Eat, drink and be scary.

~Author Unknown

On the Evils of Market TimingI've got a little Halloween-themed Friday Food for Thought for you here today. I came across this article On Market Timing and Whiskey on Twitter via Rob Bennett. Basically, the author takes a 1952 quote about the pros and cons of whiskey and superimposes on it his own take on market timing.

As with any debate, defining the terms is key. Market timing, in some circles, has come to take on a foreboding tone. It is seen as an investment vice, garnering a level of disdain similar to that of whiskey during the days of prohibition. For some, it's the strategy that shall not be named – the Voldemort of the investment world if you will. As we prepare to celebrate All Hallows' Eve, I thought it might be interesting to look at whether market timing is really all that spooky.

On Market Timing

For greatest effect, I recommend that you go to Value Restoration Project and read the whole piece. For convenience, I'll just reproduce the crux of the market timing portion here:

All right, here is how I feel about market timing: If when you say market timing you mean the loser’s game, the fool’s errand, the speculator’s effort that separates savers from their capital, turns investors into gamblers, lines the greedy pockets of brokers, strategists, and newsletter writers, challenges the irrefutable logic of efficient markets, yea, literally plunders the wealth from widows and retirees; if you mean the evil action that disrupts the well counseled man and woman from the pinnacle of appropriate strategic asset allocation, balanced objectives, long-term orientation into the bottomless pit of fear, and greed, and meaningless noise, high expenses, and tax inefficiency, and short-termism, then certainly I am against it.


But, if when you say market timing, you mean assessing fundamental value compared to price, favoring undervalued assets while avoiding overvalued ones, always demanding a margin of safety and being in cash when none exists; if you mean being opportunistic and forward looking, buying low and selling high; if you mean the activity which saves investors from catastrophic and permanent losses of capital, achieving positive absolute returns, the endeavor that avoids following the herd up the mountain of excess and over the cliff of despair, favoring instead consistent compounding of modest returns, and the ability to sleep well at night; if you mean that undertaking which has provided capital as the gasoline for the engines of economic growth and prosperity, protected purchasing power and met future liabilities, funded robust retirements, sustainable wealth transfer, and philanthropic endowments, then certainly I am for it.

~ JJ Abodeely, 2011

How Market Timing Is Like Whiskey

It seems perceptions about market timing and whiskey share several common characteristics:

  • Used in excess, they can cause real damage to our lives.
  • Used in an educated, responsible manner, they can enhance the quality of life for some people.
  • Some folks choose not to use them because they don't appeal to them.
  • Some have learned through painful experiences of loss that they are not able to use them effectively, so they choose to abstain.
  • Some take a puritanical approach, looking down on those who choose to partake, and advocating for abolition.
  • Some use statistics to prove that they are safe for use when employed wisely.
  • Some use statistics to prove that they are a danger to the average person.
  • Some use them without fully understanding the risks and rewards.

I'm sure you could come up with many more parallels. Feel free to share them in the comments section below.

Everyone's a Market Timer

For most, market timing means any attempt to strategically move in or out of a given stock, sector, or asset class. Passive investors acknowledge that there's no way to predict market movements, so many choose to set an asset allocation and rebalance periodically. Many feel market timing is a waste of time.

While I agree that market timing in the sense of strategic, active investing may not be the best way for the average person to invest, I don't think it's something we need to lobby against, fear, or avoid altogether. For any investor, there are really only two things that will determine short or long-term returns:

  1. The price when you buy.
  2. The price when you sell.

In this sense, everyone's a market timer. Your results depend on when you buy and when you sell. Some may transact more often than others, but we all time the market in one way or another. If you think about it, the whole reason for investing is ostensibly to create a retirement fund for the years when we're no longer earning income. That fact alone makes investing time sensitive.

For the Record

On Whiskey: I know some folks who know a lot about it, truly enjoy it and understand that moderation is imperative if they are to keep enjoying it. I also know a few people who are no longer able to enjoy it because it became a liability for them. As for me, I don't like whiskey, so I don't drink it. I prefer a glass of red wine with a nice meal, but I wouldn't presume to tell others whether they should or should not partake in any particular libation.

On Market Timing: I know some folks who know a lot about different market timing strategies. They take full responsibility for their results and enjoy the art of investing. I know others who just don't care to put the time or effort into it or simply prefer a less active strategy. As for me, I prefer a hybrid approach, but I wouldn't presume to tell others which strategy is right for them.

Live and let live. That pretty much sums up my 2 cents on whiskey and market timing. Both can have scary consequences, but they don't have to.

What are your thoughts on whiskey and market timing?