In investing, there are many candidates for the Big Lie. But the one I suspect afflicts most of us in this game most grievously and costs individual investors more money than any other, is the shibboleth "Market-timing is always a bad idea."
TV commercials with Peter Lynch and assorted comics to endless stories in the money-management magazines, to the chatty little brochures that come in the mail with your mutual funds' statements, the drumbeat of "don't engage in market-timing!" advice is deafening. You'd think market-timing was a crime, like ... umm ... lying in a federal court proceeding.
In fact, market-timing, by any reasonable definition, is a natural and essential part of investing. Ideally, you want to get in low and sell higher, and neither condition can be separated from the times you buy and the times you sell. Stock-picking is only half the game: Harvesting profits by selling at the right moment -- make that
right moment, for there is rarely an
right moment, except in hindsight -- is the way we cash out the profits from our smart stock picks. Sell at the wrong moment -- or buy at the wrong moment -- and you can dramatically sub-optimize the payoff from good stock-picking.
Timing your buying and selling is an essential part of trading ... and of investing as well, even if you're a committed buy-and-hold investor. (You've got to sell
or you'd never have anything but paper profits.)
You could thus argue that the rightness or wrongness of market-timing is a matter of definition -- and you'd be exactly right. I suspect most of these noisy and absolutist damnations of the market-timing idea grew out of a binary view of investing, in which individual investors are assumed to either be In the Market or Out of the Market, entirely and completely, at any given moment. In other words, load up with stock, then at what you perceive as a sell signal -- invariably, a bout of market weakness -- Sell Everything.
Then, when prices have come back and are approaching a market top, Buy Everything Again. Then when things look bad, Sell Everything Again.
Of course, that's stupid ... and you and I know that. Indeed, I'm skeptical that there has ever been a huge number of investors who followed, over time, that kind of self-defeating, money-losing, slash-and-burn market-timing. Yet the conventional wisdom about market-timing emerged and has taken hold. Boy, has it taken hold.
Like most conventional wisdom, "Don't engage in market-timing" is all too conventional and simplistic ... and hardly wisdom.
The problem, I've realized, is that we need a more macro definition of the potential wrongness of market-timing, something like:
Selling all your positions and hiding in cash because you think the market is entering a dark period, then moving all that cash back into the market when you think good times are about to resume, is rarely smart, because you won't be able to time that complete exit from the market -- and your subsequent complete re-entry into the market -- in a way which makes the most of the opportunity.
But I despair of that kind of definition ever taking hold because the opposite, simplistic one holds sway so tenaciously.
My thoughts on the legitimacy of market-timing aren't new -- I've marveled often over the nearly four decades I've been investing at how many otherwise intelligent people have been held captive by this simplistic nonsense -- but they are much in my mind these days because of some notes in the emailbag following my Jan. 12
column on harvesting profits from big wins. The column drew even more email than usual, the overwhelming majority of which was positive. But a significant number of those messages expressed shock, along the lines of
But wouldn't selling when a stock is up be ... GASP! ... market-timing? How could you possibly suggest that? Don't you know that all the experts say market-timing never works?
and I got into an interesting correspondence over the idea of market-timing and my apparent dance with the devil after that column appeared. I think you'll find it interesting. With her permission, here is our exchange, slightly edited for space:
Jim-- I'm confused. Over the past two years of reading TSC, I've learned a great deal -- mostly about why to buy a stock in the first place and why to sell it. Thus despite JJC's concerns last October, I only sold one stock -- Boeing (BA) - Get Boeing Company Report -- for obvious reasons. Now you are encouraging me to take some profits from some of the stocks on your list (many of which I own and have owned for some time). It seems to me the choice is: are you willing to risk the profits you have gained since you bought Yahoo! (YHOO) because you believe it will continue to rise or not? I don't need the profits at the moment since I'm 20+ years from retirement, it is a small position (less than 2% of my portfolio), and I wouldn't have committed the money to buy the stock in the first place if I hadn't been able to lose it. Consequently I'm worried (just as I was with JJC's comments in October) about you making what appear to be such sweeping generalities -- such as "take some profits." And where do I start and where do I end? And aren't you encouraging market-timing? (Take some profits now and maybe get back in later.) I must be missing something in all this, given that I've been only doing this for a short time and you have been doing it for years. So what am I missing? Thanks, Kathlyn
My response -- or actually, a follow-up, after a brief first reply:
Kathlyn, your note has stayed with me, and I realized last night that my first response missed an important element. Basically, your 'plaint is that I'm suggesting a form of market-timing, which is implicitly a Bad Thing. One of the Big Lies of investing is that market-timing, always and in all forms, is a Bad Thing. That's just not so. Timing -- on both the buy and sell ends of a position -- is just as important as stock-picking. Indeed, to deny the usefulness of either is silly and self-defeating. Yes, I know the statistics about the long-term effects of buying in on the best day of a year and selling, years later, on the worst day of a year -- in effect, producing (under that definition ... and that's key) the worst possible return, which still turns out, in those stats, to be pretty good. Problem is, all those stats ignore the alternative of intelligently harvesting and redeploying profits along the way. People, for example, who followed my thoughts yesterday morning about taking some profits in bloated positions can today, if they wish, re-establish those positions at a lot lower basis -- keeping the net gain from the deltas between yesterday's prices and today's, less taxes. I know few absolutes in the market, and I don't accept the idea that timing either absolutely or innately bad. It has to be done deftly, and your timing is NEVER perfect. But used intelligently, timing is a key part of managing a portfolio. Folks unwilling to handle the timing part of the ((stock-picking) + (market-timing) = real gains) equation should probably put their money in an index fund. (Why not a conventional equities fund? Because they engage in market-timing in a big way too, and if you don't believe in it, you don't want them doing it for you, either!) Hope this is useful, and not just (more?) confusing! Best, Jim
To which Kathlyn replied:
Jim-- Very useful! And my comments were probably an oversimplification of my full thoughts. I agree market-timing isn't bad. I'm all in favor of buying on the dips and have been very successful at doing this. As you say, I never find the exact bottom, but I'm close enough to make me feel comfortable. I guess what really prompted my original email was something which has escaped me to date -- that being, when to take profits, as you suggested. I just can't push the button and sell when I think it's a market correction, not brought about by any significant change in the stock, and thus I'm not convinced I could get back in at a lower level than my original purchase price. But I guess your point is: take some profits, buy again later at a lower price -- and although your basis will be higher, you have the profits you took to invest elsewhere. As you said, I'm an investor, not a trader, and I guess this will come with more experience. Thanks for your additional insight. Kathlyn
Seems to me Kathlyn has it right -- for her investing style -- and with 20-plus years ahead of her before retirement, she's likely to have a nice nest egg laid away.
Constant selling is even worse than never selling ... but not much. Don't flinch from taking profits, turning a substantial gain into real dollars. Then reinvest those dollars where you think they'll have the best chance to multiply once again.
Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At the time of publication, Seymour held no positions in stocks mentioned in this column, though positions can change at any time. While Seymour cannot provide investment advice or recommendations, he invites your feedback.