Why is 'Timing' the market bad ?

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  • kidmugsy wrote: »
    Four things I have learned about investing.

    (i) The advantages of equities over alternatives (even cash) are routinely overstated.

    (ii) Nonetheless you need equities in a long term portfolio if you are to try to keep up with price inflation or earnings inflation.

    (iii) If you buy shares when they are good value you can reasonably hope for a good return from them over the next few decades; if when bad value, you should expect a poor return. The best available measures of value are the Case-Shiller CAPE and Tobin's q; each makes economic sense, and they tend to agree with each other well on the two most studied markets (USA and UK).

    Thanks for this post kidmugsy. I think you have nailed it.
  • Pincher
    Pincher Posts: 6,552
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    Have you considered the merit of timing the market when it's OTHER PEOPLE's money?


    If you make money, you get a fat bonus. If you lose, it's the customer that loses.
  • Thrugelmir
    Thrugelmir Posts: 89,546
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    Cogs44 wrote: »
    If a simple (or even very complex) mechanical process was possible then someone would have done it already. You could set up a model with very little capital just making a small bet on the market movement each day based on distance from supposed long term trend.

    Rumour has it that there's a private hedge fund in New York. Who have designed a computer programme that's accurate at forecasting future market movements.
  • Thrugelmir wrote: »
    Rumour has it that there's a private hedge fund in New York. Who have designed a computer programme that's accurate at forecasting future market movements.

    I am sure you have heard of Long Term Capital Management, and their, ahem, infallible system. :)
  • economic
    economic Posts: 3,002 Forumite
    Thrugelmir wrote: »
    Rumour has it that there's a private hedge fund in New York. Who have designed a computer programme that's accurate at forecasting future market movements.

    renaissance technologies?
  • grey_gym_sock
    grey_gym_sock Posts: 4,508 Forumite
    jamesd wrote: »
    P2P is perhaps lower risk than bonds, certainly lower than equities because it's generally secured lending or backed by a protection fund or both. It largely lacks the capital loss potential due to interest rate rises.

    in general, p2p has to be riskier than investment-grade bonds, and is more comparable to junk bonds. it does depend how you do p2p. do it carefully, and i can believe it might be lower-risk and higher-return than most junk bonds. carelessly, and it could be worse.

    IMHO, security-backed lending is a better thing to look for than protection funds. a protection fund depends on the p2p platform - if (for instance) their underwriting is incompetent, and this is exposed due to an economic downturn, then a protection fund could run out. a lot of it still comes back to the soundness of one business - the p2p platform, not the borrowers.
    A sample of some I have or had, simple (no compounding) interest rates before allowing for bad debt:

    1. £30k at 19% to a car flipper featured in a TV series, secured on the cars. Ended last summer.
    2. £10k at 16% for a holiday park development in Scotland, secured on the land and building that will remain. Guarantee by the loan intermediary to cover shortfalls after security sale.
    3. £10k at 14% for a two storey Portacabin building at Pinewood studios that is doing long term renovation, secured on the building and rental stream from Pinewood.
    4. £5k at 14% to a claims management company for postal marketing, secured on land. Guarantee by the loan intermediary to cover shortfalls after security sale.
    5. Circa £25k at 12% to a car HP seller, secured on the HP payments and, if the borrower defaults and the seller also fails, on the cars. Seller takes the day to day credit risk, swapping out defaulted loans as long as they don't fail.
    6. Circa £23k at 12% to an invoice finance firm, secured on the goods, ultimate buyer and 90% credit insurance or letter of credit from UK bank.
    7. Several tens of k at about 16% (there's a profit share component) to a firm importing and reselling or leasing containers, secured on the containers.

    Those tend to be at the higher risk end of what I'll lend on. I tend not to hold to the end of the loan term, that's when the default risk is highest. At the moment it's easy enough to sell though that's not guaranteed.

    The only default I've seen on that sort of stuff was to another container importing firm where the individual behind it seems to have committed several crimes. Their personal assets, including their home, are now at stake, being subject to an order from the High Court. I'd sold most of this before the default. Much easier to steal and sell containers than buildings or land.

    A fair bit of more banal property bridging loans as well as a range of other stuff. Usually I avoid property development loans, too much chance of those being slow to sell or having completion trouble in a residential or commercial downturn.
    that was mostly about how reliable the borrower and loan security are. which is important, but i think the bigger risks are perhaps with the p2p platforms themselves. it's not just about whether they're honest about where your money is going, but also about how good their underwriting process is, and whether there are conflicts of interest (e.g. will they compromise on loan quality to expand their business faster?).

    i suspect it's very difficult to tell how good (i.e. honest, competent, open) a platform is. how much info do you get access to? how much time do you spend examining it, and doing related investigations to test the info? (personally, i wouldn't want to invest a lot of time into this.) are you a professional in some aspect of lending? if not, is your personal attempt at due diligence going to be very effective? [these are mostly meant as rhetorical questions.]

    how many p2p platforms are there that it's worth using? if it's (say) 5, then the platform risk is in a sense comparable with putting all your equity investments in 5 individual companies. which most would regard as extremely reckless. with equities, it's much easier to be diversified enough that you don't care about any individual company going bust.

    on reliability of security: among other issues, i would be concerned about any security whose value is specific to the kind of business using it. e.g. shipping containers might well lose value precisely when the company using them goes out of business, if both are due to a downturn in world trade.

    also, any security with large numbers of relatively low-value items is going to be disproportionately costly to sell, if it comes to that. e.g. i remember reading something about loans secured on jewellery - not that you mentioned that.

    what you're doing may make sense. i'm not sure. but i do think it's difficult, and there are a lot of risks to consider - and keep a close watch on.
  • Thrugelmir
    Thrugelmir Posts: 89,546
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    economic wrote: »
    renaissance technologies?

