Good morning & happy Monday!
“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 recognized.”
Henry Singleton, American engineer
Market timing … something you will hear about constantly if you turn on CNBC or Fox Business … something we may THINK we know … but I would like to submit to you today that NOBODY KNOWS.
As the adage goes, buy low and sell high … seems like a pretty common-sense approach to investing … that is after all how one makes money in investing. So, it only natural for one to want to try to time such buys / sells.
Market timing refers to WHEN one would buy and WHEN one would sell … what is the right TIME to make each of those transactions.
Whenever we have a market correction, I will very frequently hear clients state something along the lines of “I feel that it’s going to get worse before it gets better.” When the market is doing very well, I hear something like “I have a feeling that things are going to be going down soon, this rally can’t just keep going.” I’ve been hearing that later statement a lot recently.
Here’s the thing … you don’t know, and I don’t know, and the CNBC anchor does not know, and NOONE KNOWS when the market will move in any direction. Now, we ALL have all sorts of FEELINGS about what the market is about to do (examples of frequent sentiments I am hearing these days: “With the administration in Washington I feel the market is about to crash.” “The market has been on such a run recently; I just have a feeling it’s about to tank.” “This market run still has more life, I have a feeling it will go on for at least the rest of the year.”). All of these feelings are just that … feelings. They may be right and they may be wrong.
Something else to think about … we will validate our feelings virtually every opportunity we have. As an example, let’s say I believe the stock market is due for a correction (my feelings) … well, eventually I will be correct. The market may run up 50% and then pull back 20%, but I will still say “I was correct, I knew the market would pullback.” Never mind that the market gains far outpaced the market pullback in this example, I will still feel validated in my feelings.
See how dangerous our emotions can be in the investing world? Crazy, huh?
Now, just for kicks and giggles, let’s say I act on one of my gut feelings and actually turn out to be correct. In this example, let’s say I believe the market is due for a correction and I bail from my portfolio and then the market does indeed have a pullback. Well, I’m going to feel very confident about myself, likely way overestimating my abilities to time the market. But that’s only half the battle. When do I get back into the market? Is this a 10% market drop? Maybe 20%? 27.89%? Where exactly is the bottom in which it’s time to get back in the market?
This was a common occurrence during the coronavirus pullback of 2020. Here’s a hypothetical example: The market goes down, say 20% and an investor pulls funds out. The market proceeds to go down further, as low as 34%, so the investor who bailed feels validated in his/her decision (“I only lost 20%, I could have lost 34%”). But when did that investor get back in the market? Probably nowhere close to the 34% bottom, far more likely to be at a point well above the value when he/she bailed. Let’s say the investor got back in when the market had fully recovered from the coronavirus pullback … the investor locked in a 20% loss!!! The patient investor who rode the entire wave would be at 0%, where as the market-timer would be down 20% because he/she was only ½ right in their gut feeling … he/she maybe was somewhat right on when to get out but botched the when to get back in decision.
See, you don’t just have to be right on when to get out, but then also on when to get back in. The likelihood of being right on both fronts (when to get in & when to get out) is not impossible, but pretty stinking close. Then what about next time? Next time we have a FEELING do we act on it again? How many times as investors do we act on our emotions?
My proposal – NEVER.
Never act on a gut feeling, don’t give into the temptation to believe you know better than the market … it’s a trap … and one that has cost many investors a great amount of money throughout the years.
Stay the course, stick to the plan, ignore the emotions and let the market do its beautiful work 😊