong.
This is a chart I created that tracks two elements of the
S&P 500 index.[1]
The blue line shows the earnings of the index going back to
1980. Since this index represents about
80% of the US stock market, it’s a good proxy for our economy. The bumpy ride reflects rough and smooth
patches in our national financial health.
On the positive side, earnings in 1980 were about $15 a
share. Last year they topped $85. That’s better than a five-fold increase and
doesn’t include some handsome annual dividends.
Look at the blue line as a child with a yo-yo climbing
stairs. She drops and returns it with
every step.
If you measure yo-yo volatility by the step, the swings from
high to low are huge. If you measure it
by the whole staircase, the yo-yo is much higher at the top than the bottom –
even from the high on the first step to the low on the last.
The blue line was the easy one. The red line is the price/earnings (P/E)
ratio. That’s the blue line divided by
the price of the index.
Over the long-haul, stock prices reflect earnings. Day-to-day, prices are whatever investors are
willing to pay for those unknown earnings, or the economy, or politics or their
mother-in-law or whatever else consumes them at the time. Their actions range from disciplined to blind
panic.
To be a successful timer using only those two variables
means correctly anticipating future earnings and understanding how investors
will feel about them when they happen.
You also need nerves of steel and the discipline to take gains and
losses without emotion.
A very famous continuous study by the Dalbar Company[2]
called the “Quantitave Analysis of Investor Behavior” (QUIB) shows most
investors do anything but “buy low and sell high”.
They buy at tops.
They sell in panics. They chase
what’s hot. They listen to their brother-in-law
or, lately, internet gurus. Then they do
it all over again.
Ego plays a part.
Men always think they are great poker players and stock
pickers. I’m reminded of the old saying,
“if you are playing poker and can’t spot the sucker in five minutes, it’s you.”
Individuals playing against institutional traders are up
against formidable resources.
We offer complimentary 12-step market timing withdrawal
therapy with every new account. I’m
serious. You know how you’ve done.
Next week I’ll talk about why we still try to time the
markets anyway. Thanks for visiting and
I’ll see you then, sh
The opinions expressed here are those of Skip Helms and do not necessarily reflect those of LPL Financial or anyone else. It is not possible to determine the top or the bottom of the market. Investing involves risks, including the loss of principal. Past performance does not guarantee future results. Please consider potential transactions carefully and read all appropriate materials before investing or sending money. No strategy, such as asset allocation or diversification assures a profit or protects against loss. Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA / SIPC
