“The Thing That They Call a Price Crash Is Really an Emotions Crash.”

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

Wade Pfau’s form says you can’t time the market. Sounds like you are pushing a fraudulent timing scheme.

https://retirementresearcher.com/occams-cant-time-markets/

Wade Pfau didn’t write that article. Wade wrote what he believed about market timing in the peer-reviewed research that we co-authored. He summed up the conclusions he reached as the result of his 16 months of study of the question by saying: “Yes, Virginia, Valuation-Informed Indexing works!”

One thing that I like about the article is that it sums up all of the important arguments that I have heard against market timing over the years. There’s value in having them all presented in one place.

The flaw in the article is the one made by Buy-and-Holders over and over and over again. The article looks only at short-term timing. The arguments that it makes against short-term timing are all valid. People who follow the peer-reviewed research have known for many years now that short-term timing never works. There’s no harm in repeating those arguments since they are valid and all investors need to hear them. But an argument that short-term timing doesn’t work is not an argument that long-term timing doesn’t work.

Long-term timing always works. The Bennett/Pfau research shows that. And the core reason why short-term timing never works is pretty close to the same core reason why long-term timing always works (and is always 100 percent required). Stock price changes are determined by shifts in investor emotion. Short-term timing doesn’t work because it is not possible to predict shifts in emotion. People who are in a committed relationship sometimes change their mind and leave it. Is there a certain number of arguments that it takes for that to happen? There is not. Outsiders will say “I have seen so many arguments that I cannot believe that they are still together” and yet the couple will remain together. And then one day over seemingly nothing one member of the couple will end it. That’s how stock price changes happen. They are rooted by shifts in emotion and you cannot predict when they will happen.

But the market must ultimately reflect reality. The core purpose of any market is to set prices properly. We cannot say when the emotion will shift and prices will move in the direction of fair value but we can say with absolute certainty that sooner or later it will happen. Long-term timing always works. It has always worked in the past because there is no possibility that it could ever not work. The market cannot remain at emotional extremes indefinitely. The farther away the market gets from setting prices properly, the more dysfunctional it gets. Sooner or later, it just collapses.

The thing that they call a price crash is really an emotions crash. If investors were willing to engage in market timing, we would never see a price crash because prices would just adjust to reality naturally. But when large numbers of investors refuse to practice market timing (price discipline!), the only way left for the market to set prices properly again is to crash them. When causes us all great pain by causing an economic crisis. We would be better off if we all just practiced market timing and didn’t have to live through bear markets and economics crises and all the pain associated with them.

I’ll sign off on a statement saying that short-term timing never works. There is a lot of evidence that that is so.

But, when Wade studied long-term timing, he was amazed that no researcher had done so before him given how strong the case is that long-term market timing always works. We should be permitting Wade and all other academic researchers to do honest work re these matters. Those researchers would love to help us all out if only they were not made to feel that they were putting their careers at risk by doing so.

My sincere take.

Honest Research Advocate Rob