Market Timers Lose Again

We've been through one of the most volatile market periods in modern times. If you're like me, you felt every inch of it, from the sickening plunge driven by the financial crisis to the 50% moon shot brought on when investors realized the world was not going to end after all.

And yet, the worst part for me was news that many individual investors missed the massive rally. Scared out of the market when blood was running in the streets, many are only now thinking of getting back in.

According The Washington Post, the Dow's drive back over the 10,000 mark was fueled largely by institutional investors. By contrast, individual investors pulled $205 billion out of mutual funds during the crisis, but only $56 billion returned before the Dow hit 10,000.

I must admit this news hits me hard, because I've always advocated that investors stay in the market through good times and bad. Like Warren Buffett, I believe market timing is impossible on a consistent basis, and investors who are constantly jumping in and out of the market wind up at a huge disadvantage.

I heard this a lot during the crisis after the market had plunged: Why don't I just sell all my stocks until things get better? As we're now seeing, again, things just don't work that way. The market gives so many head fakes that it's impossible to know when is the right time to "jump back in." Instead, investors who try the timing game wind up missing gains like these:

Company

Post-March 9 Gain

Las Vegas Sands (NYSE: LVS  )

274%

Dendreon (Nasdaq: DNDN  )

335%

Hecla Mining (NYSE: HL  )

207%

Interoil Corp. (NYSE: IOC  )

167%

Conseco (NYSE: CNO  )

253%

Advanced Micro Devices (NYSE: AMD  )

159%

Golden Star Resources (AMEX: GSS  )

156%

Data from Capital IQ through Jan. 4, 2010.

And here's another lesson we're all re-learning: The market does not follow or walk in lockstep with the economy. Oh sure, various bits of news -- good or bad -- can whip it in one direction or another. But overall the market is a leading indicator. The 50% rally took place despite rising unemployment and continuing massive layoffs, record numbers of mortgage defaults, and glum news from businesses everywhere.

But that didn't matter to Mr. Market. Buffett, reinforcing once again the futility of market timing, said in his most recent annual letter to Berkshire Hathaway shareholders: "We're certain, for example, that the economy will be in shambles throughout 2009 -- and, for that matter, probably well beyond -- but that conclusion does not tell us whether the stock market will rise or fall."

Think about that the next time you hear the doom-and-gloomers talk about continuing high unemployment and a faltering economy. The world's best investor says none of this helps us predict where the market's headed.

Buying good companies at fair prices and staying invested through thick and thin is the only way to secure the massive 10-baggers in your portfolio. This was the top lesson David Gardner had to offer after Marvel Entertainment became his first 14-bagger in the Motley Fool Stock Advisor service. After seven years in which the S&P 500 was nearly flat, Marvel returned 1,300% before being bought out by Disney.

If you take only one lesson from this article, let it be this: The only way to achieve those life-changing gains is to hold your ground and not be scared out of great companies -- and to stick with them for many years.

For the next 30 days you can see every one of David's current recommendations for free, including his top five stocks for new money right now. Here's more information.

Fool analyst Rex Moore once led a horse to water and made him drink. Berkshire Hathaway is a Motley Fool Inside Value selection. Berkshire Hathaway and Marvel Entertainment are Motley Fool Stock Advisor recommendations. Disney is a recommendation of both Inside Value and Stock Advisor. The Fool has a financial position in Berkshire Hathaway, and a disclosure policy that needs no timing.


Read/Post Comments (18) | Recommend This Article (31)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 07, 2010, at 4:59 PM, Fool wrote:

    David have done some great work and I agree that market timing doesn't work but if you bought LVS at $140 your have to be a very very patient.

    I lost 30% and made it up by buying a lot of cheap stocks in the beginning of 2K9 while holding on to the old stuff. Old stuff came back but the real profits where in the new purchases. Buying cheap has a lot to do with market timing, that is actually the easy part. The real art of investing is knowing when to sell and switch for better opportunity's. I think it takes a lot of study to be able to learn that.

    Perhaps Fool can help us a little and write an article about when to sell a stock?

  • Report this Comment On January 07, 2010, at 5:15 PM, Ikaris wrote:

    Wouldn't someone who stayed in the market with their stocks basically be back near even if they didn't get out of their stocks? Granted they would possibly get dividends... Does this article mean that the market timers sold at the bottom completely and didn't buy at all until now?

  • Report this Comment On January 07, 2010, at 5:23 PM, Ibeatmykids wrote:

    People asking about selling!!! Time for a little dip!

