Friday, January 28, 2011

Timing The Market

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The new FCIC report came out yesterday with blame for everyone as to who caused the financial crisis.  Most deny any wrongdoing by saying, "Nobody knew!"  Do they mean to tell me that the actuaries at AIG who are trained in probability analysis figured there was a zero percent probability that the U.S. housing market might correct?  Are they telling me the rating agencies whose job it is to assess the worthiness of a security had no idea products based on mortgages from the U.S. housing market might be less than AAA?

I would have a difficult time proving anyone is that stupid.  Assuming they aren't, then doesn't it go to follow they are not telling us the truth?  Why would they lie to us?  Could it have to do with how they were  being compensated and by how much?  I have read stories of traders who barely understood how to spell the word market (okay, I'm exaggerating) were pulling in multiples of six figure incomes.  Would you lie for a million dollars?  I know some people who would.  I think we all do.

What if I told you some of these people are the same people who are telling us we cannot time the market?  Are you surprised?  Please look at the chart.  This is a very basic chart showing the monthly price ranges of a security that trades on the TSX.  The ticker symbol is XIU.  It is an Exchange Traded Fund (ETF) that derives it value from the Toronto Stock Index.  In other words, as the TSX goes up, so does the ETF by the same percentage.  Likewise when the TSX goes down.

Also shown is the line which, basically represents the 200-day moving average.  Take the average price of the XIU for the last 200 days and draw a dot on the chart.  Take the 200-days one day prior to that and do the same.  And so on.

How do I use that information?  Once a week, I look to see if our price is above, or below the line.  When it has crossed from below, I buy XIU.  When it has crossed from above, I sell XIU.  Doing that from even the peak of the market in the year 2000, and I would likely have more than doubled my return since then, even after paying any commissions.  A little better than that of the "buy and hold" mutual fund owners, wouldn't you say? 

I'm sure I could show that to some children and they would be able to do it for themselves.  Do you really think your financial advisor has never seen this?  Can they really be that dumb?  Of course not.  The reason they don't tell us about it is because they won't make any money if that's all we do.  More importantly, the company they work for will only make a lousy little commission.  Now, we couldn't have that!  Now I'm not saying I will double my money every ten, or so years, but I like the returns a lot better than a "buy and hold" approach.

Still, I can hear the protests.  "But you're not diversified, the TSX isn't always going to do so well, nobody can predict the future", etc., etc., etc.  Do I really think the world is going to stop growing?  Does the world have too much oil, copper, wood, grain, fertilizer, water, that nobody is ever again going to buy anything from a free, democratic, trading country like Canada?  Maybe Australia will fill all the needs!  Come on folks!  I'm not saying we have to put all of our money into the TSX, and even though it may represent only three percent of the companies in the world, it is three percent of the best financial, mining, and energy companies anywhere on this entire planet!

There is no doubt in my mind there will come a time when what Canada has to offer will no longer be so desired.  Until then, why make it more difficult than it needs to be?  Simplify, simplify, simplify.  Look past the elaborate smoke screens and misinformation and marketing ploys.  There are any number of companies who want to mislead us in order to lighten our pockets.  Never mind a million dollars, there are people who will lie for a lot less than a million dollars.  After looking at this chart, do you really mean to tell me there is no timing the market?!?

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