There are many impossibilities in life.
And I’m sure you’ve heard of some of them - to live forever, to travel at the speed of light, or even to travel back in time. But one of the lesser known impossibilities is the belief that someone is able to consistently Time the Markets. And anyone telling you they know exactly when something is going to happen in those same markets is quite simply not telling you the truth.
If only it were possible.
Imagine being able to predict what the market was going to do at some point in time. To know exactly when it was going up, or down, or when it was time to get in or out. You’d be very wealthy and also very famous. But its not reality, despite many people acting like or believing that they can.
Market commentators and forecasters are always sprouting off on what the market is about to do. ‘Sell now, before it’s too late’. ‘Buy the dip.’. ‘A Market Crash is Imminent’. ‘Rotate into Cyclicals’. The unfortunate thing is that very few people have shown an ability to successfully navigate the ups and downs of the stock market, including the world’s best investors.
“There are only two types of people: those who can’t market time, and those who don’t know they can’t market time.” Terry Smith
Timing the Market is a very tricky thing to do. Despite knowing this, the most basic rules of investing almost suggest that we should be able to. Buy Low, Sell High - that is the simplest recipe for success in the stock market. When the market appears braced for a fall, move to the sidelines. After the decline, buy back those stocks cheaper.
If only it was that simple.
The good news is that the Investment Masters long term track records of success, stand in spite of this. You don’t have to be able to time the market, and in fact, Timing the market isn’t a pre-requisite to success at all.
Here’s what some of the world’s greatest investors had to say about market timing:
“I can’t time stocks.. I don’t know anybody else who can either.” Warren Buffett
“I don’t think we would want a manager who thought he could just go to cash based on macroeconomic notions and then hop back in when it was no longer advantageous to be in cash. Since we can’t do that ourselves.” Charlie Munger
“We wish we had perfect market timing (as well as the ability to fly). The reality is that no one does or ever will.” Seth Klarman
"Do not try to time the market." Chris Davis
“Active market timers usually fail.” David Swenson
"We don't try to time the market." Glenn Greenberg
"Our observation over 38 years is that no one can consistently predict either the stock market or the US economy." Bill Smead
“The odds of my adding value consistently by trying to time the market are very slim.” Lee Ainslie
“We think attempting to time markets (knowingly or unknowingly) is a fool’s errand.” Allan Mecham
“The real fool’s game remains, as it has throughout my career, attempting to time the stock market.” Shad Rowe
“In more than 35 years in the investment business, I have yet to find a short-term timing strategy that works.” Christopher Browne
“The character of the markets is continually changing, and there is no single timing system that will consistently, indefinitely work.” Barton Biggs
"After nearly 50 years in this business, I do not know of anybody who has [timed the market] successfully. I don't even know of anybody who knows anybody who has done it." Jack Bogle
"I don't believe all this nonsense about market timing. Just buy very good value and when the market is ready that value will be recognised." Henry Singleton
“Market timers consistently try to guess when to sell equities. To us, that’s a losing battle given the market had a positive return about three-quarters of the time.” Bill Nygren
“Market timing, rather than long-term investing, is ‘your first instinct’ as a money manager. But as I got older, I decided it's a fool's game." Roger Engemann
“We never try to ‘time’ the market.” Dan Davidowitz
“The greatest investors in history like John Templeton, Peter Lynch, Philip Fisher, Philip Carrett and Warren Buffett believe that it’s futile to attempt to predict the market in the short term. We share in their market agnosticism.” Francois Rochon
“We remain as market agnostic as ever. But, being market agnostic does not mean a lack of conviction. It just means that our convictions relate to the individual businesses we own and the valuations needed to generate the returns we aspire to.” Chuck Akre
“We do not look at the stock market or the individual price movements within the market to draw any inferences from, or any particular macro or micro information. In other words, we are totally stock market agnostic.” David Polen
"For the record, and in case there is any misunderstanding, we do not have the faintest idea what share prices will do in the short term - nor do we think it is important for the long-term investor." Nick Sleep
“Our data in our firm says most of the people in our firm are not very good market timers. They’re very good stock pickers but they’re not great market timers” Steve Cohen
“When we look at the US trading records for the long-term, we cannot find successful long-term investments that are based on short-term-oriented theories and strategies. The great long-term investments have all been made by value investors.” Li Lu
“While we may, from time to time, have views on where the stock market is headed, we generally do not make bets on its direction.” David Abrams
“As a practical matter, market timing is a fool’s errand.” Ted Weschler
“Seeking comfort has never been the basis of a winning strategy in the stock market. Neither has being a market timer.” Shad Rowe