  • Report this Comment On January 07, 2010, at 5:28 PM, halfhedge wrote:

    I second Fool' s comment - I came into some spare cash in late 2008 and invested it gradually through to May 09 - worked out well so far on the basis of unrealised gains. As stated in previous comment, how to determine exit from each security? - I find that much tougher than when to go in.

  • Report this Comment On January 07, 2010, at 6:12 PM, jbrt wrote:

    whether you make one dollar , one hundred dollars , as long as you MAKE monies forget about coulda' woulda' shoulda' YOU CAN'T GO BROKE MAKIN' MONEY thats for certain .

  • Report this Comment On January 07, 2010, at 7:08 PM, NOTvuffett wrote:

    To say market timing doesn't work is as foolish as saying it always works. I would hope that fools try to time the market at least to some degree. I look at companies all the time where I say I like their business model, their balance sheet is sound but I don't like the price. Also I sell good companies because I think their price is out of whack to what I think is a fair valuation.

    You should pick your entry points carefully, and not blow your whole wad at once. And I agree with halfhedge that it is harder to pick the exit. Even when you sell with a big gain, it is hard when you realize you sold a little too early.

    As an example, I sold the last of my Alcoa yesterday (AA). The current recession has made them into a better company, but I think they have exceeded a fair market value now. Maybe I was right, maybe I was wrong, but I took my profits. If the next guy makes a profit, great.

  • Report this Comment On January 07, 2010, at 7:16 PM, NOTvuffett wrote:

    To say market timing doesn't work is as foolish as saying it always works. I would hope that fools try to time the market at least to some degree. I look at companies all the time where I say I like their business model, their balance sheet is sound but I don't like the price. Also I sell good companies because I think their price is out of whack to what I think is a fair valuation.

    You should pick your entry points carefully, and not blow your whole wad at once. And I agree with halfhedge that it is harder to pick the exit. Even when you sell with a big gain, it is hard when you realize you sold a little too early.

  • Report this Comment On January 07, 2010, at 7:29 PM, rkanowske wrote:

    You people at Motley Fool are full of you know what, you have downgraded LVS as well as MGM and Wynn for the last six months and continue to say to buy any of them and you are a fool and you will lose your money. I'm sorry, I bought LVS at under $5.00 and MGM as well and have made money. There is NO SUCH thing as buying long term any more, that is all BS. Wall St does nothing except day trade to make money. every time their is some negative about anything it is an excuse to sell off and take profits, nothing more. The next day they buy it back cheaper and sell again in a short time as small investers keep holding for the "Long term" which is a joke. The small investor is stupid if he holds long term. Buy it, try to time the best you can and get out, make some money and buy back in later.

  • Report this Comment On January 07, 2010, at 7:31 PM, stan8331 wrote:

    There's a huge difference between buying more shares of good companies when you can visibly see that prices have already fallen very far, versus wholesale moving in and out of positions in an attempt to anticipate where the market is heading in the near future.

    It's the SELLING in an attempt to outsmart the market that's deadly. There's nothing wrong with trimming some profits from big gainers that have run up to what look like high valuations, but selling whole positions in hopes of buying them back at cheaper prices in the short term is a fools game. And if you believe a stock will be cheaper in the LONG term than it is now, there's no reason to own it in the first place.

  • Report this Comment On January 07, 2010, at 11:04 PM, BMFPitt wrote:

    I got completely out of the market in my 401k around DOW 11000, and only recently put some percentage back into internationals. I am just as resolute today as I was in May or June that this rally is not supported by reality and we can still fall below 6500.

  • Report this Comment On January 08, 2010, at 12:13 AM, lutece7 wrote:

    when I read an article like this, it really shakes my faith in Motley Fool, and makes me wonder why I have spent so much money on their subscriptions. The point of this article is that if you try to time the market, you will miss out on the 200 + percent gains in the stocks sighted in the chart above, yet those gains could only have been realized by people who timed the bottom for a great entry point. And people who have held the above stocks for the past few years, are still way down and waiting for more recovery, the very people who are in it for the long haul, and not market times.

    I really wish the author would reply. I am just shaking my head in disbelief.

  • Report this Comment On January 08, 2010, at 12:45 AM, HistoricalPEGuy wrote:

    Sorry, but timing the market is rediculously easy. It just takes commitment. Fear and Greed - That's the issue here. Those of us who invest with our heads find market timing very easy. In 2002, I bought QQQQ over and over again until it stopped dropping. I did the same here, but with DIA. Here are my actual transactions:

    Date DIA Price % Allocated

    09/17/2008  $107.55  10%

    10/08/2008  $93.59  12%

    10/22/2008  $86.63  10%

    11/20/2008  $79.06  15%

    02/24/2009  $71.49  17%

    03/06/2009  $65.59  37%

    Did I time the market? I'll leave that up to you, but I think it is. I am a market timer and will always be. Those that don't have the fortitude should by high yielding stocks and use DRIP. That's the best way to buy and hold.

