In my review of
“Yes, You Can Time the Market!” by Ben Stein and Phil DeMuth
posted to Amazon.co.uk, I gave the book Four Stars.
This means I think it is Good and Well Worth Reading.
Here is my book review.
An important message
I discovered this book after reading Financial Bull Riding (LFB), a book about using the Austrian Business Cycle Theory to guide when you make investments.
In summary this is quite a boring book with a very important message that underlines the essence of successful investing… buy when prices are low.
I’m suspicious of the financial services industry and their message that it’s time in the market that matters much more than the time you buy. Reading the marketing material from my investment advisers, it is always the right time to buy. If stocks are high, then I shouldn’t miss out on the rising bull market. If stocks have fallen away, I should buy on the dips. If there has been a crash, then I should buy when everyone else is selling.
I started investing in the early eighties and I’ve only really experienced three crashes:
1) Japan in 1990.
Here I made money but I got out early because it felt too good to be true. I’ve been tempted back at various times since but this is the market pattern we’re all really afraid of. The Nikkei 225 index didn’t hit it’s bottom until March 2009 and has never come close to recover those values seen in December 1989.
2) The Dot Com Crash in 2000
I was late into this one, suspicious of the hype about the Internet. Then I saw how much money other people were making and I wanted some of it. I dipped my toe into the tech market and effectively had it sliced off. I also incurred major book losses in other investments that turned out to be closet technology funds as the investment managers chased returns.
3) The 2008 Crash
Burnt by the dot coms I found it increasingly difficult to invest my pension and ISA funds from around 2005. Everything looked expensive to me and I either invested I what I thought were conservative funds or held money in cash. What I didn’t do was make any significant changes to the existing investments in my ISAs and SIPP. As a result I was proved right and wrong but still incurred massive paper losses. I didn’t panic but I didn’t have the confidence to invest my cash close to the bottom of the market.
Now I’m waiting for the next crash. It’s coming. I can’t see any way that the activities of the central banks and their incredibly loose monetary policies can not lead to another and potentially bigger, stock market and property crash.
This book provides statistical evidence that, if you’re disciplined and buy when stocks are cheap and avoid buying when stocks are expensive, you should do much better than buying all the time. Of course, that’s not what the financial services industry promotes. According to them, you should be using pound cost averaging to buy more when prices are low. They don’t tell you that it means you’ll buy more when it’s expensive.
Pound cost averaging works very nicely in a rising stock market when you gain on everything you buy. The FTSE 100 index started in 1984 and apart from a few blips, the trend rises steadily through to December 1999. Pound cost averaging doesn’t look so clever if the time series ends with a crash (as in 2000 or 2008). In fact on 24 February 2014, the index reached its highest level since 1999 but it hasn’t exceeded that 14 year old high and that’s without allowing for inflation (although there have been dividend payments that help the total return).
The book gives you various ways to assess whether the stock market is offering good value based on a 15 year moving average. Why 15 years? The book admits that it’s arbitrary and could have been 10 or 20 years. The authors wanted to provide a long term perspective that would cover the business cycles. It then does a lot of statistical analysis based on buying in a year and holding it for 5, 10 15 and 20 years. Some of the results for 5 years are a bit mixed but by 10 years, the case for market timing is becoming clear and it gets stronger as time increases.
The explanation of all the analytical work is dull. It’s hard to talk about summaries of annual statistics and make it interesting. The message is important and reading this book should give you confidence to say No when your investment adviser is telling you to invest when the market is bubbling up.
History shows that mistakes are expensive and in normal markets, take a long time to recover. The FTSE hasn’t yet recovered to its 1999 peak despite the policies of the Bank of England. The S&P 500 index in America took seven years to get back to the peak after the 2000 crash and then another 5 years to set new highs after the 2008 crash. Even worse, is Japan where the index fell again and again to new lows.
This book was written well before the shenanigans of the central bankers from 2008 onwards which have created false values for just about every class of assets. The markets look expensive and history will judge whether it is a good time to invest or not.
I’m betting not.
I must admit being out of the market when it goes up is hard. You’re betting that you’re in the minority that is sensible and everyone else is crazy.
This book might give you the confidence to be a contrarian and not follow the herd. The recommended alternative to investing in shares is to invest in government bonds. The central banks have ruined that option with their interest rate suppression and quantitative easing. Now there are big risks of losing money in the “safe” government bonds as values will plummet if and when interest rates rise.
Other than that, I recommend the book to anyone who feels they need more than intuitive common sense to avoid the buy high advice of the financial services industry. After all, they gain from you buying and holding investment funds. You only gain if you buy low and sell higher.
It is available to buy from Amazon.co.uk and Amazon.com.
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