Ben Stein Says You Can Time The Stock Market

So, I recently posted about my investigation into whether "technical analysis" could be applied to the real estate investment market.  One of the things that I decided to do as a part of my investigation was to learn more about what technical analysis is, and how it is being used (Successfully or not?) in its other fields of application, including the stock market.

I went to the local library in search of some books I could understand, and came up with Ben Stein and Phil DeMuth’s, "Yes, You can Time The Market."  A fun, short read it proposes that SHORT TERM (day trading) market timing with technical analysis is NOT something they recommend or encourage, but LONG TERM investment performance (over a 5 year time horizon or longer…) will improve when market-timing figures are utilized.

Ben Stein Says YES to Timing the Stock Market with Technical Analysis!

They look at 4 primary variables:

• Price of the stock
• P/E ratio of the stock
• Dividend Yield and
• Tobin’s Q (This is a variable that essentially measures "replacement cost" of the company’s assets and is thus a very fundamental analysis of a given company’s value)

The authors use these variables to determine whether or not stocks are currently priced "cheap" or not.

For example, with the price of stocks, they used a 15-year trailing average (the average price of the stock for the last 15 years) and graphed it against the current price of the stock.  When today’s price was HIGHER than the 15-year average, they said the stock was over-priced.  When today’s price of the stock was LOWER than the 15-year average, they said the stock was under-priced and represented a buying opportunity.

Over time, the authors found, that stock portfolio performance could be significantly increased (on the order of 40% better returns than a dollar-cost-averaging approach) when market timing was used.

Points To Consider When Considering This Investment Strategy:

• The authors used the ENTIRE history of the stock market in the 20th century to run their numbers, not "just since the crash of the 1920′s which is the starting point for many stock market researchers.
• The authors used the S&P 500 to run their figures, running numbers based on the idea of investing once per year in a mutual fund, or investing in a lump sum.
• Since adherents to the proposed strategy would not be making monthly or annual stock market buys, and might in fact choose NOT to buy stock for several years running, appropriate places would need to be found to hold this money between buying opportunities.  The authors proposed safe/liquid T-bills.

Overall, the approach they advocate is relatively simple to understand and while they do show their research methodology and delve into some fancy terms toward the end, the authors do a good job explaining everything and defining new terms so we can all follow along.

The reminder at the end is to plan to be in the stock market market long term, but don’t get fooled into buying each month or each year if you believe you are over-paying for stocks at that time.  Buy when it makes sense and hold for the long run.

It’s a great read and I highly recommend it, especially for the die-hard Dollar-Cost-Averaging folks out there, of which I counted myself one before reading this book!

Emily

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4. Rental Property – Can you handle the truth?
5. Portfolio Balancing