Investing Insights

The Folly of Trying to Time the Market

by Richard L. Platte, Jr., CFA, Of Counsel | January 10, 2021

“Nowhere does history indulge in repetitions so often or uniformly as in Wall Street... The game does not change and neither does human nature.”

– Edwin Lefevre
Reminiscences of a Stock Operator

How can an idea that’s been proven so repeatedly wrong remain so beguiling? What can be simpler than selling when stocks are high and repurchasing them when they’re low? Easy-peasy. How many individuals have significantly improved their investment returns by profitably jumping in and out of stocks? Not many. (No one talks about Uncle Harry who sold stocks at what he was absolutely convinced was a market top and then repurchased them six months later at higher prices. Uncle Harry doesn’t talk about it either.) Market timing is a loser’s game for the following reasons.

“The only function of economic forecasting is to make astrology look respectable.”

– Raymond F. DeVoe, Jr.

Not much to say here other than human beings are notoriously poor predictors of the future. Enough so that there’s a whole genre of quotes such as the one above, mocking one’s inability to see the future with any useful accuracy. Short-term stock price movements are caused by events that are unknowable and can’t be predicted. Three years ago, who would have predicted a pandemic? And if anyone did, would they have anticipated that the return on the S&P 500 would have still been a plus 18.4% in 2020 and plus 26% year to date for 2021? On September 1, 2001, who foresaw the tragic event of September 11, 2001? Remember all the angst around Y2K? That was a nothing in terms of investing. As poor as the record has been, there’s something innate in human nature that compels some to “read the tea leaves” and predict the future. Traders have been doing this guessing for a long time, but it really doesn’t work. The future is simply too complicated to be predictable.

“What everyone knows isn’t worth knowing.”

– Walter Lippman

As Mr. Lippman pointed out when it comes to investing, knowing what everyone else knows isn’t worth much. If everyone is afraid that stocks will decline, and you are too, it’s a safe bet that stocks are not likely to decline much. The explanation for this is relatively simple: markets reflect the consensus outlook. As investors become increasingly apprehensive about the outlook for stocks they act on that sentiment, which is reflected in stock prices. So, your forecast of the future not only has to be accurate, it must also differ from the consensus. And finally,

“You’ve gotta ask yourself a question: ‘Do I feel lucky?’ Well, do ya… punk?”

– Dirty Harry

Those are the principal factors working against efforts to profitably time the market. What are the consequences of getting it wrong? Good to know. Markets can move quickly and dramatically around inflection points and often do, so the consequences of being even a few days late can be devastating. Strategas Research Partners has found that missing just a few of the best days in the market can dramatically reduce annual returns even over lengthy time frames. Miss the best ten days out of a 25-year period and you’ve reduced your return by 3.1%, per year. Ouch!

In Sum

If you’re hoping to profitably time your way in and out of the market, you must do two very difficult things:

  1. Accurately forecast the future. Twice! (Impossible)

  2. Have an outlook that is sufficiently different from the consensus so that it isn’t already reflected in stock prices. (Difficult, if not impossible)

In our opinion, the penalty for failing on either point can be devastating to long term investment returns. For that reason, seasoned and serious long-term investors simply accept the fact that the market will go up and down on a short-term cyclical basis, and that over time the trend is higher. It’s that underlying trend, which corresponds with the growing value of the underlying companies, which creates real and lasting wealth for investors. Timing the market is a losing proposition.

The thoughts and opinions expressed in the article are solely those of the author as of January 10, 2021.


George’s Gems

by George P. Schwartz, CFA | June 17, 2021

Inspired by Warren Buffett and distilled over my 50 years in the field, here are some basics guidelines and simple precepts that can point you in a productive direction when you’re making investment decisions.

Don’t let hope or optimism color your reading of the facts. If anything, understate your assessments. As noted value investor Benjamin Graham advised, leave a margin of safety – a large margin (think of it as building a bridge strong enough to carry a 30,000-pound truck, but then only being willing to drive a 10,000-pound truck over it).

Over the years, my firm has concentrated on businesses we know well. We’ve had a particular interest in financial services (banks, thrifts, and insurance companies), healthcare, auto aftermarket companies, and manufacturers of certain proprietary products. Buffett calls it operating within your sphere of competency.

Any number of investment opportunities can present themselves right in your own area, and proximity makes it easier to get to know the folks minding the store. Since we’re headquartered in suburban Detroit, we frequently go out and “kick the tires” of companies we’re following in Michigan or the adjoining states of Indiana and Ohio. To quote the famous sermon, sometimes there are “acres of diamonds” in your own backyard.1

You can’t possibly know when the “perfect” time is to buy, but if you’re minimally aware of trends, you can make reasonable projections. It’s like the old saw about buying straw hats in January, when they’re cheap, in anticipation of making a profit selling them when demand is up in July. We made a great contrarian investment for our clients some years ago, at a time when healthcare was looming as an issue on the political horizon. It was a Michigan company called MEDSTAT (no longer a publicly traded company), which did outcomes analysis for healthcare organizations. We realized this service would be increasingly important, but at the time, MEDSTAT’s principal asset, its database, didn’t even appear on its balance sheet. We started buying shares and were rewarded years later, when the stock soared as the result of a buyout by a Canadian company. The return for our clients was more than six times their average costs.

Value Investing is like farming. You cultivate, you sow, you water, and then you wait. It takes time before the crop comes in. Likewise, the Value Investor needs farmer-like patience and persistence – which I can tell you from years of personal experience. We make investments just about every day, but we sell only occasionally. As in the MEDSTAT example above, eventually you reap the harvest.

To sum up, investing is not gambling. It’s work – hard work – and you will make mistakes doing it. But with seriousness, maturity, dedication, and a willingness to take risks, you can succeed and “make capital out of experience.”

1 “Acres of Diamonds,” by Rev. Russell H. Conwell (1843–1925), Baptist minister, lecturer, and founder of Philadelphia’s Temple University.

Past performance does not guarantee future results.

George P. Schwartz is Chairman and CEO of Schwartz Investment Counsel, Inc. and co-portfolio manager of the Ave Maria Rising Dividend Fund and Ave Maria Bond Fund.