“Has anyone ever consistently gauged turning points, timed markets? Sure, people can get it right once, twice. But then they’re dead the third time or the fourth time. I mean dead. I mean, buried.” Paul Singer
“I have no aptitude for market timing, and I think trying to be a long-term investor who actively times the market is a paradox poised for failure.” Scott Miller
“It’s in the nature of stock markets to go way down from time to time. There’s no system to avoid bad markets. You can’t do it unless you try to time the market, which is a seriously dumb thing to do.” Charlie Munger
“Our job to assemble portfolios that will perform well over the long run, and market timing is unlikely to add to the outcome unless it can be done well, which I’m not convinced is usually the case.” Howard Marks
“It is important to remember that timing the stock market is an impossible task even for seasoned professionals. Stay focused on your long-term goals and make sure you are comfortable with your asset allocation, so you can stomach the inevitable short-term volatility associated with investing.” Douglas Foreman
“Our directors will tell you that they’ve never been to a directors meeting where the subject of the direction of the stock market is — we are not in that business. We don’t know how to be in that business. Obviously, if we could guess successfully a high percentage of the time where the stock market was going to go, we would do nothing but play the S&P futures market. There wouldn’t be any reason to look at businesses and stocks. So it’s just not our game.” Warren Buffett
Markets are Complex Adaptive Systems
The reason it’s so hard to time the market is that markets are complex, adaptive systems. Some information is always unattainable and human reactions can be irrational and unpredictable. This often results in unexpected and non-linear outcomes.
"Do not attempt to time the stock market. The near term direction of the stock market is determined by so many forces that it is difficult for anybody to identify all the relevant ones, let alone understand them and weigh them and then determine the extent that they are already discounted into the market. Furthermore, the forces are dynamic, leaving market timers at the mercy of future forces that are difficult (and many times impossible) to predict. For all these reasons, most market timers do not seem to enjoy acceptable batting averages." Ed Wachenheim
“It is worth reminding oneself from time to time that almost any description and every prediction about the U.S. stock market involves a gross oversimplification of an extraordinarily complex system, a system that adaptively incorporates the collective expectations of all its participants into the price of its securities.” Bill Miller
“The important turning points in markets are never identified with precision in advance by ‘experts’ and policymakers. This lack of foresight is not surprising, because markets and the course of the economy are not model-able scientific phenomena but rather are examples of mass human behavior, which are never predictable with anything like precision.” Paul Singer
“Markets are a so-called second-order system - to usefully employ your predictions you would not only have to make mostly correct predictions but you would also need to gauge what the markets expected to occur in order to predict how they would react. Good luck with that.” Terry Smith
Research suggests Market Timers Fail
Research shows the odds are against you if you try and time the market.
“Nobel Prize winner William Sharpe found that a market timer must be right a staggering 82 percent of the time to match a buy and hold return. That’s a lot of work to achieve what could be achieved by taking a nap.” Christopher Browne
“The persistent belief that superior returns can be generated through dancing in and out of stocks as the tune of the music changes, defies logic or empirical analysis but at least provides useful material for students of behavioural finance.” Marathon Asset Management
“The vast majority of us are terrible at so-called “market timing”, in which investors try to sell at or close to market peaks and buy at market lows. All the statistics about investor flows show that believing you can accomplish this feat is the triumph of hope over experience. The wisest investors who are most likely to get the best performance are those who have at least realised that they can’t do this successfully and so don’t try.” Terry Smith
Markets Timers Must Get Multiple Decisions Right
When attempting to time the market you need to get multiple decision right; the buying and the selling.
“In my experience, most people who are lucky enough to sell something before it goes down get so busy patting themselves on the back they forget to buy it back.” Howard Marks
“Are you really smart enough to not only a) predict a market fall but also; b) figure out how this translates into individual stock movements; c) get your timing sufficiently correct that you do not either forgo gains which far outweigh any losses you protect against or suffer some of the downturn; d) have sufficient mental agility and nerve to start buying when your prediction of a market fall has become reality; and e) get the timing roughly right on that side of the trade so that you don’t end up catching the proverbial falling knife or missing some or all of the recovery? If so, I doubt you will be reading this letter on your private island. But above all, I doubt you exist.” Terry Smith
Most Investors are driven by Emotion
Furthermore, human nature usually works against your chances of success. Most investors tend to be wired so they panic after markets decline and sell at or near the lows. Ordinarily they wait for the markets to stabilise before re-entering and miss the bottom.