    Cannot recall who they were. There was an article recently.
  • grey_gym_sock
    grey_gym_sock Posts: 4,508 Forumite
    jamesd wrote: »
    14 March 2017, "ROBERT SHILLER: 'This market is way overpriced'", referring to the US equity markets. "Its most recent reading on Monday was 29.24, a level not seen since the early 2000s when the internet bubble was leaking." It's currently higher than it's ever been except for the internet bubble and around 1929's Black Tuesday. "He did not forecast a short-term decline in stocks, but told Bloomberg that he wasn't buying more." He said he was now buying outside the US in places with more favourable valuations.

    'Shiller says when markets are as buoyant as they are now, resisting the urge to pile in is hard regardless of what else might be happening in society. “I was tempted to do it, too,” he says. “Trump keeps talking about a new spirit for America and so you could (A) believe that or (B) you could believe that other investors believe that.”' Click on the picture of Trump to watch the interview where he discusses both psychological Trump rise factors and the long term issues, while advising most investors to keep some in the equity market but not go overboard. He mentioned both bonds and equities as over-funded in the same sentence. Yet he also observed that in the short term there could be a repeat of the rise from 1997 and described the situation as very uncertain.

    That didn't use the magic word bubble but way overpriced for both US bonds and US equities is a pretty good alternative phrase.

    comparing the current PE10 (unadjusted) with 1929's PE10 is spurious. the current PE10 should be a bit higher, because of

    1) accounting changes, re writing down assets with impaired values, and re allowing for the cost of employee share options, which have reduced earnings in recent years, and hence increased the PE and the PE10.

    2) greater use of share buy-backs in recent decades. this doesn't affect the PE, but does increase the PE10, compared to what it would have been if the company had paid out the same cash in dividends instead of buy-backs (because - i'm not sure if this explains it properly - the earnings per share from 9 years ago are calculated based on the larger number of shares that existed at that time).

    (there was a series of long articles a few years ago on http://www.philosophicaleconomics.com/ which covered the above 2 points.)

    in any case, shiller isn't selling any US equities, and presumably he already holds a significant amount of them. and he's just making new purchases in non-US equities.

    i've no real argument with that. i would add that, for anybody who has no equities to start with, and is thinking of buying some, the nearest thing to shiller approach would be to include some US equities in that, but underweight the US a bit - not to avoid the US altogether.

    shiller may or may not be making the right move. to come back to the topic, it is timing the market a bit. but in a small way.

    and when you switch to other assets where you expect a decent return (whether that is different equity markets or selected p2p), then timing the market is not nearly as problematic as the classic case of holding a lot of cash, fully intending to put it back into equities, but not until after the market crash, which you insist will happen.
    As you can see from my other posts in this discussion I might well do some short term speculation on a US Trump-related rise in spite of the poor long term context. But that'd be deliberate short term momentum-following speculation, not a long term position.

    well, that's what i'd call really scary market timing :)
    If you want to see places that were cheap on 21 Feb there's a handy world map here. Relatively cheap included the UK and most of Europe. Plenty of alternative opportunities to stay in equities at lower prices, if desired.

    adjusting your equity allocations to individual countries is generally best avoided, except for the major 3 (from a UK perspective) of USA + UK + japan. you could increase your weightings in UK and europe ex-UK, based on apparent relative value. i've no big argument with that, but it's not a racing certainty to work out. europe may be cheap because it has economic problems (especially, that the eurozone is run with a bias towards recessions).

    i will probably being selling a bit of US equities to buy europe ex-UK equities soon, but that is just rebalancing back to my pre-defined allocations, not changing them. (is rebalancing a kind of market timing? well, sort of.)
  • grey_gym_sock
    grey_gym_sock Posts: 4,508 Forumite
    SteveG787 wrote: »
    b) Many posters see this as a method to "beat" the market, ie make more money than staying in. That was not my intention, it was always to protect gains that I had already made (through good fortune rather than any skill of mine). In my mind I am ahead of where I wanted to be and so would be happy to spend some of that (by foregoeing potential gain) to protect capital.

    there is nothing wrong with taking some chips off the table - i.e. simply reducing your risk.

    suppose, due to large gains from volatile investments, you now have enough to retire comfortably and securely, providing you reduce the risk of your portfolio. but that if you keep invested as you are, you're at risk of losing so much that you have to go back to work. it's perfectly rational to reduce risk.

    and i wouldn't call it market timing when you don't intend to increase risk again in the future. it's when you do - e.g. you're holding cash now, but intend to plough it all back into equities later on - that it's clearly market timing.
  • SteveG787 wrote: »
    b) Many posters see this as a method to "beat" the market, ie make more money than staying in. That was not my intention, it was always to protect gains that I had already made (through good fortune rather than any skill of mine). In my mind I am ahead of where I wanted to be and so would be happy to spend some of that (by foregoeing potential gain) to protect capital.

    I think there is a good argument for "the best defense is a strong offense", and there is a danger that if you are preoccupied with capital protection, your end result could be lac-luster compared to what it could be.

    Fair enough though if that is what you want, but it's also worth keeping in mind that even if you go what is perceived to be the safe route, the market may have other ideas -- and this also applies to mine and all other strategies too.

    It may seem counter intuitive, but taking carefully calculated risks in order to keep your portfolio growing, might actually be a better defensive strategy. I believe so anyway.

    If you are so concerned with protecting your pot, then surely it would be better to hold it in bank accounts? Or at least a part of it, till interest rates pick up a bit, which probably won't be long.
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