I’ve posted Entry #507 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Buy-and-Hold Is Both Intuitive and Counter-Intuitive At the Same Time.
Juicy Excerpt: That is an even more counter-intuitive idea than the idea that all forms of market timing work. Once people hear the concession that short-term timing doesn’t work, their minds push “eject” re the entire market timing concept. To engage in market timing, one would need to see into the future. If one could not see into the future well enough to predict where stock prices will be in six months, it seems implausible that one could see into the future well enough to predict where stock prices will be in 10 years. That paradox is probably the biggest hurdle that keeps people from grasping the Valuation-Informed Indexing concept.
You feel comfortable with 10 years being long term timing and that VII will work with a 10 year time horizon?
The ten-year thing comes from the paper that Shiller issued in July 1996 recommending market timing. It was based on the historical return data that was available at that time. But it is just a rule of thumb. There was no guarantee that prices would fall within 10 years. In reality, prices fell hard in September 2008. So that was 12 years. Then they rose again in 2009 and have stayed high for 11 years.
Ten years is a good rule of thumb for how long it will take prices to correct. But we are dealing with a psychological phenomenon. So there is no way to make precise predictions that will prove accurate. I do not say that that is possible and Shiller does not say that that is possible.
If Shiller is right, prices will fall hard from where they are today. But no one can say precisely when.
Rob
So what you are saying is that you can’t time the market because you don’t know when it will drop. Thanks for finally admitting what people have told you for years.
I’ve been saying that since the first day. Short-term timing never works, long-term timing always works. Investors need to know both realities. Both are of critical importance.
Rob
What do you consider long term timing and when have you been successful in getting back in the market?
Short-term timing is trying to guess when a price change will take place and to profit from it. Long-term timing is changing your stock allocation because the level of risk associated with that stock allocation has changed and you want to keep your risk profile constant over tine.
An effort to engage in long-term timing is successful at the moment it is made because that is the moment when the risk profile is corrected. I don’t think that it is possible for an effort in long-term timing to fail, not any more than it is possible for an effort to engage in price discipline to fail when making purchases in any other market. If someone pays less for a car because he engages in research and negotiates with the dealer, I don’t see how that effort could produce bad results. He may end up getting the wrong car because he didn’t know his own mind well enough. That sort of thing can happen in the stock market. You could engage in market timing to adjust to your preferred risk profile and you could determine years later that you chose the preferred risk profile improperly. That doesn’t show that price discipline (market timing) is a bad thing. It shows that our execution of it is going to be imperfect because our knowledge of the subject is imperfect.
That’s not an argument for failing to engage in market timing (price discipline), it is an argument for expanding our knowledge of the subject. Which of course requires opening every investing site on the internet to honest posting re the last 39 years of peer-reviewed research in this field.
Rob