Investing

Let me answer the common argument for market timing versus relying on the Efficient Market Hypothesis (EMH) for managing a portfolio.

The argument usually is something like: “EMH allows bubbles to form and other mis-pricings, therefore it is wrong and doesn’t work. Market timing works better.”

Well EMH does work. Or I should say it works most of the time for most situations. Yes it can go off the rails from time to time. But this is a small minority. EMH is not perfect, but it is much better than what competing explanations can say about markets and profiting over others.

For me it’s not a question of whether EMH explains everything because it doesn’t. Bubbles, etc. do exist and mis-pricing can happen. But in terms of theories that apply to the markets, EMH is the most consistently profitable despite the problems it has.

I hear a lot of talk about various timing mechanisms and how they did in the past, etc. But I never come across people that actually can show me real-world profits from those strategies. And I’m not talking about a string of lucky trades. I’m talking year in and year out consistent and reliable profits above the overall market. And I’m talking about profits that have all the associated trading and tax costs factored in as well – not a bunch of backtest returns in a spreadsheet or on a graph.

The problem with market timing is that people are not computers. A backtesting spreadsheet or computer analysis may make it seem so simple to buy and sell at pre-defined times according to market timing rules. But in reality there is a human that has to make those decisions and humans are emotional. Part of that emotion is the idea that an investor needs to not just decide when to sell out when the strategy says, but also when to buy back in. That’s two different decision points. And each time there is a chance they will question their judgment and waver. That’s where the problems start to multiply and the profits start to dwindle. People have a hard enough time rebalancing with static bands of the Permanent Portfolio (set at 15% on the low and 35% on the high). How in the heck do they have any chance when trades are happening monthly, weekly or even daily?

People have a hard enough time rebalancing with static rebalancing bands of the Permanent Portfolio (set at 15% on the low and 35% on the high). How in the heck do they have any chance when trades are happening monthly, weekly or even daily?

Taking these trading strategies into the real-world never seems to work the way the advocates state. Either because the strategy itself really doesn’t work but they’ve talked themselves into seeing a pattern that doesn’t exist. Or the strategy is simply too hard to put into practice due to trading costs and human emotions.

Finally, consider these two points:

1) If these strategies are so reliable, why do the advocates need to go back and keep tweaking them over and over again when new data comes to light? Shouldn’t they always work if they are so foolproof?

2) If these various trading systems did work and the markets were so simple to take advantage of, then why isn’t everyone doing it already? The firms on Wall St. spend millions a year looking for the slightest edge on each other. How did they manage to miss all this easy money?

Market timing doesn’t work. Stay away from it and you’ll make far more money in your investments.

The new Permanent Portfolio Book is coming soon. Read all about it and sign up for the announcement list here: Permanent Portfolio Book