Step 4: Time Pickers
be accurate 74% of the time in order to outperform a passive portfolio at a comparable level of risk. In 1992, SEI Corporation updated Sharpe’s study to include the average 9.4% stock market return from the period 1901-1990. This study determined that gurus must be right at least 69% and as high as 91% of the time, depending on the timing of the moves.62 What percentage of times do market timing gurus get it right? CXO Advisory Group tracks public forecasts of selfproclaimed market-timing gurus and rates their accuracy by assigning grades as “correct,” “incorrect” or “indecisive.” Figure 4-1 depicts CXO’s percentage grades for 28 well-known markettiming gurus who made a collective 4,629 forecasts from 2000 2012. The study shows that not one of the self-proclaimed gurus was able to meet Sharpe’s requirement of 74% accuracy, or SEI’s minimum 69%, thereby failing to deliver accuracy sufficient to beat a simple index portfolio63. At first glance, the 10 gurus who had percentage accuracy of more than 50% might look appealing to a time picker—but beware, the opportunity costs associated with a time picker’s proclivity toward holding cash in some up years creates a higher hurdle as they will have to make up those higher returns foregone by stocks. Transaction costs associated with market timing add another hurdle for market timers to break even. In The Big Investment Lie,64 Michael Edesess explains why market timing is so difficult, “The stock market can turn on a dime and always does. Prices are constantly twisting and turning without trend or predictable pattern. Their recent movement gives you nothing to go on.”
Published on Jun 1, 2015
This book reveals the potential land mines and pitfalls of active investing and educates readers on the benefits of passive investing with i...