The Dangers of Trying to Time the Market

Marc Faber is a Swiss born investor who’s the editor and publisher of the financial newsletter, the “Gloom, Boom & Doom Report.”

He has been bearish (i.e. he thinks the markets will fall) on the American share market for a long time and – thanks to a recent post from the finance and economics blog Calculated Risk – also a really good example of how dangerous it can be for someone to try to time the market (in timing the market, an investor is seeking to predict when the market, as a whole, would rise or tumble).

So, coming to Faber’s timing, the following is just a mini-snapshot of some of his market calls:

1. On 24 October 2012, he predicted on business news channel CNBC that US shares could fall by 20%. Of course, no such event eventually occurred. That day, the S&P 500 (a broad American share market index) closed at 1,409 points.

2. Roughly eight months later on 8 August 2013, he appeared on CNBC again and this time, predicted that American shares could be “maybe 20 percent [lower], maybe more!” by the end of the year. The S&P 500 closed the day at 1,697 points. By the time 2013 rolled to an end with the world welcoming 2014, it was clear that Faber’s prediction of a big crash didn’t happen.

3. Just two days ago on 8 July 2014, Faber was on CNBC, touting a possible 30% collapse in the S&P 500. On that day, the American index closed at 1,964 points.

Now, here’s why it’s so dangerous to time the market. Let’s say the S&P 500 would collapse by 30% from its 8 July 2014 close of 1,964 points: The American share market barometer would then hypothetically end up at 1,375 points. But on 24 October 2012, when he made the claim that the market could be up to 20% lower, the S&P 500 was at 1,409 points, or just barely 2.5% higher than 1,375.

For the past one-and-three-quarter years since 24 October 2012, Faber had been guarding against a market drop that didn’t happen and left 40% worth of gains on the table (1,964 points is 40% higher than 1,409). To make matters worse, the drop he’s trying so hard to guard against now, would bring the share market to a level that’s just a hair’s breadth lower than where it was on 24 October 2012.

And when you consider the fact that Faber has been bearish way before 24 October 2012, when the US market was a lot lower than where it was at that date, it’s easy to see the folly of trying to time the market.

So, if one shouldn’t be trying to time his or her entries into the market, what should one do? The answer, in my opinion, lies in this piece of golden advice from investor Nick Murray (emphasis mine):

“Timing the market is a fool’s game, whereas time in the market is your greatest natural advantage.”

What kind of advantages though? Two come easily to my mind. This is the first:

“Measuring returns at the start of every month from 1988 to August 2013, if the [Straits Times Index (SGX: ^STI)] was held for a year, there’s a 41% chance of sitting on negative nominal (i.e. unadjusted for inflation) returns. Hold it for 10 years, and losses occurred only 19% of the time. Double the holding period to 20 years however – here comes the kicker – and there were no losses.

Simply said, the odds of making losses are dramatically reduced when our holding periods lengthen. I’ve mentioned it before, and I’ll say it again: Time can be a powerful ally in winning the investing game (maybe even the most powerful ally we’ll ever have).”

This is the second:

“[Staying] invested maximises our odds of having the market reflect the value of the businesses we own. There are times when the share prices of companies fail to reflect a growth in their businesses for extended periods of time, only to then spike up by a huge amount over a relatively short number of years.

Case in point: Raffles Medical Group (SGX: R01). Between March 1999 and November 2008, the healthcare operator’s earnings grew by 512% but yet, its share price stayed flat from end to end at basically S$0.56. [As of 25 June 2014], with its earnings up 1,532% since March 1999, its shares are 600% higher at S$3.92.”

Marc Faber’s numerous failed attempts at timing a market collapse also brings to mind one more important point: It can be downright dangerous for your investing-health if your success at investing is overwhelmingly predicated upon correctly forecasting when markets will move up or down.

Or as my American colleague Morgan Housel puts it (and I’m leaving him with the final word here):

“In my experience, the people who are the most successful in finance — whether it’s a professional investor or a passive retiree — are not those who make the best forecasts. It’s those who put themselves in situations where they don’t need to rely on forecasts coming true in order to do OK…

…Sure, you’ve heard stories about investors who make a big, gutsy call and make a fortune. But those stories often rely overwhelmingly on luck and revert to the mean very quickly. Lasting financial success comes to those who align the odds of success in their favor. That comes from being adaptable and open to change, which is literally the opposite of relying on forecasts.”

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Raffles Medical Group.