Market Timing is it timing the market or time in the market?

MARKET TIMING

Is it timing the market or time in the market?

Part one

I don’t often write about the equity markets, however, since most of you out there have at least a few stock holdings I want to address what is nearest and dearest to all of our minds; market timing. One can easily go on and on for days on the subject, so I will attempt to be brief.

When conversations around the water cooler at work turn to the subject of the stock market, there are two things you can easily count on; everybody’s an accomplished market timer, and everybody’s a male. This trading business is rarely an affliction of the female species, and is nearly always mans problem, just like fighting.

Nearly everyone you pole is a fairly accomplished fighter and can at least hold their own, and none of them are women. It’s an ego thing. Every guy fancies himself as a butt kicker, and, when they aren’t out there kicking behinds, they are behind a desk day trading their way to millions, thousands, make that hundreds.

Most stockbrokers (financial advisors), get caught up in market timing as well, and it’s hard not to when you watch stocks on your computer fourteen hours a day. Because of this market timing mentality, there are a plethora of brokerage companies out there that are only too happy to convince you that with their unique system, you can achieve those 1200% returns everybody dreams of. Most will give you a trial account with, for example, fifty thousand simulated dollars to trade with and sit back and watch you hook yourself.

They can do this because they have removed the single most powerful element in the market, and that is emotion. If you are sitting at home with fifty thousand dollars of fake money, there are no consequences for losing it. With this new found freedom you are able to take a step back from the market and see much more clearly now. With the fear factor removed you are able to take much bigger risks that are sometimes needed to see those high returns. If with every day in the market, or every trade you do, a loss means losing your house, how can you dare to trade? Fear and greed is what happens when a banking giant misses earnings by a mile and the market is gyrating wildly as people react with fear and greed. They liquidate their positions, only to buy them back at a lower price, and then return to the ‘table’ once more as a seller. That is part of the psychology of the market that gives those market timers hell.

So back to the big question which is it, timing the market of time in the market? On a personal level, as a stockbroker, I saw only one person who was able to show a positive return regardless of what the market was doing. He was also a seasoned professional, and CFO of one of the world’s largest financial institutions and he knew how to time the market, and had developed a complex trading system over the years. This was his personal system that he used and had no interest in selling it other investors.

The late nineties bread a new kind of investor, many of which had never experienced a down market, and everyone was a pro. Market timing became a thing of the past. In 1999 and early 2000, the only thing one had to do to make money in the market was to buy something. Remember the old story about using a monkey to pick your stocks? Well for awhile it actually worked, and for a brief and glorious period it did not matter what stock you picked, only that you picked it.

For the purpose of the rest of this series on market timing we are going to put that brief period of time out of our minds and think about historical data. While I do not recommend timing the market, I was at a firm, and in a position that required me to be an astute day trader, and like everyone else, I won some, lost some, and on occasion, got my head handed to me.

Good luck and happy investing.