Blog - Investing Notes
June 8, 2006 - Stupid Timing Tricks
In the course of exhaustive research, we have discovered two very simple yet effective timing tricks that are not widely known, namely: (1) the optimistic monkeys; and, (2) the monkey oscillator. Here are the secrets:
The optimistic monkeys (OMs) do not care about any economic fundamentals or stock market technical indicators. They just know the market is going up. The obsessive OM predicts that the market will go up each day. The OM with a weekly column predicts that the market will go up every week. The OM with a monthly newsletter predicts that the market will go up every month. The analytical OM forecasts a rising market every quarter. The political OM predicts an up market every year.
The following chart shows the accuracy rates for all five OMs based on historical S&P 500 index data from 1950 to the present and from 1990 to the present. Sorry, gurus! The point is that there is a persistent upward bias in the U.S. stock market. An "expert" would achieve the accuracy rates in the chart simply by always saying the market will be flat or up in all forecasts. In all fairness, many experts make more specific forecasts, and we hold them to this specificity at Gurus Grades.
The monkey oscillator (MO) is strictly time-driven. It has nothing to to with overbought or underbought. Every ten trading days, it signals alternately 100% into stocks or 100% into cash -- ten days in the market followed by ten days out.
The next chart shows that, neglecting the costs of 53 transactions, the MO outperforms buy-and-hold during the painful period of September 2000 through September 2002. The MO is lucky being out of the market 9/11/01 but unlucky being in the market (and selling at capitulation time) in early July 2002. The average weekly return for the MO (buy-and-hold) over this period is -0.6% (-1.1%), and the standard deviation of weekly returns is 3.5% (4.6%). The MO beats buy-and-hold both in raw return and, more convincingly, risk-adjusted return. The point is that even arbitrary market timers will likely outperform in bear markets. However, as seen above, there has generally been more bull than bear in the U.S. stock market.
The next chart shows that the MO underperforms buy-and-hold during October 2002 through May 2006. The MO is pretty unlucky in catching market declines in mid-2004. The average weekly return for the MO (buy-and-hold) over this period is 0.2% (0.5%), and the standard deviation of weekly returns is 1.7% (2.6%). Buy-and-hold beats the MO both in raw return and, less convincingly, risk-adjusted return. The point here is that arbitrary market timers will tend to underperform in bull markets, although they will likely experience lower volatility.
In summary, if your managed account outperforms (but still loses money) in bear markets and underperforms in bull markets, you might be paying for arbitrary market timing.
In no way do we mean to insult monkeys.
See also our blog entries of 5/19/06, 4/19/06, and 9/26/05 for some less frivolous material in a similar vein.
