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Saturday, April 18, 2009

Market Timing

From the Hoss's Mouth

Market timing, in the opinion of Hoss Cents Free Financial Money Magazine, is no different than betting on the horse races. It’s a gamble no matter how you look at it. What is Market timing? It is a strategy used by investors or money managers of making buy or sell decisions of financial assets by attempting to predict when the market will change course.

market timing

Horse players, when attempting to predict winners, will review all available data for all the horses in a particular race. They look at many variables such as the horse's win percentage, ability at the distance and weight it will carry in today's race. Some even develop computer programs to calculate all the variables and predict a winner.

horse racing

Sound familiar? Market timers also use data, only their data is of an economic nature, found in the Wall Street Journal or similar publication, or on the Internet. Market volume, price to earning ratios and cash flow are just a few of the many variables they use to predict stock market fluctuations. Some market timers even develop (yes, you guessed it) computer models which employ technical and/or fundamental analysis for predicting changes in the stock market.
Now for the main and perhaps most important similarity between horse players and market timers: there are more losers than winners. Just in case you missed it, I repeat, there are more losers than winners.

This is not just the opinion of the Hoss. Most reliable studies of market timing demonstrate that market timing usually results in reduced returns. For example, The Hoss refers you to the following two studies: Determinants of Portfolio Performance by Gary Brinson and Investment Policy by Charles Ellis, both of which concluded market timing did not result in improved returns.

If Market timing was the only investment avenue available, The Hoss would rather enjoy a day at the races than waste his money on market timing.

Stay on track,

The Hoss

Next Hoss Cents Free Financial Money Magazine Post: April 26, 2009
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