    Cheers and Fool on! I love the service the Fool provides! And its all free! Simply put, the fool.com is the best investing web portal out there - hands down. Thank you and keep up the great work!

  • Report this Comment On January 08, 2010, at 3:54 AM, engineer8 wrote:

    It's easy to look backwards now and say we all should have bought. But those folks who bought in the first leg down, then the second, then the third, then the final, made money on the stuff they bought on the low days, but are still behind on the stuff they bought in the early stages of the crash.

    And not all those "hold forever" stocks come back. Intel, Cisco, Motorola, Broadcom, Citigroup, all great names from before, but holding through their crashes, you still aren't even after 9 years.

    Fool is the most honest site around for fundamentals. But anyone who believed in technicals got out of both the 2000-2002 and 2008 crashes and kept away while others got creamed. They just got in later too.

    I listen/read some CANSLIM investors. Their record of staying out of the bears was stellar. Getting back in was too slow.

  • Report this Comment On January 08, 2010, at 7:57 PM, Fool wrote:

    `4ereeeeeeeeeeeeeeeeeeee`maMA,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,0-hlk090o.

    p[;p=-0p?+p?

  • Report this Comment On January 13, 2010, at 11:30 AM, TMFOrangeblood wrote:

    Hi lutece7. You said:

    <<<<The point of this article is that if you try to time the market, you will miss out on the 200 + percent gains in the stocks sighted in the chart above, yet those gains could only have been realized by people who timed the bottom for a great entry point. And people who have held the above stocks for the past few years, are still way down and waiting for more recovery, the very people who are in it for the long haul, and not market times.>>>>

    The point of the article is that many individual investors pulled money out of the market after it plummeted, and few returned as it rose back through 10,000. I said nothing about timing the market for an entry point.

    My point is, and always will be, that no one can consistently time the market -- and if you want to be in it you need to stay in it and add money all along the way. This is what we've done in Stock Advisor.

    There are always people who say market timing is easy, or that it can be done, but I've yet hear an answer to the question: Who are history's great market timers? Where are the Buffetts and Grahams and Lynches of the market-timing crowd? There aren't any.

  • Report this Comment On January 15, 2010, at 2:24 PM, millsbob wrote:

    Buffett was allegedly all cash for several years before Nov 2008, and has since converted a large proportion to securities.

    that's not market timing?

    btw, i am a Buffett follower and buy and hold type, but you can't be Totally rigid and stupid about it.

  • Report this Comment On January 15, 2010, at 7:10 PM, gazkaz wrote:

    I would love to have the inside track, the same as Warren Buffet.

    Unfortunately I don't have friends at Goldman who will give me preference stock (NOW) paying a guaranteed 10% yield and throw in a fixed price option to buy the same number of ordinary shares.

    With the right friends, you don't need a crystal ball or good grasp of market direction, you always buy the winning raffle ticket.

    Although the polar icecaps on Mars have been melting for the last few years (obviously the result of those pesky invisible martians driving round in invisible cars and planes) - its not the sun thats causing global warming here - it's "our" carbon footprints.

    The reasons the US have not signed up to carbon reduction yet - it takes time to draft what "will" go through congress - therefore knowing in advance what will benefit most; then source the appropriate companies/projects, buy/invest in them & make preparations to set up the carbon trading exchanges etc.

    Then, and only then, put it all in place and sign up - and oh don't forget, swing the derivatives into place.

    When oil supplies were growing and demand falling the derivative speculation got oil to $150+ a barrel.

    So imagine the fun that can be had in carbon trading. Then again that will only hit "our" energy bills, transport, food costs..... and ............... well everything really.

    But never mind what we pay will go to a good cause again, perhaps some more 6, maybe 7,8 figure bonuses.

    Check out where the B......iiii....g U.S money is going right now - then buy some nasal spray - you will need a very clear nose - to pay through.

    Check it out - because for some reason I don't think that it be spelt out or spoon fed on main stream TV or in media empire newspapers.

  • Report this Comment On January 17, 2010, at 1:58 PM, TMFOrangeblood wrote:

    <<<Buffett was allegedly all cash for several years before Nov 2008, and has since converted a large proportion to securities.

    that's not market timing?>>>

    Berkshire has never been close to all cash. Buffett himself states that no one can time the market -- so no, he's not a market timer.

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