The Investor’s Carnival Game: Market Timing

December 08, 2016

The Allure Of Carnival Games

Market timing requires you to be correct at least twice, which is twice as hard as being correct once: Investors must correctly time the buy and the sell. Even if there is a 50/50 chance of being right once, there would only be a 25% chance of being right twice in a row.

However, to compound the difficulty of exercising market-timing discipline, it seems easier than it is. Whenever something seems easier than it is, you will find people willing to try it and people willing to enable others to try it. This made us think of carnival games.

We have all played carnival games at some point. The oval basketball rim, the whiffle ball that won't bank into the laundry basket and the dull darts that won't pop an underinflated balloon are a few classic games. We have all lost money over the years on these "games of chance."

Game Of Chance Requires A Chance

Over time, most of us have realized these games of chance are hardly games of chance. It is hard to call something a game of chance if you have almost no chance of winning.

After realizing the chances of winning are nearly impossible, rational people would stop playing the game. Unlike casino games with established odds, you won't see a professional league or corner location offering regular play of carnival games. No one in their right mind would play carnival games consistently over time.

What if, however, you were paid an annual fee to provide carnival games? Whether you won or lost, you would be paid above-average wages to promote the tossing of dull darts at underinflated balloons. Would you promote the chance of success, or the chance of failure?

It is important for investors to understand that those offering market-timing services typically get paid whether they are right or wrong. This doesn’t make them bad—we just note the fact that just because market-timing services exist doesn’t by itself mean they all work.

Think Of Your Family

How should we decide if we want to be market timers? When in doubt, we typically think about what we would do for our family. We all make bad decisions for ourselves that we would not let our family make. For example, we might drive slower with our family in the car, or we might worry more about the safety of a flight when our family is aboard.

Presumably, we want our families to be safe and healthy, and our overall decision-making process will be driven by increasing chances of success in reference to our families.

Assuming those reading this article have an interest in investing, we might assume those reading this article drive investment decisions in their marriage. Imagine you were going away on a space shuttle for 20 years and then returning to join your spouse in retirement.

Would you tell your spouse to try and time in and out of the market to optimize returns? Would you suggest your spouse put all of your marital investments into a market-timing strategy?

We hope the answer is "no" to both of these questions.

If you don't believe your spouse has this magical market-timing ability, and you currently try to market-time, it must be faith in yourself or one specific market timer and respective magical abilities. If so, maybe your faith was tested by the recent presidential election outcome, or the results of the “Brexit” vote, as both outcomes would have been difficult to properly time.


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