Market Timing and Football
Suppose you knew every statistic about football: players, referees, field conditions and on and on. Could you make money betting on football?
Probably not. That is because you not only have to know about the sport itself, but because you also must consider the spread set by the bookies. So, to make money you must know when the spread is wrong.
Now, think about stocks and markets. You may know all about the companies. But that is not enough. You also must consider whether you are the only one with the knowledge. Has someone else with that knowledge already driven the market price to reflect what you know? If so, the gain you anticipated is already baked into the price.
That is like the spread in football. But, in the markets you do not even know what the spread is. So how can you know when the spread is wrong? If you do not know it’s wrong, how can you make money at it? How can you know what has been incorporated into the market price (spread)? Is the market price too optimistic or too pessimistic?
Numerous studies have shown that timing the market is a loser’s game. Further, the money used to time the market is adversely affecting what would otherwise be a portfolio created to meet your lifetime financial goals.