Why timing the market or band trading simply not work?

timing the market

Regardless of individual stock investment or ETF, band trade, timing the market, or speculation on the market, choose the time to enter and exit the stock market, so as to accurately grasp the maximum profit potential ─ ─ This approach simply does not work, and it is a waste of effort.

Band trade

Most investors in Taiwan seem to have been taught this way since they were children—swing or band trade is the basic common sense of stock market investment, at least most Taiwan retail investors I know think so. And I observed that almost all financial celebrities, internet celebrities, and not a small media also advocated this. Their starting point is always to sell when the stock rises at a high point, wait for the stock price to fall again, buy it when it falls enough, and hold it until it rises to a high point and then sell it. By doing this repeatedly, you will earn more than the long-term holding method of buying at a low point at the beginning and holding it for many years and then selling it.

Such an argument may seem reasonable and clever, but in fact it is not. Because no one can know when the stock will rise or fall, the fundamental argument of the advocates of swing manipulationor band trade is simply untenable.

I have been wondering for years why band trade is so popular in Taiwan. There are only two reasons I can think of: to prove that you are smarter than everyone else, but you buy stocks to make money, not to compete with others, and people who usually think they are smart aren’t.

Another reason is the same as the purpose of those who advocate that the investment portfolio should be balanced on a regular basis. The investor who loses from frequent trading is always the investor, and the only gainer is the wealth management industry. This reason cannot be simpler.

The basis of argument for timing traders

The reasons they hold including:

  • Section rotation: Insist the every stocks category dipped most will rebound eventually, turnaround companies, or penny stocks will come back to life.
  • Band trade: Believe he is able to sell at highest pirce and buy back at lowest price. Repeatly operate back and forth to maximize his profit.
  • Time to trade to get the most profit: Believe that you are smart enough and can grasp the best time to enter and exit the stock market, buy at the lowest point and sell at the highest point.
  • Guess the bottom of the market: Believe he is able to predict the bottom of the market.

In fact, none of the above practices has any factual basis, and the advocates themselves know that it is wishful thinking. No one can do it before, and it will not be possible in the future.

The facts

Historical data

According to the history of US stocks in the past 100 years, even if you buy at the highest point of the US stock market (such as invest ETFs tracking broader market index), in the worst case, investors will be able to be profitable after 18 years.

Performance of Taiwanese day traders

In the two years from 2000 to 2021 in Taiwan, the Taiwanese day-traders generated transaction volume of US$ 1.9 trillion, but they lost US$ 2.21 billion in this period. In 2021, the transaction volume reached US$ 1.37 trillion, and the total income amounted to US$ 2.42 billion. However, after deducting the tax and comission fees, the cost of the transaction was about US$ 4 billion, end up they lost US$ 1.59 billion in 2021.

Investors’ behaviour

Human nature

No matter how rational investment experts are, they cannot persuade most people to buy heavily at the high points of the stock market, or persuade people to sell at the low points of the stock market. There is no way, because this is human nature. The former will cause people to miss a large number of possible ten times or thirty times shares. The end of the latter is to refuse to stop loss, the stock may become wallpaper, and the hard money will be reset to zero.

Why is it so?

The crux of all the problems is, as Buffett told Bezos’s famous saying, “Because no one wants to get rich slowly.” Most people still think that the stock market is a place to make quick money and want to get rich overnight. Munger said “The desire to get rich fast is pretty dangerous.”

People are easily misled by the fog in front of them

In a bear market, when people pay too much attention to market timing, people’s eyes will be misled by the fog in front of them and they will not see buying opportunities–because the short-sighted nature of human nature believes that the sky is about to fall and forget what they swear every day, in order to make a big fortune, the market promises to buy heavily in the event of a crash. Because of this, almost everyone believes that gold is not everywhere in the market, but believes that it is a falling edge.

Charles Henry Dow wrote Rothschilds are said to have acted on the principle that it was well to buy up property of known value when others wanted to sell, and to sell when others wanted to buy. Baron Rothschild made a fortune buying in the panic that followed the Battle of Waterloo against Napoleon. His original quote is believed to be “Buy when there’s blood in the streets, even if the blood is your own.” Buffett’s famous saying “fear when others are greedy, and be greedy when others are fearful.” during this period of time, it seems to disappear from this world–the result is that most investors will miss the opportunity once in a decade, the chance of falling down during the crash. When investors come in and dare to enter the market to buy stocks, the market has rebounded sharply and potential profits are already limited.