“Being human, we are our own worst enemy. Everything that goes on in the world and the market conspires to make people buy when things are going well and prices are high and sell when things are going badly and prices are low.” Howard Marks
“Human nature - innate, deep rooted, permanent. People don't consciously choose to invest with emotion - they simply can't help it." Seth Klarman
Costs are a Drag on Performance
A market timing strategy also incurs additional costs in the form of trading commissions, spreads and taxes.
"If you buy, sell, buy, sell you’re gonna pay a lot of commissions and dealer spreads and lose your money." Shad Rowe
Markets have an Upward Bias
When you move to the sidelines there’s also an opportunity cost. Over time the markets have had a natural tendency to rise.
“Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favor. (The Dow Jones Industrials advanced from 66 to 11,497 in the 20th Century, a staggering 17,320% increase that materialized despite four costly wars, a Great Depression and many recessions. And don’t forget that shareholders received substantial dividends throughout the century as well.) Since the basic game is so favorable, Charlie and I believe it’s a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of “experts,” or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.” Warren Buffett
“I think it’s dangerous to draw lines in the sand after which you’ll just sit it out. Once you do, the temptation is to spend all your time trying to defend why now is not the time to be invested. I wrote a piece last year on the 25th anniversary of Oakmark Fund. At the time the fund had returned something like 20x investors’ initial capital, while the S&P was up 10x. But when you look at the list of things investors had to deal with over that time – wars, hurricanes, global financial crisis, oil-price collapse, just to name a few – it’s amazing the market returned 10-fold.” Bill Nyrgen
“You want to spread the risk as far as the specific companies you’re in by owning a diversified group, and you diversify over time by buying this month, next month, the year after, the year after, the year after. But you are making a terrible mistake if you stay out of a game that you think is going to be very good over time because you think you can pick a better time to enter it.” Warren Buffett
The odds are high you’ll miss the best returns.
"We believe that the nature of financial markets do not favor timing investment strategies. In fact, historically, 90% of stock returns happened during 1.5% of trading days. Statistics are against those that think they can outsmart the market over a long period of time." Francois Rochon
The Best Long Term Performing Stocks Decline
“I don’t know how to time the market effectively, nor am I aware of any person or computer that has consistently done so. Inevitably, market timing leads to under-investment. Portions of the downside are often avoided, but so are the recoveries. Given the positive expected values of our investments over the long term, trying to predict the daily movements of the market is not likely to improve returns… Even the highest quality companies like Berkshire Hathaway and Nike have each had multiple 50%+ drawdowns during their decades of heroic returns. Only those able to endure the pain of such declines actually participated in the 100x+ returns that ultimately were realized by the holders.” Scott Miller
Timing May Interfere with the Investment Process
"You may have trouble believing this, but Charlie and I never have an opinion about the market because it wouldn’t be any good and it might interfere with the opinions we have that are good." Warren Buffett
So what can you do?
Rather than focus on what the market will do, focus on the things you can control; like your investment process.
“In my nearly fifty years of experience on Wall Street I’ve found that I know less about what the stock market is going to do but I know more about what investors ought to do; and that’s a pretty vital change in attitude.” Benjamin Graham
Position Properly / Follow a Game Plan
Portfolios need to be built so they can handle worst-case scenarios, which are often magnitudes greater than you expect. The ‘cardinal sin’ of investing is being stopped out at the bottom. This means having appropriate diversification, position sizes, liquidity, aligned clients and avoiding leverage.
“I never really have a strong outlook for what is going to happen in the coming year. I have never felt that you can really predict with any useful degree of precision what’s going to happen from one year to the next in terms of generalized market moves. So rather than waste any mental energy doing so, we just make sure that we are positioned properly so that no matter what happens, our clients are in good shape.” Chris Mittleman
“It’s always hard to know why the market does what it does. That’s part of the ever-interesting challenge we face in traversing the twists and turns of fluctuating prices and evolving fundamentals. On any given day, the sheer number of players, behaviours, economic factors, and business developments defy anyone’s ability to fully grasp what is going on and why. That’s why we develop and follow a game plan that does not purport to tell us what to do moment by moment, but rather is intended to help us successfully navigate the most challenging tumult. This is the essence of value investing.” Seth Klarman
“To survive markets that can be irrational for long periods of time requires not betting the farm, spreading risks, and seeking asymmetric opportunities where the upside is substantially higher than the downside.” Scott Miller
Don’t Try and Predict the Next Crash
The Investment Masters realise the folly in trying to predict the next stock market crash.
