Buy and Hold or Market Timing?

12/16/2011 11:00 am EST

Focus: STRATEGIES

Mark Hulbert

Senior Columnist, MarketWatch

Instead of being solidly in one camp or the other, it's best to diversify your investing advice between the two to protect your assets, says Mark Hulbert.

More and more investors both institutional and individual are interested in market timing and trading techniques. What does your work tell us about the popularity of buy and hold versus market timing at important turns in the market?

I think that’s a fascinating question. I inaugurated a number of years ago an indicator that—on my epitaph, it can say, "Mark Hulbert invented this indicator." I call it the market timing popularity indicator, and though it’s not an exact science—it’s hard to quantify the popularity of market timing—nonetheless the principal behind it is, I think, valid.

That is that market timing has its greatest popularity right at the bottom of a bear market. Whereas buy and hold is most popular at the top of a bull market. It makes sense, after all, and yet that’s exactly the opposite of what would be most profitable for investors.

Very interesting. Tell us, is market timing possible in your research?

You know what? My data shows that market timing is no more nor no less possible than any other thing in the investment world. Which isn’t to say it’s very probable that it’s successful, but some people are able to pull it off.

I don’t find that the percentage of people who are able to select stocks that outperform the market is any higher or lower than those who are able to time the market. I find it’s about 20% of those who try end up succeeding, one out of five. It’s a dismal return. It’s no better for market timers than stock selectors or mutual-fund managers or hedge-fund managers, and so forth.

And in fact you do have empirical evidence from your advisory newsletters that 20% or about that proportion have been successful at market timing.

Correct.

Over a reasonable period of time.

That’s right.

Over a number of market turns.

That’s right.

Do they tend to be very-short-term market timers or do they tend to be longer-term market timers, in the sense that...do they give many signals, the successful ones, or do they give, you know, more sparsely?

Well, the answer to that is that it’s all over the map. I think there’s actually a lot of solace in that. It turns out that the way I put it is that there’s more than one road to riches—and good thing. If there was only one road, then it would be a very crowded road, and quickly the market would discount that away.

Yes, there are some who are short term-oriented who do well. Many don’t, but that of course, that’s true of everybody. But there are others who take a longer-term approach, and though they end up missing out on certain corrections, they’ll end up more than making it up in other phases of the market cycle, so they’ll come out ahead as well.

Many of the top market timers I track did not anticipate the degree of the downturn that we saw in August and September.

But they did get out.

Well, some did, but some did not, believe it or not.

Some of the best market timers did not get out in July, or...?

That’s right. I mean, you’d like, in retrospect, to have them get out at the April 29 market top, right? And at the October 3 low—if indeed October 3 turns out to be the final low of whatever weakness we saw beginning last April—but nonetheless, a lot of them didn’t.

You normally would think, "Oh well, that’s just an indictment of market timers if they can’t do that." But it turns out that you don’t have to catch every move in order to do well.

In retrospect, if you go back and look at the 30 years I’ve been tracking market timers, there have been a number who would catch one move exactly...let’s say they’ll get out in anticipation of a bear market. But they don’t necessarily get back in, in a subsequent bull market.

I think the most classic case of all is Richard Russell of Dow Theory Letters. He was a great market timer, and indeed it was at a MoneyShow in August 1987 in San Francisco—and I was in the audience for one of the last public appearances I remember that Russell made—and he said that’s it.

It turned out to be three days after the top of the bull market. It was one of history's great calls.

Yes.

And he was three days—I mean not a month later, it was not six months later—three days later and the market crash would happen, and then the worst crash in US market history happened two months later. And he called it.

You’d think that that would be enough to—you know, the market dropped 22.6% on the day of that crash, and it already dropped a significant amount even before that crash—you’d think that’d be enough to enshrine Russell’s record as the head of the buy and hold forever. Because he gained 30%-plus on a buy and hold just in two months' time. But he did not get back into the bull market until after it was higher, in August of 1989, than it was before he got out.

I mean, you have to do a lot of things right to beat a buy and hold. Getting out before the market tanks is one thing, but it’s only one thing. You have to get back in. And so it turns out that...

And you have to pay taxes.

Well, that’s right, and so this is why—interestingly enough, in answer to your question—there are some who are much longer term-oriented. And you’d think, "Wow, they’re at a disadvantage to these short-term timers to doing well over time." But it’s not necessarily the case, because a lot of the short-term timers end up shooting themselves in the foot even after a great call.

They get whipsawed.

That’s correct.

Do you recommend a subscriber to services diversify among different approaches—buy and hold and market timing at the same time—and are there types of diversified approaches within the newsletter universe?

Well, I’m very ecumenical on these this year, so I wouldn’t recommend necessarily one report to the other. What I do say, though, is regardless of how many approaches you follow, you divide up your portfolio into very predefined segments. Within each of those segments, follow a particular timing system with discipline and patients very mechanically.

The problem is that I’ll find that clients will subscribe to, let’s say, two or three or four newsletters, and they try to find the common denominator among those three or four. That is just a recipe for no discipline at all, because you can always find little strands in each one of them that allow you to do almost anything.

Again, to repeat, there’s more than one road to riches. The key is not trying to find the road that’s held in common among those many, but rather pick many cars and each car will follow one road religiously rather than try to pick and choose.

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