What is Market Timing?

Market timing is an investment strategy of seeking to add to your overall returns over time by picking the turning points of each market cycle. In common parlance, get out at the highs and come back in at the lows.

There are various indicators one can use in making this assessment. Some are objective coincident indicators like the current level of interest rates, the share of corporate profits in GDP and the P/E levels of company earnings relative to inflation and the rule of 20. I’ll expand on these in another article.

But there is more to it than just recognising the degree of over-valuation or under-valuation that exists in markets. You additionally have to perceive that a change in sentiment is in the wind so the market will finally react to this under or over-valuation soon after. The risk is you may prove to be far too early in your timing. Such a reliance on this “gutfeel” subjective analysis is enough to persuade most conventional institutional fund managers, who rely on pure logical analyses, to dismiss market timing as “unproven” and in the “too hard basket” and even in the realm of astrology.

My experience of Market Timing

I have always employed market timing to add value, and over the decades have had a very good track record of picking the bottoms and sometimes the highs. I’d even go as far as to say that my market timing has added more relative value in the past 5 decades than any other strategy except for stock-picking.

Picking the exact timing of highs is definitely a harder task than lows based on my experience.

The market can look seriously over-priced for many months or even years but somehow just keep going up. These disconnects are surprisingly common.My first ever share purchase was at university on the day Edward Heath, PM of the UK said to Parliament in November 1974 that “we are looking at the end of the world as we know it”. The bottoms of markets invariably occur just when every expert is saying “Stand Aside, wait for better times” which is why the majority of institutions get it wrong each time.

I correctly picked the gold move in 1979. I predicted and warned clients of a pending stockmarket major correction in the 3 weeks running up to the October 1987 crash (I under- estimated its scale) and was nearly sacked by my major broking firm who disagreed (and wiped out their equity in the subsequent crash).

I also predicted the bond bust of 1994.

When I used to write in the Sun Herald newspaper I both predicted the dotcom boom in 1999 (I tipped Davnet at 4c) and forecast the peak on the Sunday of the week the Nasdaq peaked in 2000) selling Davnet at $6.50. The motivations to buy and sell were purely market timing. I would never have normally recommended Davnet – its MD drove a Ferrari – I never invest in companies where the key management engage in conspicuous consumption, or have a politician as chairman.

Between 850,000 and 1.4 million people read those articles avidly, and a few have told me they bought Davnet, so someone out there can verify these claims.

I sold control of my investment business in November 2007, close to the peak of the market. I did not correctly pick the depths of the 2008 crisis, but I did predict and act on the bottom of the market in March 2009, fully investing on 6th March 2009.

More recently, one of the reasons for the top quartile performance of the Managed Equity portfolio between 2013 and 2023 was a decision to go heavily liquid and defensive in January 2020. Covid was just getting underway and threatened to be a real pandemic. Then, as covid got going in earnest, I picked the market low in March 2020 to the day and went back in on behalf of clients. You can evidence my thought processes through the contemporaneous quarterly newsletters on the website blog posts.

MARKET TIMING BENEFIT from the recent past based on Australian ASX200TR index.

  1. Let’s assume you invested $100,000 on 1 OCTOBER 2013. The index was at 45,321.40.
  2. There were minor ups and downs along the way, but no real opportunity to use serious market timing until January 2020 when it was clear we were entering a period of market uncertainty with covid. You could have sold out in late January or in February at a high of 74,117, but it was reasonable to sell after the Xmas rally on 1 February when it was at 72,073.
  3. Your portfolio was worth $159,026 on that day assuming dividends reinvested.
  4. The wheels fell off in March when people feared the worst from covid and after a freefall plunge it was clear the panic selling was way overdone so you completely reinvested. The index had fallen back to just 45,739.40. Interestingly the fall stopped at a low of 61.8% of its earlier high value which is a golden ratio, phi, the most prevalent number pattern in nature, so chartists would have been excited.
  1. Had you gone 100% liquid in February 2020 and 100% back in on March 2020 your portfolio at 1 October 2023 would be worth $290,599
  2. It’s more realistic to believe you would have only gone 50% liquid on 1 February, so your portfolio would be worth $237,200.
  3. Had you followed the general advice of most fund managers and stayed fully invested the whole time, your portfolio would be worth just $184,420.
  4. The analysis assumes you continued to hold an index style portfolio, and didn’t use the opportunity to reinvest into more aggressive recovery stocks (higher beta) for a bigger bounce as I always do.

Conventional fund managers see Market Timing as unproven and dangerous

Few professional fund managers employ market timing to add value.

Just as you might distract a child, so fund managers dismiss market timing talk by persuasively arguing in terms of the risks of being caught out of the market.

Here is one published by a very large and respected USA fund manager.

“The impact of being out of the market for just a short period of time can be profound, as shown by this hypothetical investment in the stocks that make up the Russell 3000 Index, a broad US stock market benchmark.

A hypothetical $1,000 investment made in 1998 turns into $6,356 for the 25-year period ending December 31, 2022. Over that same period, if you missed the Russell 3000’s best week, which ended November 28, 2008*, the value shrinks to $5,304. Miss the three best months, which ended June 22, 2020**, and the total return dwindles to $4,480.

There’s no proven way to time the market—targeting the best days or moving to the sidelines to avoid the worst—so the evidence suggests staying put through good times and bad. Missing only a brief period of strong returns can drastically impact overall performance. We believe that investing for the long term helps ensure that you’re in position to capture what the market has to offer.”

Why the example above is misleading

*The week of 28 November 2008 was just one very good week in an otherwise negative period. The example assumes you only missed that week, not the months of declines before and after until the real low in March 2009. It’s unrealistic to assume you would only miss that one good week. The article fails to mention the market low of March 6th 2009 and the big bounce to September 2009. A highly predictable low I thought although many people failed to see it and get in.

**Another extreme example. These three months were the covid rally just as infections were growing exponentially. As covid gained traction in January-March the market suddenly plunged in March 2020 anticipating the worst. It was time to buy and I did. Why?

The trigger for me was the news that the vaccinations were proving successful, so death rates were 20 times lower if vaccinated twice, plus Delta was already giving way to the lesser Omicron strain meaning we weren’t looking at a global pandemic Black Death style global recession and demographic disaster (the Dark Ages), merely a more difficult time of forced saving and lifestyle changes.

A lot of people instead sold near the lows in March and then completely missed the rapid rally. Those people should definitely avoid market timing!

Conclusion on Market Timing

Blind Freddie knows that at times all markets get outrageously expensive and sometimes offer incredibly good value.

The trick is to still have cash at the bottom of markets, and to know when to get off the gravy train of a bull market before it all ends and gains evaporate.

Getting fully invested at the bottom of markets and taking liquidity near the top can be a very lucrative strategy for adding value. If you could time the market perfectly each cycle then you would multiply your returns manyfold.

It’s fair to say that few people possess the skillset and mental fortitude to do market timing successfully. The conventional alternative of staying fully invested through thick and thin is a better strategy than using market timing and getting it wrong.