Remember that movie a few years back or so where our hero is on his way to his dead end software engineering job and he gets caught in rush hour traffic? Every time he switches lanes to one that is moving faster it stops dead. He always seems to switch lanes seconds before the new lane completely stops. Like everyone else he is racing to get to work in the fastest possible manor, and that is how some people approach investing. They are always trying to get that perfect stock that will give them those gargantuan returns in the fastest possible time.
Maybe you have heard this saying; you have to be in it to win it. Approx. 85% of returns are realized in 5% of the time. So you have to ask yourself, are you that astute of a trader that you can catch that five percent window? I was in the business and I certainly wasn’t able to catch that window of opportunity on a regular basis.
If we are going to adhere to the philosophy, you have to be in it to win it, then you had better start getting in it. Now, if you are going to do that, it means you are not timing the market, which also means you are buying some stocks at the high. That kinda goes against the buy low sell high strategy that everyone strives to emulate.
Let’s take a look at a few stocks at their historic highs and see what happens if we buy into those current prices.
Say we bought shares of JP Morgan in Jan of 1989 at 10.25 a share, which turned out to be the high, and still owned them in Oct. of 1990 at a low of 5.17 a share; I think it’s fair to assume you are not going to be happy with your market timing skills. Just hang on though, because now it is trading at a split adjusted price of 41.86. That’s not too bad for someone who bought at the worst time. Take a look at Johnson and Johnson, trading at a high of 3.11 in Jan. 1983, then dropped to 1.88 in July of 1984. If once again you displayed very poor market timing and bought in 1983 at 3.11, you’d be a pretty happy camper if you still owned it today. JNJ is trading today at 59.73, and is a far cry from the high of 3.11 that so many people agonized over.
What if you were an amazing market timer and are able to pick the lows an astounding 75 % of the time, is it really worth the headaches, lost hours of sleep at night, and daily frustration of watching a market that is controlled by fear and greed.
Don’t forget one thing while you are market timing your way to riches; you are undoubtedly racking up some short term capital gains here, so you should be sure to have some money set aside to cover that.
For those of you who are still not convinced, the S&P 500 compounded an annual rate of return at 11.9%, over a 20 year period. This means for every 10,000.00 invested, the return was a hair under 95,000.00, but the average person only gained around 21,000.00. Clearly there has been a lot of market timing going on here, when people should have stayed in the market using the S&P 500 index. Probably the easiest way to invest in the index is to buy SPY, or spiders, which trade on the New York Stock exchange and each share represents a tenth of the actual index, so when the S&P 500 is at 1200, the spiders are trading at 120 per share. You can also buy an S&P 500 index fund as well.
Despite the overwhelming evidence that points away from market timing as a investment strategy, despite what the Oracle of Omaha has been preaching for decades, there will still be many investment companies looking to exploit investors into thinking they need their software so they can market time themselves into millions. Remember, practice trading with fake money is not even in the same universe as live trading with your hard earned dollar, and don’t be swayed by companies that will tell you different.
Good Luck and Happy Investing.
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