Book Review: Yes, You Can Time The Market!

Yes You Can Time the MarketThe predominant investing mantra nowadays is to pick some nice index funds and stick with them, since you can’t know when the market is going to go up or down. In this appropriately titled book Yes, You Can Time The Market!, Ben Stein and Phil DeMuth argue against that. Instead of using fundamental valuation, where someone tries to analyze a company and find it’s “true” value vs. market value, they argue that a market index as a whole, such as the S&P 500, can be viewed as cheap or expensive by comparing it against it’s 15-year moving historical average.

For example, you can take the average of the P/E ratio of the S&P 500 for the last 15 years. If the current P/E ratio is greater than that average, then it is overvalued. If the current P/E ratio is less, then it is undervalued, a signal to buy. (Right now it’s 25 vs. 19, undervalued.)

Instead of just using the P/E ratio, they also consider other possible indicators, such as price, dividend yield, and price-to-book value ratio. In order to see if this method works, they do some back-testing using historical data.

In the book, they compare on one end Investor A who dollar-cost-averages $100 into the S&P 500 every month from 1977-2001, buying at the market price. On the other side, Investor B only buys when the P/E ratio is below the 15-year moving average, except that Investor B puts in $200 each month, supposedly because he/she would have half as many opportunities to invest. In the end, Investor A has ~$71,000, while Investor B has ~$85,000.

Sounds great right? I thought so too, until I read the review of a ‘Gaetan Lion’ on Amazon, who points out:

The authors attempt to make a case that the market timer superior results (regardless of the indicator used) is due to buying into the market when it is low. But, the success of the market timer is due to his accelerated equity investment schedule. By early 1985, the market timer has made his full investment of $20,000 in equities. By the same date, the dollar cost averager has invested only $10,000.

In real life, would you really be able to come up with double the money to invest just because the market is cheap? And then not buy any stocks for 15 years?? I don’t know, maybe you could, but I probably couldn’t. So this strategy is far from perfect. There is also no signal to sell. I strongly recommend reading the whole review by Mr. Lion at Amazon, it should be the first review shown.

While I’m not going to take apart my retirement portfolio now, I appreciate that this book questioned the status quo and am glad I read it. The primary takeaway from this book is that there are going to be times when you’d want to load up on certain investments. To me, it presents another version of value investing. At less than 200 pages, it is also a quick easy read.

For the curious, you can also see if, according to the book, now is a good time to buy per the indicators at the book’s official website.

Overall Rating: 3 Stars (ratings explained)

I didn’t get this book for free, so no giveaway on this one.

Comments

  1. Hm..I started this one before the holidays and got distracted. I definitely need to pick it back up but I’m still interested in what their critics say. Thanks for the pointer to that amazon reviewer.

  2. I’m sure there’s something out there that can semi-reliably predict the market, but I doubt it’s in this book.

  3. Chris Ayres says:

    I haven’t read the book, but i find the strategy useless just looking at it. Ahh the brilliance of hindsight what a wonderful teacher it is. This would be un workable as a system. Who would trust their system while having to wait 15 years to place an investment? Not me.

    Back testing and seeing if a system would have worked is basically curve-fiiting to build a successful system on past data. 15 years worth of history is no where near enough date to test a long term investment strategy.

    Everyone can look in the past and say, ‘i should have bought here! and sold here’.

    By all means use technical analysis for investing, but this isn’t any good.

  4. “I?m sure there?s something out there that can semi-reliably predict the market, but I doubt it?s in this book.”

    To the extent that there are predictable inefficiencies in the market, their exploitation causes them to disappear.

    I highly recommend John Allen Poulos’ book, A Mathematician Plays the Stock Market, which suggests that the efficient market hypothesis generates a paradox–the more people believe in it and act as though it’s true, the more inefficiencies appear, and vice versa.

    For evidence contrary to the efficient market hypothesis, look at the investment records of Warren Buffett, Claude Shannon, Edward Thorp, and D.E. Shaw. Shannon and Thorp’s stories are told in William Poundstone’s book _Fortune’s Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street_, which I also highly recommend.

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  1. [...] wait, why don’t people time the overall market based on P/E ratio? Some authors do recommend this. The problem is that the P/E ratio can also vary wildly for decades (see above), and most people [...]

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