So, How Did the Market Timers Do? With the Dow recently completing a round trip, we search for market-timing strategists who called the peak and the trough


So, How Did the Market Timers Do?


With the Dow recently completing a round trip, we search for market-timing strategists who called the peak and the trough.

Anxiously following the stock market’s ascent to new all-time highs, wondering when it will be time to get out?

Welcome to the club. A market-timing system that will reliably get us out at tops, and back in at market bottoms, is the investor’s Holy Grail.

How is this search going? Are we getting closer?

Now is a perfect time to ask these questions: With the stock market back to where it stood in October 2007, the last five-and-a-half years constitute an ideal laboratory in which to judge the success of market timing in the real world. Only after a full market cycle can we tell whether a timer can both get out at tops and get in at bottoms.

For this column I analyzed the returns since October 2007 of the more than 100 market-timing newsletters and web-based advisors monitored by the Hulbert Financial Digest (HFD). Most of these timers also are money managers, putting real money on the line with their bets. For purposes of this column, I focused only on that portion of their returns directly attributable to their market-timing calls—ignoring their abilities (or lack thereof) to pick individual securities.

One other feature of the HFD database is also of note: It is updated in real time, and therefore reflects the signals that the market timers actually made along the way. This is crucial in the market-timing debate, because it is otherwise all too easy, with the benefit of hindsight, to retrofit a market-timing system that would have worked wonderfully. The market-timing records that the HFD reports, in contrast, reflect transactions on those days that clients were specifically told to buy or sell.

The first lesson that emerges from the HFD data may be obvious, but is worth noting: No market timer called the market top in October 2007 and the bottom in March 2009, if by “called” we mean went completely to cash on Oct. 9, 2007, the exact day of the high, and got back 100% into stocks on March 9, 2009, the precise date of the bear market bottom.

If we are going to give market timing even a fighting chance of succeeding, therefore, we will need to relax our criteria. But how far? What amazed me, as I analyzed the market timers, is how few were successful even after lowering the hurdles.

Let’s start by deciding how much time we should be willing to give timers to recognize that a top or bottom has been registered, and by how much should they have increased or reduced their exposure. Let’s assume a full month, and by more than 25 percentage points.

These, at least on the surface, certainly seem reasonable — if not generous — criteria. Yet they eliminate the vast majority of the market-timing strategies tracked by the HFD since October 2007. Of the 140 such strategies, just 15 of them had significantly lower equity exposure on Nov. 9, 2007, than they did on the day of the top a month earlier. And of those 15, just six had a markedly higher equity exposure on April 9, 2009, than they did a month earlier, on the day of the bottom.

In other words, 96% of the market-timing strategies monitored by the HFD failed to jump over these seemingly modest hurdles.

But even the six that cleared these two hurdles left much to be desired. Each of them issued a number of additional buy and sell signals during the bull and bear markets, above and beyond their well-timed signals that give them bragging rights for “calling” the October 2007 top and March 2009 bottom. These additional signals had the unfortunate effect of frittering away the gains they otherwise would have realized if they had left well enough alone.

Am I being unfair in imposing such stringent criteria for success? Perhaps. But I am doing so to make a broader point about the need to have realistic expectations about what even a good market timer is likely to achieve.

For example, a number of the HFD-monitored market timers — about one out of four, on average — did succeed in turning a small profit over the last five-and-a-half years and, therefore, beat a buy-and-hold strategy. But none of them did so by getting out at or near the top and getting in at or near the bottom — as defined by the criteria I employed above.

For example, one sometimes-successful market-timing strategy is trend following, employing technical indicators such as moving averages. By definition, such strategies won’t pick tops and bottoms, since the market’s trend has to turn in a big way for a signal to be triggered.

Another crucial point to make about these successful market-timing strategies: Exploiting them requires discipline to actually follow their signals, which is not always easy to do. A classic illustration of this comes from Doug Fabian’s Successful Investing, a well-known advisory service that got its start several decades ago urging disciplined adherence to the 39-week moving average strategy.

On a number of occasions in recent years, however, Fabian has chosen to second-guess the signals generated by that moving average and, on balance, his second-guesses have led to a diminution in his return. In fact, the HFD calculates, his model portfolio would have made 1.7 percentage points more per year, on average, if it had strictly followed the signals generated by that moving average.

Realistic expectations are crucial. Without them, you are more likely to try something rash and end up losing even more money. For example, you should give up hoping to both catch anything like the top and the subsequent bottom.

Keep this in mind as you contemplate whether or not to try your hand at predicting when this incredible bull market will finally end.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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