The elusive art of market timing

Yap Ming Hui

THE art of market timing is an ever-elusive one. Investors are forever trying to predict the next market crash or spike, a feat that even computer algorithms are unable to achieve today.

The lack of predictability on the next crash is just one of the many challenges of timing the market.

Global market crashes are not new. In 1997, the Asian financial crisis that began in Thailand triggered a global financial meltdown that took years to recover from. In 2007/08, another financial crisis swept the world, triggered by the collapse of the US housing bubble.

Each of these meltdowns have strengthened many investors’ conviction that it is necessary to time the market.

Today, we are in the midst of another financial crisis triggered by the Covid-19 pandemic, and it is said to be worse than the crisis in 1997.

The stock market, which took a dive in March 2020, has since strongly recovered. Yet there are a group of investors (those who believe in market timing), who are still contemplating (hard) when would be the best time to enter the market.

The essentials of market timing strategy

If you check out most stock’s performance graph, and you’ll realise that the long term growth of the stock consists of many short-lived dips and peaks. Your best strategy would then be to buy right after the dips, correct?

After all, the way to maximise your gains through stock market exchange is buying stocks at a low, selling at a high, and to repeat this when the opportunity presents itself. Once you do this, you’ll be seeing your money growing from the investments you have made. A simple concept, yes?

While the theory is simple to understand, the execution is far from easy. Let’s dive into the reasons why.

The cycle of stock market exchange begins when you buy your stocks, and ends when you sell those stocks. In order to make the most gains from the process, you need to make the right decision not once, but twice (at least with lottery tickets, you need to be right only once). First, you’ll need to time you’re buying when the market is low, and then time you’re selling when the market is high. Getting one of these points right is tricky enough, let alone both.

Even if you have a background in economics and know-how to perform a fundamental analysis, the whole process of market timing can still be intimidating and frustrating.

Why is it difficult to buy when the market is low?

The best time to invest in stocks is when the share value is at a low. During a stock market downturn such as the one in Mac 2020, it is usual to find many previously high-performing stocks undergoing a major dip in price. This is usually the best time to buy.

However, making such a decision can be extremely taxing emotionally. Firstly, during a financial crisis, people are more inclined to hold on to their cash. The future appears to be uncertain and volatile, and having as much cash at hand is a comforting idea.

Secondly, during these times, it is not uncommon to frequently hear bad news and stories from your connections about their failed investments. Some may be quite horrific stories where a person has lost a significant chunk of life savings when the market turned. These stories can affect our rational decision-making process significantly. What often happens is that you continue waiting, and before you know it, the stock prices have risen substantially from the bottom and you would have missed the opportunity to buy at the bottom.

Furthermore, during times of recession, you will not know for sure if the stock that you have bought has dipped to its lowest. The market may dip a little further before bouncing back into recovery. These scenarios can make you nervous and think that you have made the wrong decision in the short term. However, in the long term, you may be making the right decision for yourself.

As the saying goes, it is always darkest before dawn. If you understand the tendencies of a low market and are patient enough to wait for recovery, chances are you will benefit from the decisions you have made now. If you are impatient and are eager to see short-term gains during a low market, you may end up with investor’s anxiety, constantly second-guessing your decision.

To avoid this, many continue to wait for solid proof of market recovery before making the decision to invest. In doing so, they lose out on the opportunity to maximise their investment gains.

Why is it difficult to sell when markets are at a peak?

The second part of market timing is knowing when to sell. To maximise your gains, you should sell when the market is high and ideally at the peak – something that’s easier said than done.

In reality when the market is performing at its peak, many tend to revel in the gains they have made, boasting about their earnings and thinking that the market will continue to grow at the rate it did previously. The perception is that the good times will continue, and the urge to sell takes a back seat as investors think they’ll be able to get out in time.

Usually by the time investors realise that the market is booming, they’re already in the later stages of the upward market trend. Short-term gains are easily made during this period, which will further reinforce investors of their decision and encourage them to hold on to their stocks.

On top of that, when the market is going strong for a couple of years, there are usually fewer incidences of bad news, and more stories of people making short-term gains through their recent investments. Naturally, everyone will want to hop onto the bandwagon when the market is near its peak, instead of selling it. So, instead of getting out of the market, many so-called market timers will enter the market at this point.

The reality of market timing

At the end of the day, retail investors are human after all, and tend to invest emotionally. While investors are looking for the right moment to buy low and sell high, those who are unable to manage their emotions of greed and fear end up doing the opposite – buying high and selling low.

This is not to say that timing the market is impossible. There definitely are good investors out there who are able to time the market fairly well, albeit few.

Market timing is an elusive dream. In order to succeed in timing the market, one needs to be able to separate one’s emotional decision-making from their rational decision-making, and have a good sense of the history of stock markets. If you agree that it is difficult to effectively time the market, then perhaps it’s time for you to explore applying some other proven investment strategies.

As Covid-19 throws most of the world into a financial recession, there are many investment opportunities that present itself. If you would like to capture these precious opportunities, ensure that you have a good grasp of your own limitations, invest according to your financial circumstances and leverage on the strengths of the professionals. To do that, start by getting an investment plan done.

Yap Ming Hui is a licensed financial planner. Views expressed here are the author’s. Any reliance you place on the information shared is therefore strictly at your own risk.