I am for it.
But what is “it”?
Seth Klarman On Margin Of Safety Investing
This is part nine of a ten-part series on some of the most important and educational literature for investors with a focus on value. Across this ten-part series, I’m taking a look at ten academic studies and research papers from some of the world’s most prominent value investors and fund managers. All of the material Read More
What is Maket Timing?
Market timing can be lots of different things. I lowered my stock allocation to protect myself from the negative effects of high valuations in the Summer of 1996. That was before Shiller published his paper predicting that those who failed to do so would live to regret it within 10 years. I didn’t think of what I was doing as “market timing.” It just seemed obvious to me that owning stocks was riskier when prices were high and so I should lower my allocation when prices reached insanely dangerous levels. When I told people at the board community where I posted in 2002 what I had done, a large percentage of them were highly interested in learning more about the idea. But the dogmatic Buy-and-Holders were dead set against permitting us to hold the discussions we wanted to hold. Their argument was that what I was proposing was “market timing.” They said it like it was a dirty word.
At the time, I did not agree that what i was proposing was market timing. I accepted the premise of the argument that market timing is a bad thing but distinguished what I had done from the bad thing known as “market timing” on grounds that I understood that I might not see benefits for doing what I did for many years into the future. I continued to make that distinction for several years. The dogmatic Buy-and-Holders were never even a tiny bit impressed. They insisted that what I was describing was market timing. Eventually, I had to acknowledge that they were right re that one. I had lowered my stock allocation at a particular time because valuations were too high with the intent of increasing it when valuations were lower again. That’s market timing. I finally just threw my hands up in the air and agreed to call the thing what it was.
What I was taking issue with at that point was the idea that market timing was bad. I of course continued to acknowledge that short-term timing is bad. But the problem there is not the timing part, it is the short-term part. Being against market timing because short-term timing doesn’t work is like being against driving because drunk driving is dangerous. Short-term timing doesn’t work because irrational exuberance is caused by investor emotion and it can take a long time for investor emotion to shift. Timing is great. It always works eventually. But doing it in such a manner that it must produce good results within a short amount of time or else you will abandon the effort is taking a good concept and applying it in a way that dooms it to failure in the real world.
How Market Timing Works
I have learned some important things about how market timing works over the past 19 years. I knew from the beginning that it makes sense to lower your stock allocation when prices are nuts. But I didn’t know that doing that is properly referred to as “timing.” And I didn’t know why short-term timing never works and long-term timing always does. I didn’t know how often it is necessary to engage in timing. I didn’t know how much one should lower one’s stock allocation when one determines that timing is appropriate. I knew that some form of timing was required (although I didn’t know enough to call it that in the early days) but I knew next to nothing about how to go about doing it.
I know more today. At least I think I do. But you know what? We are in the early innings of this game of figuring out how stock investing works in the real world. I may not know as much as I think I do. You know what I am going to say I need to learn more, right? You probably have the phrase memorized at this point. I need to see every discussion board and blog on the internet opened to honest posting re the last 40 years of peer-reviewed research in this field.
I know more about how market timing works than just about anyone else alive because I have been working these fields for 19 years now. Everyone who works in these fields can bring himself or herself up to my level of knowledge by reading my work. But it is going to take more than that for us to get our economic system working smoothly. We all need to learn more. We all need to push the ball farther. We all need to stop with the foolish quarrels about whether discussion of the need for market timing should be permitted and begin spending our energies instead on figuring out how best to go about timing.
Buy-and-Holders Feel Trapped
There has never been an iota of evidence indicating that timing is not required. This is one of the reasons why the discussions have been so contentious. If 80 percent of the evidence supported Valuation-Informed Indexing and 20 percent of the evidence supported Buy-and-Hold, we could hold fruitful discussions as to which was the superior strategy. But it is not 80 percent of the evidence that supports market timing, it is 100 percent of the evidence. That makes it hard for the Buy-and-Holders to make a case. The Buy-and-Holders feel trapped in having to defend a position for which there is no evidence and so they turn to all this nasty stuff to block discussions instead. I look forward to the day when we can all agree that OF COURSE market timing is required and move on to more interesting discussions.
It could be that my understanding of how to practice market timing is flawed. When we open the entire internet to honest posting, we will have thousands of smart people contributing to the discussions and helping me and you and millions of others come to a better understanding. Good. That’s how it is supposed to be. I want to be proven wrong in those cases where I am wrong. That’s one of many reasons why I want the entire internet opened to honest discussions.
Market timing is 70 percent of the stock investing story. It would make sense if 70 percent of the words devoted to how to invest in stocks were words aimed at helping people to engage in market timing more effectively. The point of this article is not to tell you all there is to know. It is to express dismay at how little we know and to urge you to join the call for the changes that need to be made before we all can begin learning a lot more.
Rob’s bio is here.