Yesterday, we discussed the NYU paper on how Market Timing beat Buy & Hold over the past few decades.

The WSJ reviews this idea today; They make some subtle distinctions about the idea of timing:

“A study from New York University’s Stern School of Business suggests market-timing can work for some mutual-fund managers. The best stock-pickers during economic expansions also show some market-timing ability in recessions, the study found.

But academic research raises doubts that the typical fund manager can successfully time the market over the long haul . . .” (emphasis added)

That is a new slant on timing; we’ve evolved from “You cannot time the market” to “most find managers cannot time the market” — a subtle but important distinction. However, the Journal goes awry with this statement:

There are a couple of reasons why the deck is stacked against market-timers, Mr. Ekholm says. Market-timing requires more trading, and transaction costs hurt performance. What’s more, while a manager may relatively easily dig up some unique information that gives him an edge in selecting an individual stock, it’s difficult to get such superior information about the overall market.

That paragraph is mostly wrong because:

1. “Superior Information” is a misnomer. In 2005, there were lots of people discussing Housing, Derivatives, Credit. What often occurs at key turning points is that widely understood — but heavily doubted — information about the market gets ignored.

I prefer to call this Variant Perception; To take advantage of it, you need some methodology/model (call it a belief system if you like) that you have enough confidence in you can rely on it in order to buck the crowd

2. Think about this in terms of Capital Preservation strategies versus pure market timing. The potential losses (i.e. 2008) versus the modest costs/taxes of a major negative event are vastly asymmetrical;

3. In terms of pure Timing, the secret isn’t finding superior dope; rather, it is understanding what to do with existing information at key turning points. Various timing metrics will reach extremes, and trading off of that information requires a rare skill set.

You may have different views on both timing and cap preservation, but these have worked well for me . . .

>

Sources:
Attention Allocation over the Business Cycle
Marcin T. Kacperczyk (NYU, NBER) Stijn Van Nieuwerburgh (NYU, NBER, CEPR) Laura Veldkamp, (NYU, NBER)
September 22, 2009

http://pages.stern.nyu.edu/~sternfin/mkacperc/public_html/attention.pdf

More Mutual Funds ‘Time’ Market
ELEANOR LAISE
WSJ, NOVEMBER 12, 2009

http://online.wsj.com/article/SB10001424052748703811604574529903667900302.html

Category: Contrary Indicators, Psychology, Technical Analysis

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

21 Responses to “Can You Find “Superior Information” About Markets?”

  1. wally says:

    “I prefer to call this Variant Perception”

    Another good term might be ‘wild-ass guessing’.

  2. When Wally does it, perhaps.

  3. [...] like Barry Ritholtz’ The Big Picture, but today he makes an odd claim: That is a new slant on timing; we’ve evolved from “You cannot time the market” to “most [...]

  4. GetALife says:

    Market timing is wonderful.

    I can’t imagine why any intelligent being wouldn’t use it!

    Why would you want to hold stocks during the 2001-2003 and 2007-2009???

    Thank the good lord for market timing!!!

  5. fjpenney says:

    I am a market timer and am pleased with the results I have achieved. As I have an open mind, I have read a number of the academic articles which have been published in the Journal of Finance and elsewhere and I am yet to find one that has much practical importance. For example, many of the academic studies are based on making a long/short/neutral decision at the end of each calendar month and then holding that postion until the end of the next month. Clearly such studies are of no practical value since market timers make decisions on a daily basis and the rules for the decision are usually not published.

    As Barry states, it is what you do with the market timers that counts. I use leveraged ETF’s (QLD for my US holdings and HXU for my Canadian holdings) to go long with.

    There is no such thing as a prefect timer but it isn’t necessary to have a perfect market timer in order to outperform the buy-and-hold (aka buy-and-forget-to-sell) strategy. A number of financial commentators will tell you that in order to a beat buy-and-hold strategy, your market timing decisions have to be correct at least 70% of the time. BS! I have challenged some of the prominent commentators on the 70% figure and none could explain where the number came from. I’ll tell you where it came from – a 1975 paper titled Likely Gains From Market Timing by William Sharpe. The findings of the paper are based on making a market timing study at the beginning of each year and holding the position until the next year. Certainly the findings of such a methodology don’t warrant comment.

  6. sixmil says:

    Doesn’t seem very difficult to time (and beat) the market when you can do it with a simple moving average. If you simply buy at the open the day after the Nasdaq goes above the 74 day MA and sell the open the day after it goes below starting 4/28/03, you’d be at 3142.22, while buy and hold would leave you at 2166.90.

  7. Bob the unemployed says:

    Why not use game theory to help in your market predictions?

  8. wally says:

    True, BR… and I have the track record to prove it.

