It’s Not Enough to Tolerate Market Timing, We Need to Encourage It

It’s not just that market timing is not bad. Market timing is good. Market timing is price discipline. Price discipline is the magic that makes markets work. We need to encourage market timing by all investors at all times.

The benefits of market timing

Since market timing is the key to achieving long-term success as a stock investor, we all would be better off if we could exchange market timing tips at every internet site. The Buy-and-Holders get away with not permitting that because our Get Rich Quick urge compromises us. We all have an innate desire to get something for nothing. So we don’t push the market timing thing too hard. We don’t approve of the tactics that the Buy-and-Holders employ to suppress discussion. But we are sympathetic to what they are trying to do.

That changes when prices collapse. I presume that we will become less tolerant of the behavior of the Buy-and-Holders when we see for ourselves how painful an experience it can be to live through a Buy-and-Hold Crisis. So the Buy-and-Holders will have to relent a bit. I doubt that they are going to be willing to capitulate entirely. My guess is that they will go from a stubborn refusal to permit any discussion of the benefits of market timing to a reluctant acknowledgment that there might be unusual circumstances in which engaging in a tiny bit of market timing might not be so terrible an idea. The late John Bogle offered a preview of how this tactic might be employed in the comments he advanced re market timing as part of The Great Safe Withdrawal Rate Debate.

It won’t fly.

I am all for compromise. That part is gold. The problem is that market timing is not kinda sorta okay in unusual circumstances. Market timing is what makes the stock investing world go around. It’s the key to long-term success. Stocks are such an amazing asset class that it is hard to imagine how a stock investor who makes use of market timing could do poorly over the long term. And irrational exuberance is such a destructive force that it is hard to imagine how a stock investor who refuses to engage in market timing could avoid suffering crushing losses at some point in his investing lifetime.

Either market timing is nothing (which is the case if the market is efficient) or market timing is everything (which is the case if valuations affect long-term returns). Those are the only possibilities. We need to figure out which one it is (you know what i think) and then get about the business of developing a complete model of how stock investing works rooted in that foundational principle.

Either the Buy-and-Holders got it right or they got it wrong. They didn’t get it half right and half wrong. If market timing is required for investors seeking to keep their risk profile constant over time, it is irresponsible to undersell the benefits of market timing for fear of offending the people who claimed otherwise when all of the research was not yet in. We do no favors for our Buy-and-Hold friends by taking the bandage off ever so slowly. If Shiller’s research is legitimate, we need to leave the Buy-and-Hold stuff behind and move on to the first true research-based model for understanding how stock investing works as quickly as possible.

Market timing offers great benefits. But it does not possess immediate appeal. Choosing market timing means rejecting irrational exuberance, which means rejecting Get Rich Quick. That doesn’t happen naturally. That takes work.

Becoming an effective market timer

If you are going to become an effective market timer, you need to hear the case for it daily. Bull markets have been around for as long as stock investing has been around. The human weakness that causes us to want to believe that this might be the first time in history in which market timing is not 100 percent necessary is not going to disappear just because some internet sites have been opened to honest posting re the research. There are always going to be temptations for the people who offer advice in this field to pretend that irrational exuberance is real and for the people who are seeking that advice to fall for the con.

You know how hard it is to stick to a healthy diet, right? That’s the sort of battle you will be taking on when you vow to leave the Buy-and-Hold stuff behind and go with a research-based strategy. You won’t last long if the best that the investment advisers can do is to offer a hesitant acknowledgement that market timing is not so bad after all. Market timing is good. Market timing is rational. Market timing is prudent. Market timing is smart. You need to be reminded of that daily to have any realistic hope of the message truly kicking in.

Rob’s bio is here.