Friday, November 25, 2011

Market Timing Myths

Not For Everyone
Another of the myths about market timing is, if market timing actually worked, then everybody would be doing it.  If you are familiar with my blog, then you know the main reason this is not true.  Personal investors do little to influence market direction.  It is the mega-sized orders of the large fund managers that determines the direction of the markets.  It is the very size of their positions that prevent them from jumping in and out of the markets.  It takes a period of days and weeks to either establish, or eliminate their market positions.  For them, market timing is not a viable option.

One Size Fits All?
So, if it doesn't work for the professionals, then it can't work for the little guys, right?  That is like saying the route I choose in a dinghy has to be the same as that of the captain of an aircraft carrier.  As for me, I would not attempt to cross the ocean in a dinghy, just as I would not try to pilot an aircraft carrier down the local river.  While the purpose of the boat determines its size and dimensions, the size and dimensions of the boat also limit how it can be used.  That is not to say professionals do not use charts to help them make portfolio decisions.  Fund managers use every tool in the shed, including technical analysis.   

How Popular?
If it works best for personal investors, then why don't more of them use it?  One reason is financial institutions want people to think they are unable to manage their own portfolios. If people believe they are unable to do it for themselves, then they have little choice but to hire a professional.  Yet, I am willing to bet practically every nurse on the planet can read a chart, so, why not a stock chart?   

Another reason people won't time the market is because is doesn't work for them.  While that may seem like a perfectly good reason, we have to wonder why it doesn't work.  It actually is not because timing the market does not work, it is because most people are, well, people.  Given to emotion, most people buy high, and sell low - just the opposite of what they should be doing.  As a result they label timing the market as being too hard, even impossible.  Their inability makes it clear to them that market timing, simply, does not work.

Yet another reason everyone does not try to time the market is because of something called denial.  Not a lot of people want to believe that group behaviour is, in some way, predictable.  We see ourselves as acting independently of those around us.  After all, we have a mind of our own.  How dare anyone suggest our decisions are similar to that of many others despite the fact their situation may be similar to our own.  Denial is far more than just a river in Egypt.

I have never understood why, but there is another whole segment of investors who believe technical analysis precludes any sort of fundamental analysis.  One taints the other.  I say, why work with only one hand, when we are perfectly capable of using two?  The result of using one technique should complement the use of the other, not contradict it.

Bottom Line
We can see there are all sorts of reasons why everyone will not embrace technical analysis and market timing.  The belief that everyone needs to is yet another example of the misinformation surrounding the real issues.

Convinced?  Should market timing be expected to work for everyone?  

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