"Market forecasters will fill your ear but will never fill your wallet." Warren Buffett
“Trying to predict the timing of the next major market dislocation has always been a “fool’s errand.” Paul Singer
“Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.” Peter Lynch
“No one can predict market downturns with any useful level of reliability.” Terry Smith
“We believe that declines are unpredictable and those who attempt to predict the market are choosing a strategy which will serve them a loser’s hand over the long term.” Francois Rochon
Maintain a Long Term Perspective
As Buffett noted in the quote above, US equity markets have delivered attractive returns over the long term. That’s just as likely to be the case for the next century as well. That means if you have a long term investment horizon, you’ve got a natural tailwind behind you.
“Trust in time rather than timing.” Burton Malkiel
“It’s time in the market, not market timing that counts.” Christopher Browne
“History shows that time, not timing, is the key to investment success. Therefore the best time to buy stocks is when you have money.” Sir John Templeton
“We do not attempt to manage the percentage invested in equities in our portfolio to reflect any view of market levels, timing or developments. Getting market timing right is a skill we do not claim to possess. Studies clearly show that most successful fund managers avoid market timing decisions.” Terry Smith
“Let me underscore my belief that the short-term price movements are so inherently tricky to predict that I do not believe it is possible to play the in and out game and still make the enormous profits that have accrued again and again to the truly long-term holder of the right stocks.” Phil Fisher
In his recent 2018 annual letter, the Fundsmith Equity Fund’s Terry Smith looked back at the 1987 stock market crash, the largest percentage one-day stock market drop in history, and it’s impact on the long run returns of the US stock market. As is evident in the chart below and as Smith noted, ‘In the long term, it did not matter’.
Smith continued:
“However, this does not stop advisers and commentators predicting crashes and bear markets and suggesting you take preventative action, which ranges from reducing your equity holdings, buying or ‘rotating’ into lowly rated so-called ‘value’ stocks, through to selling everything and holding cash to safeguard the value of your assets or buying Bitcoin (down 80% in 2018).”
Source: Fundsmith 2018 Annual Report
Cash Should Reflect Opportunity-Set
The Investment Masters hold significant cash when they are unable to find attractive investments, not due to a market call.
“When bargains are lacking, we are comfortable holding cash.” Seth Klarman
"Because we are focused on absolute returns, we will hold cash in the absence of values and a margin of safety. We view cash as an opportunity fund." Arnold Van Den Berg
“It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.” Charlie Munger
"Our cash position is not a “market call,” it simply reflects an absence of ideas that we find attractive. We’ve never made hay by hoarding cash in anticipation of market corrections; a quick trip down memory lane serves as a reminder that we entered both bear markets (2002 & 2008) fully invested. We prefer partial ownership in businesses over snappy trades that require gazelle-like instincts to dart away from any hint of danger. We think attempting to time markets (knowingly or unknowingly) is a fool’s errand and agree with Peter Lynch: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” Allan Mecham
"If we have cash, it’s because we haven’t found anything intelligent to do with it that day, in the way of buying into the kind of businesses we like. And when we can’t find anything for a while, the cash piles up. But that’s not through choice, that’s because we’re failing at what we essentially are trying to do, which is to find things to buy." Warren Buffett
“We tell our clients .. ‘we are fully invested all the time, we’re not market timers, we don’t know anything about the market’. If we can’t find anything we will buy a company that’s being taken over.” Mario Gabelli
Own Quality Companies
Owning quality companies is the best defence to endure economic downturns. They often come out the other side stronger.
"Generally speaking, trying to dance in and out of the companies you really love, on a long-term basis, has not been a good idea for most investors. And we’re quite content to sit with our best holdings. People have tried to do that with Berkshire over the years. And I’ve had some friends that thought it was getting a little ahead of itself from time to time. And they thought they’d sell and buy it back cheaper and everything. It’s pretty tough to do. You have to make two decisions right. You know, you have to buy — you have to sell it right first, and then you have to buy it right later on. And usually you have to pay some tax in-between. If you get into a wonderful business, best thing to do is usually is to stick with it." Warren Buffett
"A few words on the timing of purchases. Woody Allen said that 80% of success is showing up. That's one of the main reasons we always want to be invested in the stock market, because we believe that owning great companies, not trying to predict the stock market, is the key thing to be able to beat the index over the long run." Francois Rochon
Price, don’t Time
Focus on paying the right price for quality companies. If you can buy a good business at an attractive price, do so.
