August 16, 2014

Timing the Market: No, You Don't Have a Time Machine, So Stop Pretending

The  internet is infested with investors who end articles, comments, and blog posts with phrases like, "timing is everything," or, "you just need to time it right," among endless other sentiments that imply market timing is easy or is somehow possible if you just do enough research. It doesn't help when we have a market crash or boom and a small percent of "experts" get lucky. 99% of the rest of the world probably made the wrong call, so these "experts" are deified and appear everywhere in the media. Everyone assumes since they were right the last time around, they'll get it right again. Instead of acknowledging that a broken clock is right two times a day, we all think market timing is easy if we just listed to the right people!

Timing the market as a whole is difficult enough, but there are those who are convinced they can easily time the market for individual stocks as well. I can't count the number of people who seem to think they're investing experts for participating in some part of the increase in Apple stock in recent years. These same people conveniently don't tell you about their big losers over the years.

But in any case, let's use Apple as a case study in market timing. "If I had only put all of my money into Apple when the first iPod came out. It was obvious they were going to make a ton of money!" The chart below maps Apple's adjusted close prices since going public at the end of 1980.

Never mind for a moment that AAPL was a mediocre investment for over 20 years. An investment in 1980 in an index fund like the Vanguard 500 Index (VFINX) would have outperformed an equal investment in Apple at that time all the way through mid-2005, nearly 25 years.

Critical investing opportunities and risks in the history of Apple's (AAPL) stock

Once Apple changed the game with the iPod, one could argue that would have been an obvious point to jump into Apple stock. But can you honestly answer these questions?
  1. By the end of 2004 or early 2005, would you have held on to your AAPL? Or would have you have sold after roughly quadrupling your initial investment?
  2. If you sold, would you have then been tempted to jump back in at the end of 2005 after seeing Apple stock doubled yet again during the year?
  3. Would you have taken profits in the lead-up to the release of the iPhone?
  4. But then be tempted to buy once again after seeing the iPhone was going to be a hit and watching AAPL double again by the end of 2007.
  5. Would you freak out after watching the stock lose more than half of its value by the end of 2008 and sell near the bottom? Or would you have been brave enough to hold on?
  6. By early 2011, the stock more than quadrupled in price from its recession lows, on the back of the iPad. Would you have known to buy in advance of this, or only have been tempted to get it after the release of the iPad?
  7. What would you have done when a third of the stock's value evaporated by mid-2013? Were the company's best days behind it?
  8. Were you surprised to see it increase over 50% again by mid-2014 due to increasing profits but in the face of declining iPad sales?
Participating in the full growth of Apple stock over the past decade would have required a lot of "ifs". It sounds easy in hindsight to have held on for that full time period, but there were many moments where it would have been tempting to buy or sell at the wrong time.

What's going to happen to Apple going forward? Continued growth with the release of yet another new round of iPhones? Or is it entering a phase that's going to look more like the past 13-14 years of Microsoft's stock? (which itself was a once-in-a-lifetime investment during the 90s)

There are, and have been, countless other momentum stocks that have offered the same risks and opportunities. Amazon stock was pretty exciting in 2000 before dropping to less than a tenth of its former value by late 2001. It since recovered, then lost over 50% of its value during 2008. Since then, it's up nearly 800%. How about the whiplash-inducing stock movements of TSLA? Does anyone truly have an idea of where Tesla will end up 5 years from now?

When you factor in huge chunks of your gains getting eaten up by taxes and the stress of watching individual positions have wild swings, simple, cheap index ETFs are easier, cheaper, less stressful, and will result in better returns for most people.

So can you time the market? Unless you are truly exceptional (you're not), the answer is no.

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