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Author: dharmadollars Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75797  
Subject: Re: The case against market timing Date: 4/29/1999 8:42 AM
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This is not a defense of market timing. I'm not sure we even know what that term means any more. It's kind of like "do you believe in God?" when everybody holds a different idea about what God means.

This is two observations about the articles cited. One for each (remember to share).

The first article, and every other one like it that I have encountered, appear to be methodologically flawed in that they assume that the market timer misses absolutely every one of the best "in" days, and also (though unstated) misses being out of the market on every one of the absolutely worst days. This omission compromises the validity of the conclusion drawn. It offers a profile of a market timer (what/who-ever that is) who is pretty incompetent. Let's not morph a judgement on incompetence into a judgement on the strategy employed by the incompetent.

Second, there is a huge, I say HUGE, flaw in the logic in the LR article. Our hero invests only $20,000 over a ten year period. Our antagonist invests double that amount. But the operative difference here is the compounding periods. OK, boys and girls, let's all recite the six functions of a dollar.... Let's pay particular attention to the two that apply to this case: The future value of one, and the future value of one per period. This article makes a strong case for the power of compounding. A lump sum will compound to a greater future value than a stream of payments spread over the same period of time, assuming the same rate of return. In this case, the lump sum compounds to a greater FV than a stream of payments equaling twice the lump sum. Let's hear it for compounding!!!

The conslusion drawn, unfortunately, confuses correlation with causation.

I'd like to hear more from other posters on market timing. Perhaps we could work toward arriving at a working definition, and then go from there.

Namaste,
dharmadollars
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