Is Buying Low and Selling High Possible? Don't Fall into the “Timing Trap”!

"I don't have any ability to time the market... I don't think anybody does." - Warren Buffett

"We hope we can anticipate the perfect timing. The reality is that no one does, and no one ever will." - Seth Klarman

"Don't try to time the market." - Ray Dalio

 

Timing the market is one of the most common investment behaviors we often see. For example, you might feel like a financial crisis is looming, so you start selling off stocks or even shorting the market. That's a form of timing the market.

 

Moments of unexpectedly high returns in the market are more important than timing

 

The essence of market timing is actually making short-term predictions about the market and the performance of various assets in the near future. Even the most adept investors face a substantial risk of failure when attempting to time the market, as evidenced by numerous historical examples. More crucial than market timing is seizing the opportunities when the market unexpectedly yields high returns.

 

Researchers have calculated the returns of investing in the S&P 500 index from 1996 to 2015 over a 20-year period:

 

If you held steady during this time, the return was around 4.8% per year;

 

If, for various reasons, you missed the five days with the highest returns during these 20 years, your return would drop to around 2.7% per year;

 

If you missed the ten days with the highest returns, your return would become a mere 1.3% per year, akin to a savings account;

 

If, unfortunately, you missed 40 days, your annual return would plummet to a dismal -4%.

 

 

In essence, missing just 1% of trading days over these 20 years would render all your efforts futile.

 

But what if we avoided the top 1% of trading days with the largest declines? Would the return increase? There is data showing the overall return if you simultaneously missed the top 1% best and worst trading days in more than a dozen major markets worldwide.

 [Graph]

From the graph, you'll notice that if you could indeed miss them simultaneously, the return would indeed be slightly higher than being present throughout. But who has the ability to accurately predict which 80 trading days out of over 4,000 in 20 years will experience significant gains or losses?

 

Loss is inevitable without professional knowledge and firm conviction

 

Many people may think that predicting significant gains or losses on individual trading days is indeed too difficult, but is it possible to successfully predict trends over longer periods? For example, could you predict the 2008 financial crisis?

 

In reality, the most challenging aspect of predicting this is that even if you anticipate a financial crisis, how can you be certain it will occur precisely in 2008 and not 2007 or 2009?In fact, signs of that economic crisis began to appear in 2005. Throughout 2006 and 2007, many voices in the market were saying that the real estate bubble was too big and would affect the entire financial market. However, few believed it at the time. Michael Burry, one of the prototypes of the characters in the movie "The Big Short," actually started shorting subprime mortgages in 2005, but it took him over two years until he made money in 2007. Similarly, if you thought the economic crisis would only arrive in 2009, you would not only have caught the almost halving drop in 2008 but also missed the significant rebound in 2009—when the U.S. stock market rose by over 20%, and the Chinese stock market had a staggering 100% increase.

 

Therefore, without very professional knowledge as a safeguard and very firm conviction as support, loss is almost inevitable when it comes to timing based solely on feelings and simple judgments.

 

How Julian Robertson's Tiger Fund Closed

 

Timing the market is extremely difficult. Even the most skilled investors can fail miserably. Julian Robertson, who managed the Tiger Fund, was known as the "Hedge Fund King." The fund achieved a growth rate of over 259,000% in 18 years, with an annualized return of 31.7%. However, he was forced to close the Tiger Fund in May 2000.

 

[Graph 2]

In 1998 and 1999, during the Internet stock market boom, Robertson believed the market bubble was too big and began shorting tech stocks, leading to heavy losses for the Tiger Fund. Additionally, with funds flowing from traditional industries to the Internet sector, traditional value stocks were severely impacted. This ultimately led to a continued decline in the Tiger Fund's assets, with its assets plummeting from a staggering $23 billion to $6.5 billion in just one year.

 

Sadly, the Tiger Fund officially closed on March 30, 2000. In April, the entire market began to crash, dropping by 15% in just one month and nearly 80% over the next two years. If Robertson had shorted at this time, the return would have been unimaginable.

 

Although his judgment was correct, he fell before dawn. That's how difficult timing the market can be.

 

The Difference between Complete Success and Complete Failure in Timing the Market Isn't Obvious

 

Albert Bridge Capital conducted a study in 2019, looking at the importance of timing from another angle. If you started investing $1,000 in the S&P 500 index every year 30 years ago and continued for the next 30 years, you would time the market every year, trying to choose a perfect day to invest this $1,000.

 

Two assumptions are made:

 

(1) Best Timing: Over these thirty years, you always manage to choose correctly, investing each year at the lowest point in the market (i.e., investing at the lowest closing price each year over thirty years starting from 1989).

 

The probability of successfully timing each year for thirty years in a row is (1/253)^30, or 1 in 1240 (with 60 zeros). After thirty years, you would have $155,800.

 

(2) Worst Timing: Suppose you're the unluckiest person in the capital market. Over these thirty years, not only are you unlucky, but you're also very skilled at making bad choices, always investing at the wrong time. Starting from 1989, you invest each year at the highest point in the market (i.e., investing at the highest closing price each year over thirty years).

 

Similarly, the probability of being unlucky is also one in (1/253)^30. Interestingly, even with such bad luck and making the worst investment decisions possible over thirty years, you'd still have $122,000 after thirty years.

 

If you choose an excellent target (S&P 500), in the long run, even the unluckiest person can achieve 80% of the returns of someone who times the market perfectly.

 

So, your attempts at timing the market don't yield as many benefits as you might expect!

 

Conclusion: Don't attempt to time the market; it's more important to ensure you're in the market.