Yes, You Can Time the Market!

Ben Stein and Phil DeMuth are right. You really can time the market. This does not mean that you can succeed in short term timing. They are talking about the intermediate term and the long term.

Nitpickers will complain about the procedures used in the early sections of the book. I agree that the procedures are indicative as opposed to conclusive. My own research fills in the gap. Ben Stein and Phil DeMuth are right.

Ben Stein and Phil DeMuth used 15-Year moving averages to create an all-or-nothing threshold to buy or not to buy. Returns were outstanding when their indicators recommended buying. They were lousy when their indicators recommended against buying.

Purists will complain that investors have to act in the world as they find it. They need procedures that will tell them what to do when an indicator recommends against buying. My own research using switching algorithms (i.e., varying stock allocations in accordance with valuations, usually P/E10) fills this gap. My own investigations with a TIPS-only portfolio while waiting also fills this gap. Ben Stein and Phil DeMuth are right. What remains is only a matter of detail.

The real value of this book is in the sound thinking of the authors. Numbers crunching is secondary. Their best gems are located in the final few chapters. Section 4 of Chapter 8 (Using Market Timing), by itself, is well worth the price of the book. It carries the subtitle “Proceed with Caution.” A couple of items on page 160 confirm that the authors favor a more reasoned approach than the extreme buy/don’t buy approach used in their data presentation. They recommend:

“Don’t make any sudden moves.”
“Never move more than a small percentage of your money around in any one day or transaction (except for the day you buy your house).”

Although Ben Stein and Phil DeMuth used 15-Year moving averages to generate data, they do not recommend it, per se. What they really recommend is avoiding the really stupid decisions that come from ignoring prices altogether.

[Those who would like to examine moving averages of the market as a whole can modify my calculator easily. After generating annual moving average data (or an alternative indicator), paste it into row 186. The calculator will treat the new data as if it were P/E10. Just put in thresholds and allocations using the appropriate values for the new indicator.]

Rob Bennett’s article “Market Timing--What Works and What Doesn't” is a natural, practical addition to Yes, You Can Time the Market.
Market Timing--What Works and What Doesn't

I disagree on a handful of specifics. For example, I do not share Ben Stein’s and Phil DeMuth’s advocacy of extensive diversification. In fact, I consider the appropriate amount of diversification to be a matter of personal preference, not compelling logic. There is such a thing as excessive diversification. At some point, you end up knowingly buying inferior investments simply for the sake of diversification, not to lower risk.

Have fun.

John Walter Russell
December 26, 2006