    :-)

  9. Mannwich says:

    This is now my preferred method.

    http://www.youtube.com/watch?v=3uYuScZOyiM

  10. Self-awareness is key. Knowing and anticipating that the human brain wants to find patterns helps in knowing and anticipating fallacious inferences.

    If the markets, on average, rise 10 percent following a Yankees win in the World Series, it does not mean that this will occur again this year.

    “Sell in May and go away” was a losing bet this year. The S&P put in an 18% gain from May 1 to November 1.

    People have won big and lost big on quant strategies, technical trading and fundamental analysis.

    The key once again, and as Barry appears to be saying, is that there is no replacement for good judgment, which would likely have a prudent investor considering all given data and using a combination of various competing and complementary strategies — not just one strategy that appears to be working in a given environment.

    Most investors tend to look for patterns and latch on to them as long as they appear to work then blame some random anomaly for failure. They confuse causation with correlation and give themselves the illusion of control.

    Once again, market timing in its absolute form is a foolish pursuit but the prudent timing of various competing and complementary strategies is …

  11. The yield curve is often used to time the market and call tops. How it was ignored the last time (actually, the last two times I recall) around is a great example of how metrics can be ignored when the leaders of the Peter Pan consensus have too much vested in wanting to believe.

    I think where the danger for market timers always comes in is not if a specific metric will once again prove its worth. The dangers lies in when it will play out. This is what has caused so many bears (and also dead cat bouncers) to crash on the rocks over time. Having big funds, the fed and the government gaming the market to keep Peter Pan on life support is no help either in reading the indicators properly.

    There is no doubt that a Nortel with a P/S of 200 is going to come down. It is the job of the timers to figure out when and to survive the bubbleocity until that time

  12. @Bob the unemployed

    Why not use game theory to help in your market predictions?

    If game theory is going to that to my hair I think I’ll pass ;)

  13. DeDude says:

    Market timing is like scoring Jessica Simpson;

    It’s good, if you can.

  14. DeDude says:

    “If you simply buy at the open the day after the Nasdaq goes above the 74 day MA and sell the open the day after it goes below starting 4/28/03, you’d be at 3142.22, while buy and hold would leave you at 2166.90.”

    That sounds like great advice if we were at the beginning of April 2003. But what I need to know is what strategy will work from the beginning of December 2009. Should I use the 74 or 87 or 56 MA for my buy/sell strategy. It’s very easy to come up with a formula that predicts the past, much more difficult to come up with one that predicts the future ;-)

  15. Ny Stock Guy says:

    I remember in 2007 wondering why most everyone in the financial media seemed to be ignoring the inverted yield curve. It’s always been a good signal to take your money and run.

  16. Ramstone says:

    Three, perhaps more, distinct animals are being discussed here: equity funds, dynamic funds, and money managers like BR et al. Frankly, I’d rather my mutual funds not time the market for me, tyvm. I have my notion of where we are on a macro level, and adjust my allocation accordingly. Contrafund can continue to hunt down undervalued stocks for me, and if that involves taking into account business cycle byproducts like sector rotation, that’s fine. But I don’t want them sitting on 20 percent cash, I’ll handle that myself. Given these constraints, I’m still surprised a significant number of retail equity funds can still generate some alpha (duh, that’s what they’re paid to do, but you’ll excuse me if I find this a conceit in general). But that’s gross. Once they take thier 1 percent annually, none of that finds its way into my return.

    Which is a long way of getting to the point that BR shouldn’t be taking that much umbrage since he;s managing soup-to-nuts for his clients. Most equity funds aren;t, nor should they.

  17. Simon says:

    I believe in market timing unfortunately market timing does not believe in me… *joke*

  18. “Contrafund can continue to hunt down undervalued stocks for me,…”

    http://finance.yahoo.com/q/pm?s=FCNTX –Fidelity Contrafund
    ~4.65 % 5-yr avg. ROR, for a Fee, of course..

    “Differin’ Opines make’m Run the Equuines”

    tho..ever wonder why there isn’t an Options Chain on these MutFundz?

    it’s funny, peep can decide where to go on Vacation, But, Where, and When to expose their ‘Financial Assets’?? Not on your Life!~ sayeth http://www.ici.org/ y http://www.financialadvisormagazine.com/ and, other, associated Shills..

  19. Pat G. says:

    Managers shouldn’t be trying to “time” the markets. That’s for day traders who can get in and out more niftily because they aren’t trying to steer the Titanic. Besides, don’t they tell us that it’s better to dollar cost average into investments. Oh yeah, that’s just for us. They’ll do the gambling. Well, they are pros?

  20. keithpiccirillo says:

    AlphaClone has had great success lately and may be expounding on some newer ideas.
    Anybody following hedge fund holdings and implementing market timing of it with moving averages?

  21. [...] thoughts on mutual funds and their timing ability.  (Big Picture, Fund My Mutual [...]