Joe DiMaggio and the taxi cab driver – market timing. 3 of 5

With his record 56 game hitting streak on the line, New York Yankee slugger Joe DiMaggio hailed a taxi to his 57th game at the Cleveland Municipal Stadium.  While enroute to the stadium, the cabbie told DiMaggio he predicted DiMaggio would go hitless that afternoon thus ending his streak.  Upon hearing this, DiMaggio pulled himself out of the cab and walked the rest of the way to the stadium.  But the damage was done; the cabbie’s prediction came true.  DiMaggio went hitless that afternoon and one of baseball’s greatest winning streaks came to an end.

Today’s winning streak in the investment markets – ten years and running – is currently held by market timing.  Since 2000, investors who employ market timing strategies have enjoyed returns trouncing buy-and-hold, rebalance and momentum investors’ returns. (see http://arlingtonhall.com/and-the-winnah-is%e2%80%a6). 

In the third part of a series, we examine the question for investors entering 2011:

Will market timing’s win streak continue or will the “predictions” of another crash end the streak?

 

We are inclined to believe market timing’s performance from 2010-2020 may not crumble but instead may be blunted for the following reasons:

First, the “taxi cab driver predictions” abound.  Investment pundits regularly trumpet the imminent end of the market rebound.  We wonder if their predictions may become a self fulfilling prophesy. At times over the past six months, we find ourselves unable to find a single positive news story for the stock market; we scan several hundred daily.

Second, market timing’s growing popularity among investors may undermine its strength.  That is, market timing permitted investors to sidestep the devastating blow of that crippled many other investors’ portfolios during the 2008-09 financial crisis.  Consequently, investors, swayed by this past decade of success, increasingly implement market timing and too many disciples of one investment strategy tend to lead to disappointing outcomes based on our research.

Third, the proliferation of high-speed computer trading shortens the time window of opportunity in which market timers may react.  History suggests that when a manual activity meets new technology designed to replace that manual activity it is the manual activity that tends to succumb to the new technology.

In conclusion, we suggest investors may consider using a market timing strategy according to his or her risk profile prepared by their advisor.  However, those wishing to allocate 100% of their assets to market timing should beware the consequences of “buying high.”  Ask your investment advisor about complementing market timing with other investment strategies some of which we write of in this blog.

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