So You Think You Can Time the Market?
All it takes is a couple of lucky trades to end up with a false belief in one’s ability to jump in and out at the right times.
Bloomberg, August 25, 2020
The giant 34% recent sell-off and 59% recovery has investors fantasizing about top ticking the market on the way out, and jumping back in at the bottom. This is a little harder than these folks imagine.
To be successful at market timing, you only need to get three fundamental issues right:
1. The Exit
2. The Re-Entry
3. The Costs
For those of you who believe you have figured the above out, you need to be able to answer these questions:
1. Is this a repeatable (not chance-based) process, that would have had you selling equities near the highs?
2. Do you have a process would to buy back in after a major collapse?
3. Are your number of false positive market signals small enough to make this a worthwhile endeavor?
To do that, there are three emotional components you must master:
1. An objective ability to evaluate your own skills in this space; Whether this is based on your own subjective feel for bottoms or some quantitative measure, you have to self-evaluate honestly;
2. An understanding that your skills in this space are both genuine and and the conviction that your edge superior to other investors. Note: this is very different than mere overconfidence;
3. The discipline to act on these beliefs, following a plan despite the mayhem that occurs near market bottoms.
If you can answer all of the above satisfactorily, go ahead and time markets. Everyone esle, should read on to understand why you should not . . .