The 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: (ratings explained)
I didn’t get this book for free, so no giveaway on this one.
By Jonathan Ping | Book Reviews | 1/8/06, 6:54pm