Why I’m confident to write the above paragraph? I want to prove it from another angle; if most investors can buy when the stock market crashes, most of the stock market investors should perform well, be able to easily beat the market and get rich from the stock market. But the facts are the opposite. Most stock market investors have poor performance. When the stock market is stable, investors struggle to earn single-digit percentage returns and are not available. They try to find the best way to make money in the stock market. The biggest problem is that you failed to adopt the contrarian investment strategy, dare to buy the dip when the stock market crashed, because buying during the crash can greatly improve your investment performance and enable you to easily fulfill your dream of getting rich.

Investors should make investment decisions based on the sales, earnings, and dividends of listed companies; ignore market fluctuations, rather than through clever transactions (trading timing, market trends, and trends). Even if you know that there will be any major changes in the stock market, you must forget these changes or fluctuations in the market (they are all noise). Only by doing this can it be more profitable, And focus on finding the right stocks to buy. This is, and is possible, the correct investment behavior to obtain a large amount of wealth.

What should be correct?

Masters view

About forecast or future, Keynes said “We simply don’t know.”

Buffett once said: “Guess the market, that is what God is doing.” He also said “Speculation is most dangerous when it looks easiest.” In 1994, Buffett said: “I never have an opinion about the market because it wouldn’t be any good and it might interfere with the opinions we have that are good.”

Peter Lynch’s famous saying “If you cannot convince yourself that “the stock price drops by 25%, I will buy.” and give up “the stock drops by 25%, and I will sell.” It is best not to buy stocks.” Buffett has a similar view and said:”Unless you can watch your stock holding decline by 50 percent without becoming panic-stricken, you should not be in the stock market.”

Munger also mentioned, “If you can’t be calm about two or three or more times in a century when the market drops by more than 50%, you are not suitable for investing, and compared with those investors who have the ability to deal with market fluctuations rationally. A relatively mediocre investment income can be obtained.”

The correct way

This shows the difficulty of timing transactions, or it should be said that there is no possibility of timing the market to transactions. Therefore, the best strategy for investors is to abandon the possibility of timing transactions, instead invest in research and find competitive stocks, regardless of market conditions, and hold them for a long time. Because a rare good stock will still be a good stock after three to five years, long-term holding will definitely reflect its ultimate value.

This is why Buffett said in 1989 Berkshire’s shareholder letter, “Time is the friend of good companies and the enemy of mediocre companies. You might think this principle is obvious, but I had to learn it the hard way ‐ in fact, I had to learn it several times over.”

Buffett’s view on timing the market

In 2022 shareholders meeting, Buffett said he never figured out how to time the market. He insisted that he would never speculate on the market’s timing and that “we don’t have the slightest idea of ​​what’s going to happen in the stock market.”

“We don’t have the slightest idea of ​​what the stock market will do when it opens on Monday. We never buy (stocks) based on how the stock market will go. We never have a deep economic view. We can’t pick without error. market timing.”

“I don’t think we ever decide, who of us is going to say where, or think we should buy or sell based on where the market is going, or where the economy is going. We don’t know.”

Buffett admitted that he missed the opportunity to buy stocks in March 2020, saying “I completely missed the market in March 2020.”

Buffett adheres to the strategy of value investing, and advises everyone not to spend time answering questions like how to outperform the S&P 500 this year.

“We’re not good at timing. What we’re good at is figuring out when to get enough money for us. We don’t know when to buy what, but we’ve been hoping that there’s going to be a period of downside (the market) so we might Buy more…I mean, it’s something you probably learned in fourth grade.”

Dimon, CEO of JPMorgan Chase (ticker: JPM) once said, “Investing should be an eternal thing, guessing at the top of the market, guessing at the bottom of the market — it’s a total loser’s game. I’ve never seen No one has ever won in it. Warren Buffett, the smartest investor in the world, would say, this is not the way to invest.”

timing the market
Credit: vowellfg.com

Closing words

“You have to be there when lightning strikes. That’s why market timing is a truly wicked idea. Don’t try it,” writes Charles Ellis.

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