Financial Advisors
Selwyn Gerber writes: The conventional wisdom suggests that smart people generate good stock picks. Therefore, the more research a person does, the better his investing results will be. Likewise, a person will expect that the best returns will come from hiring the best managers to do the hard work for them. It is true that there are some extremely talented individuals who have done quite well at the stock picking game. That being said, the data is clear, for the vast majority of those attempting to play, stock picking is a loser’s game.
For many years the Wall Street Journal ran a “Dartboard Portfolio” in which, as the name indicates, the stocks were randomly selected by throwing darts at the stock listings. That portfolio regularly outperformed the “experts”.
Literally hundreds of studies have been conducted comparing active managers’ performance over a ten year period against the market’s performance over the same interval. Time and time again, the market beat the managers. In fact, the odds of a particular manager beating the market over the long run are between 2.4% and 2.7%. By contrast, the odds of winning by picking a single number in roulette are 2.6%. Few people would go to Las Vegas and bet their life savings on a single spin of the roulette wheel. Why bet on a manger who has the same chances of beating the market when you could chose an investment that will, at the very least, meet the market.
RVW Principle 3: Market Timing Doesn’t Work
“For short term stock market forecasts we suggest using tarot cards. It’s only in the long run that the noise gets filtered out and the trends emerge”
- Rip Van Winkle Wisdom
The most famous adage in investing is: buy low, sell high. It is obvious to most that doing so is far easier said than done. Nevertheless, there are many who believe that it is possible to determine the optimal time to buy and to sell. Market timing, as it is called, is another art that many claim to have mastered yet few have actually benefited from. In fact there are hundreds of newsletters written by so-called market timing gurus that promise to inform readers of the exact moments of opportunity. It is hard to ignore the fact that if true, the predictions written in such letters should generate enough profits to dissuade the so-called gurus from extending the efforts to write them. The data confirm the skepticism with which savvy investors view these letters.
The data shows conclusively that over the short term markets move randomly and that when the equity markets move up they tend to do so in significant spurts rather than in straight lines. Missing the best 30 trading days over a 10 year period ending in 2004 will change a significant gain of 160% for those who held on throughout, into a loss of 8%.
According to a University of Utah and Duke University study, 95% of market timing newsletters did not survive beyond an average four year lifespan. Moreover, independent newsletter tracker, Mark Hulbert tracked the average returns of the picks from 25 newsletters that did survive from 1988 through 1997. Not surprisingly, the newsletters delivered an average return of 11.1% versus the S&P’s return of 18.1% over the same period.
There is no question that these letters are alluring, especially when they tout unbelievable past results. That being said, the statistics don’t lie. Attempting to time the market might be an entertaining pastime but it is no way to invest the bulk of your hard earned capital.