"It’s uncertain every single day. Take uncertainty as being involved in investment. But uncertainty can be your friend. When people are uncertain, we pay less for things. We try to price, we don’t try to time at all.” Warren Buffett
“We don’t have an opinion about where the stock market’s going to go tomorrow or next week or next month. So to sit around and not do something that’s sensible because you think there will be something even more attractive, that’s just not our approach to it. Anytime we get a chance to do something that makes sense, we do it... So picking bottoms is basically not our game. Pricing is our game. And that’s not so difficult. Picking bottoms, I think, is probably impossible. when you start getting a lot for your money, you buy it.." Warren Buffett
Be Guided by the Business, not Market Forecasts
“If we’re right about a business, if we think a business is attractive, it would be very foolish for us to not take action on that,because we thought something about what the market was going to do, or anything of that sort.” Warren Buffett
Expect Uncertainty, Volatility and Down Markets
Maintaining a disposition toward future uncertainty, volatility and down markets will better prepare you for when they inevitably come.
“The idea that you try to time purchases based on what you think businesses are going to do in the next year or two, I think that’s the greatest mistake investors make because it’s always uncertain. People say ‘well it’s a time of uncertainty’. It was uncertain on September 10, 2001, people just didn’t know it was uncertain. It’s uncertain every single day. Take uncertainty as being involved in investment. But uncertainty can be your friend. When people are uncertain, we pay less for things. We try to price, we don’t try to time at all.” Warren Buffett
“If I buy a farm near here and it turns out to be a terrible year, and pests come in, and there’s no rain and all that sort of thing, am I going to sell if for half the price that it was selling for a year earlier? When I know over the next 100 years, there are going to be 90 years that are pretty good and a few bad ones? It doesn’t make sense to try and time things that way.” Warren Buffett
Control Your Emotions
“We wish we had perfect market timing (as well as the ability to fly). The reality is that no one does or ever will. The key is to find a way to care about one’s investment results over time, but to not feel burdened by the daily fluctuations of Mr. Market. The only way to invest, after what you purchased has fallen in price, is to be that successful relief pitcher. Put yesterday’s outcome out of your mind, get back on the mound, and make the best decision you can today with all the information at hand.” Seth Klarman
Be Optimistic
“I feel that people should learn to be optimistic because life goes on, and sometimes favorable surprises come out of the blue, whether due to new policies or scientific breakthroughs.” Irving Kahn
“Bulls make more than bears, so if anything be an optimist about life and about things in general is a great attribute as an investor. You just can’t be starry eyed and naive.” Stanley Druckenmiller
“We have chosen optimism and the belief that our civilization is fundamentally progressing. While prudence frames our approach towards stock selection, we have so far been rewarded for maintaining a constructive attitude.” Francois Rochon
“I had to teach myself to be bullish. But I promise you, as soon as I started looking on the bright side, not only did my investment performance begin to improve, but I felt and looked younger, too. Let’s face it – bearishness is the natural province of crabby old people. All the great investors – Buffett, Fisher, Munger, Templeton – stayed structural bulls and (have) reached grand old ages. Not only were they intellectually correct to be bullish – as history and their track records amply confirm – but they were emotionally smart, too.” Nick Train
Relax
"It’s very hard to move around successfully and beat, really, what can be done with a very relaxed philosophy." Warren Buffett
“Those investors who put the market on a time table not only become frustrated but end up making foolish moves. Instead, get on the train, sit back and enjoy the scenery.” Roger Engemann
Summary
So if you know someone who not only states they can predict the near term future, or this or that downturn or recession, but also the precise timing of those events, ask them what other things they’ve been able to predict. I guarantee there wont be much else. If it’s true, and I highly doubt that it is, it will have been no more than luck. Even a broken clock is right twice a day.
When the world’s greatest investors acknowledge they can’t time the market, what makes other people think they can? Seriously speaking, given the attractive long term returns generated by the world’s best investors without market timing, there is no logical reason that anyone should try to time the markets.
But if you do meet someone who wants to persist in this fool’s errand, borrow the very wise words of Terry Smith and say: “Good luck with that.”
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Further Reading:
“The Futility of Market Timing” - Drew Dickson, Albert Bridge Capital
“Even God Couldn’t Beat Dollar-Cost Averaging” - Nick Maggiulli
“The Stock Market Timing Game”