How Can I Time Stock Market Correctly?

Millions of investors ask the same question over and over again: ‘How can I time the stock market?’ You have seen a stock or fund’s 52-week high and 52-week low, and if you are like me, you’ve probably wondered why you didn’t buy at the lowest and sell at the highest.

Every stock I see on Yahoo! finance makes me sigh… If only I could have bought the stock at such-and-such date and sold on such-and-such date. I could have been a multimillionaire by now had I timed the market correctly.

Various fools and alphas have written tons of articles on timing the market.

Experts have written papers on trading strategies for particular stocks, but have you heard any story of rags to riches in stock market trading?

It’s one thing to write about stock investing, but it’s another thing to actually profit from it.

Have you ever asked these so called experts why they don’t buy the stocks they recommend instead of asking everyone else to buy?

They earn a moderate income writing in favor of a stock, but they could earn unlimited income by making profit in stock. Are these guys really experts in picking stocks?

Go back to these experts’ websites and look at past editions from 2007 or 2000. Didn’t they boast about the stock market’s potential at that time? Many of us believed and bled subsequently!

I have learned a valuable lesson about stock market timing early on. In particular, short-term market timing doesn’t work for amateur investors (like I am).

If I asked you to tell me whether the stock market (or an individual stock) will rise or fall next week, you’d probably be guessing. We should not make investing decisions based on guesses.

Let me give you an example. I decided to buy stocks last year, in order to mix my assets according to the recommendations of my advisor (a friend of mine who doesn’t charge me). I wanted to buy stocks with high dividends and also in Berkshire’s portfolio as I buy only those stocks Warren has bought. But when it actually came time to buy the stock, I just couldn’t hit the buy button.

“What if it goes down?” I kept thinking. The market had been climbing since 2009, and the stock was up 40% from its 52-week low! That’s a pretty good increase in price that had already taken place. I also thought, “Maybe I should wait until the next market panic”, so I waited, and to my dismay, the stock kept on going up.

I started following the stock’s movement every day. I would give a limited buy order on the stock in the morning before going to work. I couldn’t believe that my low limit wasn’t hit for whole one week.

I revised my limit by $2 more per share the week after.

Again, the same story – by the end of week 2, my shares were not bought. I finished reading all articles that were on offer covering that one silly damn stock! I raised my limit order by $1 more at the beginning of week 3.

Somewhere midway through the 3rd week, I finally got my hands on the stock. It came to me at $3 more than my target price per share after two and a half weeks. That’s not the end of my sad story of timing gone wrong! After being at a slight profit on that stock for couple of weeks (and happiness on my latest prized catch) my beloved stock started in its journey south!

Just a few days after the trend reversed, I was losing more than $5 on each share. “Ouch!,” I thought. “I should have waited a few more days before buying the stock. I could have gotten it cheaper!”

Now I’m still holding that stock in my portfolio and making a slight profit (which turned into a loss again after the August collapse).

I could be making a profit of 8% on the stock had I timed well and waited two more weeks before buying. Instead, I am taking a loss!

Could I have timed it well at all? I saw articles suggesting a buy even when it started to decline and remained beaten down for a long time. How could I have timed it any better? This is the problem of timing the market. Only the very very best (a handful of living beings probably) can do it repeatedly.

You can time the market well yourself but that would only be once out of 10 (or more) different timing decisions. Even a broken watch gives the correct time twice a day, friends!

The day-to-day ups and downs of the market cannot be predicted, no matter what your argument might be. You can only guess about the market trend (bull vs bear) for next few months or years. Even when you think you have factored in all possible scenarios to predict the market correctly, a tower or two gets bombed down along with your prediction and money!

You have probably heard a thousand times that the long-term average stock market return is 7% (factoring in inflation). Have you ever thought about the basis from which the start and end points of this return are calculated? Or, have you ever thought about the meaning of ‘long-term’ – what length of time is defined as a long-term?

Do you know for sure when should you buy and when should you sell to realize that 7% long-term stock market gain? I don’t.

The next time you see 52 weeks’ high/low on charts, stop worrying about it. In my experience I can only say that when the stock was at its 52-week low, ordinary people (aka amateurs) were selling that stock, and when it was at its 52-week high, ordinary people were buying it after reading a strong buy call by the experts.

Market timing doesn’t always go as badly as I had experienced. In general, the stock market, like a well-led corporation, does return decent profit in 10 or 20 years (at least history has showed so, repeatedly).

I am an investor in individual stocks and stock funds even after knowing that I cannot time the market at all, because I base my decisions on long-term performance of the stock market instead of trying to guess what my stock or fund will do tomorrow or a month later.

Stop worrying about market timing, readers. You can’t master it! Focus on buying low and selling high.