“It’s Idiot Switching That Gave Market Timing a Bad Name.”

Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

You say Idiot Switchers got out of stocks in 1996, because of high valuations.

Which is exactly what you did. For the exact same reason. But you are absolutely NOT an Idiot Switcher.

Even you can’t really believe such nonsense. Or can you?

Idiot switching is getting out of stocks in 1996 for the perfectly good reason that valuations are sky high and expecting that you will be rewarded for doing so within six months or a year or two years. If you did that, then your strategy failed. Stock prices zoomed for the next six months and for the next year and for the next two years. When you saw that your strategy failed, you gave up on it and then bought back into stocks, having missed out on two years of gains. Then you lost out again down the road a bit when prices fell hard. Idiot switching is a very bad strategy.

That’s not at all what I did. I got out in 1996. But I had not thought that that strategy would be vindicated within two years. The research does not support such a belief. I got out because the long-term value proposition was not there. So the fact that prices zoomed did not concern me. I knew from looking at the historical record that that was a live possibility. So, when prices continued up, I did not become alarmed and did not buy in and ended doing fine in the long run, just as the research showed would happen.

You are confusing (for about the 10,000th time, I feel obliged to note) short-term timing and long-term timing. Fama showed that short-term timing never works and was awarded a Nobel prize for his efforts. Shiller showed that long-term timing always works and was awarded a Nobel prize for his efforts. Both Fama and Shiller merited their Nobel prizes. Valuation-Informed Indexing COMBINES the powerfully important findings of Fama with the powerfully important findings of Shiller. We never, never, never, never, never practice short-term timing (idiot switching) because we know that it never works. But we always, always, always, always, always practice long-term timing because we know that it always works and is always 100 percent required for all investors who seek to keep their risk profiles roughly constant over time.

It is my view that anyone who does not understand the importance of the distinction between short-term timing and long-term timing cannot be fairly referred to as an “expert” in this field. Understanding that distinction is key to understanding the last 36 years of peer-reviewed research in this field and the last 36 years of peer-reviewed research is the most important 36 years of peer-reviewed research published in the historical of investing analysis.

I should add that it’s idiot switching that gave market timing a bad name. Market timing is wonderful. It is through market timing that we practice price discipline when buying stocks. Market timing ALWAYS works so long as it’s not idiot switching. The peer-reviewed research that I co-authored with Wade Pfau shows that any investor can reduce the risk of stock investing by 70 percent while also earning far higher returns just be being willing to tune out the Buy-and-Hold noise and practice market timing faithfully.

So how the heck did it come to be that millions of good and smart people believe that market timing is a bad idea?

Their experience with idiot switching was so bad that they gave up on market timing altogether. Investors became so intent upon avoiding the disaster suffered by idiot switchers that they became freakin’ Buy-and-Holders.

Fama was right. We need to avoid idiot switching. And Shiller was right. We need to be certain to always practice market timing. We need to take ALL of the peer-reviewed research into consideration when buying stocks.

I hope that helps a small bit, Anonymous.

Rob