I have spent the last 25 years of my life teaching investors to stay disciplined and those who have listened have had a very successful investment experience. But the belief in “market timing” just won’t go away.
Last month, in the Wall Street Journal, there was an article with the above title. It began with a lot of evidence regarding the failure of market timing and the success experienced by those investors using a long-term “buy and hold” strategy.
The article then went on to claim that there may in fact be a “model” that can enable investors to beat a “buy and hold” strategy. Most “market timers,” “chartist,” etc. have very little credibility with investors because their failure to time the market successfully is well documented. They begin with a model that tells them when to get in and out of the market. (Something every investor would love to know.) They fit their model to the past performance of the market to show how well an investor would have done, had they followed the model in the past. But the problem is this; the past is not the future when it comes to investing.
It’s a dynamic world we live in and the pace of change is increasing rapidly. To look at past market moves and various accounting ratios etc. to predict the future moves in the market is risky, if not dangerous. History does not always repeat itself.
The Wall Street Journal article was of course talking about Robert Shiller’s “market timing” model. Just last week, Shiller wrote a piece for the New York times stating how dangerous the market is today according to his model.
Shiller has a lot more credibility than most market timers because he recently won a Nobel Prize in economics and he teaches finance a Yale University. In my opinion, that is what makes him dangerous. Investors may believe they have found the “Lebron James of Investing” and follow his advice.
I am always skeptical when someone claims to be able to do something no one else has been able to do. Especially when it comes to investing. I then ask a simple question. If Shiller’s “market timing” model works, why isn’t he a very wealthy man? Maybe we should call this the “Jim Cramer Test.”
Wheeler Writes 
Nice one Dan!! Great article.
Hope all is well.
Regards from the DFA Berlin office,
Lukas
Lukas Schneider
+49 (0) 30700159 637
Dan, of course market timing and security selection are important, but not in the way most people think. I use market timing almost every day when evaluating when to rebalance portfolios that have moved away from the asset allocation set in the IPS. Another form of market timing I find useful is Value Averaging (Michael Edelson). In terms of security selection, I think there are only 3 or 4 firms in the whole world that I would use to build portfolios (DFA, Vanguard, iShares). So I think perhaps we should move away from telling people that market timing and security selection are not important or don’t work – but educate them as to how they can be used effectively.