In a classic series of articles preserved for posterity on this website, Fool writer Randy Befumo laid bare the "long-term buy-and-hold" (LTBH) philosophy to Fool readers. His conclusion: "Market timing is bunk." I want to quote two lines of that conclusion today, describing the difficulty of timing "buys" and "sells" based on predictions of short-term price movements):
To miss the worst days and not miss the best days you have to have perfect timing. And given that the returns for the best single day or month often occur right after those of the worst single day or month, perfect timing is really important.
Got that? Not just good timing or great timing will suffice. Only perfect timing will succeed.
Now, an investor may be bright. She may know a company very well. Yet, even that may not be enough to make her timing "perfect." Take Martha Stewart. It is hard to argue that this lady is not bright. And ImClone Systems (NASDAQ:IMCL), the company she is most famous for investing in -- after Motley Fool Stock Advisor pick Martha Stewart LivingOmnimedia (NYSE:MSO), of course -- is one she knew very well. Why, she even knew its CEO very well!
Yet, for all her intelligence, for all her knowledge of ImClone (insider and otherwise), look at how horribly wrong her attempt at timing the market went.
Granted, she managed to sell some shares just before ImClone stock plunged 75% in value. So she avoided some short-term losses (at least until the indictment). But the thing to keep in mind is that those losses were not permanent. Like her trading, they were only short term. It took ImClone shares barely two years to climb back to the price at which she had sold it.
And if you look at a chart of ImClone's progress over the past couple of years and compare it to a chart of the market's progress as a whole, it is hard to argue that by selling ImClone and buying another stock, Martha would have made out any better than if she had stood pat.
Moreover, had she let her money ride on ImClone for, say, the three-year minimum that subscribers of Motley Fool Hidden Gems aim for, then by mid-morning on April 27, 2004, she would have seen her investment rise 30% in value -- very nearly tying its March 6, 2000 all-time high of $84.56.
Conclusion: in a contest between market timing and LTBH, market timing gets the lower bunk.
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Fool contributor Rich Smith has no beneficial interest in any of the companies mentioned in this article.
