Posted on: Sunday, September 14, 2003
Some say beating market a matter of timing
By John Waggoner
USA Today
You can time the market two ways. One way may or may not help you increase your gains. The other will get you a personalized note from New York Attorney General Eliot Spitzer. Today, we'll talk about both.
If you try to catch the gains and avoid the losses in the stock market, you're timing the market. Academics tend to dismiss market timing as the equivalent of snark hunting. But Mark Hulbert, editor of the Hulbert Financial Digest, a newsletter that tracks market timers, isn't convinced that market timing is futile.
"We find that about 20 percent of those who try to time the market can do it," he says. That's not a big percentage, but it's not dumb luck.
"I tend to be agnostic on the issue," Hulbert says. "I don't say it's impossible, but it's not easy, either."
Unless you cheat — which is one allegation Spitzer made against Canary Partners, a loosely regulated investment pool for the wealthy. Canary agreed to a settlement last week but didn't admit wrongdoing. The settlement implicated — but didn't charge — Bank of America, Bank One, Strong Investments and Janus Capital in shady trading practices.
Spitzer alleged that Canary made big, rapid-fire timing trades in and out of international funds. Why? Mutual funds price their portfolio holdings every day. Normally, if you buy a fund Thursday, its share price reflects the value of its holdings as of 4 p.m. that day. If you buy after 4 p.m., you get Friday's price.
But international funds often hold stocks whose last price was quoted long before the NYSE opened. The Japanese exchanges close at 2 a.m. ET, for example. If you buy a Japan fund at 3:55 on Thursday afternoon, you're buying a fund that reflects the price of Japanese stocks on Wednesday.
Most times, it's a good bet that a sharp rally in the United States drives up worldwide markets. If you buy a Japan fund on Thursday, you're buying a portfolio of Japan's stocks at Wednesday's prices. If Japan's stock market soars, you'll get a quick and easy gain.
None of this is illegal. Spitzer alleges, however, that the funds Canary traded forbid market timing by the wee folk. If so, then the funds aren't treating investors equally — a major principle of fund regulation.
The irony is that some funds actually welcome market timers. Rydex, ProFunds and the Potomac funds, for example, all allow you to switch between funds every day if you'd like. And you can buy and sell exchange-traded funds throughout the trading day.
The question is: Should you?
If you're investing money you would hate to lose, don't try it. But some common market-timing practices can help you time purchases or sales more effectively. For example, if your fund doesn't use fair value pricing, it makes sense to make your international-fund purchases on days when the U.S. market soars.
A more sedate timing technique is to look at the average price of a stock or stock market index for the past 200 days.
Suppose you're considering buying an exchange-traded fund that tracks the Standard & Poor's 500-stock index. If the fund's share price is above its 200-day average, it's OK to buy. If it's below its 200-day average, it's in a downtrend.
Clearly, anyone who found a surefire (and legal) market timing strategy wouldn't share it with the likes of us.
And even reasonably prudent guides for buying and selling can fail, because most people just don't have the time or the inclination for them. And ultimately, that was the heart of the problem in the mutual fund trading scandal.
Canary didn't try to time the market. They tried to cheat other investors. And some funds, apparently, were willing to let them.
John Waggoner is a writer for USA Today.
