The Accidental Case For Market Timing

This morning Nick Maggiulli published a post about the importance of checking your work. He said, “becoming a purveyor of signal in a world drowned by noise is the ultimate reputational asset.” If people can’t trust that your numbers are right, or that your information is accurate, you’re finished. People will forgive a typo here, or a miscalculation there, but too many of them, and they’re gone forever.

Last night I published a post without checking my data. This data was not incidental, it was the entire point that I was trying to make.

My numbers were so off that it completely changed the takeaway. I showed that if you were able to sell at every top and buy at every bottom, with a 15-day lag, then you might as well have bought and held.

Below is the post, with the correct information, and the complete opposite takeaway.

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If you were able to see into the future, this is how you would trade the stock market. You’d sell at every peak (prior to a 20% drawdown) and you’d buy at every bottom.

This chart shows perfect market timing.

But in the real world, you would owe taxes, assuming you’re not trading in a tax-deferred account. And in the real world, you can’t see into the future. But, for the sake of argument, let’s assume that you were a decent market timer. You didn’t sell at the top and buy at the bottom, but rather you missed each of these by just 15 trading days. Let’s also assume that every time you sell, due to the non-negotiable partnership with Uncle Sam, they take 20% of your profits. In this case, coincidentally, you ended up with the exact same amount of money as the person who bought and never did a thing. Turns out that you don’t need to nail the top and bottom to come out way ahead, even net of taxes. In this case, you would have had nearly twice as much money as the person who bought and held.

Growth of $1 between buy and hold versus a market timing strategy

Here’s how I ended the post last night:

“It’s hard enough to get one call right, let alone a lifetime of them. Determine how much risk you can tolerate, let the markets do what they may, and focus on more productive uses of your time.”

That should have read:

You should absolutely time the market, but only if you’re very good at it.

 

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