Tuesday, April 5, 2011

Masonson, All About Market Timing, 2d ed.

“If you were in a leaking boat,” Leslie N. Masonson writes, “you’d have three choices: 1. Stay in the boat and stop the leak = Go short. 2. Get out of the boat = Switch to cash. 3. Go down with the ship = Buy-and-hold.” (p. 60) In this second edition of All About Market Timing: The Easy Way to Get Started (McGraw-Hill, 2011) Masonson explains why market timing is superior to buy-and-hold and describes some timing strategies that have been profitable in the past.

Most people, I assume, would prefer market timing to buy-and-hold—if it really were a viable strategy. The main argument against timing is that it can’t be done. The investor will end up being out of the market on the best days, in on the worst days, and poorer for his efforts. Better just sit there, say the critics, take your lumps in bear markets, and trust that the market will eventually power ahead, taking you along with it. Unfortunately the market can be very slow to recuperate from downdrafts, as the author documents in several tables.

Masonson presents five familiar market timing strategies: the best six months, presidential cycles combined with seasonality, simple moving averages, the Value Line 3 and 4 percent, and the Nasdaq Composite 6 percent. These strategies are best pursued using ETFs rather than individual stocks or mutual funds.

Performance summaries for each of these strategies (and variations on them—for instance, using daily versus weekly data, leveraging, and tweaking the seasonal approach) are included. Some of the summaries are updated through 2010, and some come with equity curves for the more visually oriented.

Where the performance of a particular strategy has degraded over time, Masonson offers an alternative. The Value Line 4% strategy, which triggers a buy signal when the Value Line Composite Index rises 4% from its last market low and a sell signal when it declines 4% from its last market top, performed well for quite a spell but then turned in mediocre results (although it still beat buy-and-hold). Between January 28, 2000 and January 12, 2001 the weekly strategy signaled 15 trades, of which 14 were losers; the daily strategy over roughly the same time period experienced 18 losers out of 20 trades. A 3% weekly strategy would have outperformed dramatically. Of course, this is 20/20 hindsight, and we don’t know how well a 3% strategy will deliver in the future.

In the book’s final chapter Masonson highlights some market timing newsletters, web sites, and advisors. Most of these are by subscription only—no free lunch, it seems, in the market timing world.

All About Market Timing is an introductory text, but it’s an excellent place to start to weigh the pros and cons of trying to time the market.

1 comment:

  1. Masonson is an unsung hero and apologist for evidence-based, empirically verified market timing. It's taken me hundreds of hours of study to finally figure it out and make huge gains consistently by timing the market. Market timing is not for the novice. If you don't fully understand it, use a market timing service with a proven, verifiable track record.