A Questionable Timing Strategy

My Thoughts on Buy, Hold and Sell by Ken Moraif

There are great books on personal finance and investing by financial planners. Larry Swedroe, Nick Murray and Carl Richards immediately come to mind as entertaining and knowledgeable planner/authors. Authors like William Bernstein, Scott Burns and Burton Malkiel orient more toward the academic side but address the difficulties of the individual investor with excellent writing and scientific backup. All could be lumped into the category of buy and hold advocates.

At the other end of the spectrum is this dreck. Ken has published the essential script of his corny Saturday morning radio show. The conceit of the book is to present some justification of a buy and hold strategy as a pejorative ‘myth’ in the same tone of the ‘things they don’t want you to know’ genre, then destroy it with some logic that makes a timing strategy the only reasonable alternative.

Except there is no academic support for a sell timing strategy, not even in the book. Ken refers to a quote from Jeremy Siegel’s Stocks For the Long Run for support, a laugh out loud irony that misses the essential quote by Siegel on the issue:

Looks are deceiving. When examining returns from 2001 onward… it appears as if the returns from the timing strategy would swamp the buy-and-hold strategy, but that is not the case. The buy-and-hold strategy from 2001 to 2012 beats the timing strategy by more than two percentage points per year even before transaction costs are factored in. (emphasis mine)

I am not a fan of timing strategies. It is not an accident that the academic support for market timing is nonexistent. The concept of arbitrage and markets with a free flow of information and low transaction costs would quickly dismantle any provable timing system. In other words, if there was a free lunch in market timing, someone would eat it before you do.

The attraction of a sell timing strategy is that it plays to the fears of most investors. It does not make financial plans work better, it does not increase returns, and it does not lower costs. Furthermore, it doesn’t make great reading.

Please don’t think of this as an unprovoked attack. Ken spends much of his radio show attacking buy and hold advisors, which includes me.  A timing strategy that outperforms a simple buy and hold strategy is the real myth.

Written by Bob Stowe, CFP®