The investing world’s Holy Grail

Archimedes once said that he could move the world with a large enough lever and a place to stand. Like Archimedes, I think I could “move the world” by dramatically improving investors’ returns–if I could just eliminate their desire to time the market.

I don’t believe there is anything that destroys long term investment returns as much as the desire to time the market. It is the investing world’s Holy Grail–it doesn’t exist, but people keep trying to find it anyway.

Every investor seems to wish he could sell at “the top” and buy at “the bottom.” Very few consider whether this feat is possible with anything other than hindsight. If investors would consider this seriously, perhaps their returns would improve dramatically.

The stories investors hear about someone who supposedly sold at “the top” and bought back at “the bottom” seems to egg them on. Like feats of ESP, this supposed achievement is frequently sited but infrequently submitted to rigorous study.

Remember, even a broken clock is right twice a day. So, if someone repeats over and over again that the market is going to drop, at some point they will be right. Same with the market rallying. This is not a demonstration of skill, but that a broken clock can be right.

Have you ever examined the Forbes 400 list of richest people? Check it out some time, and look for the market timers. You won’t find a single one. In fact, the guy topping the list, Warren Buffett, says timing the market is not possible. Take his advice, seek not the Holy Grail.

The investors who build wealth over the long run do it by PRICING, not TIMING. They figure out something is cheap and they buy it. They don’t panic when it becomes cheaper, because they know what it’s worth. They usually buy more.

Those who try to time the market end up guessing about market tops and bottoms, because such things can only be seen clearly in hindsight. They almost always end up buying high and selling low.

Look at the statistics on investor versus mutual fund returns. Mutual fund returns are anywhere from 4% to 8% higher than the returns investors get. Why? Because most investors, in their search for the Holy Grail, sell what’s not “working” and buy what is “working.” They almost always sell something that is about to take off and buy something that’s about to tank.

I’m not saying people don’t get lucky every once in a while and sell at the top or buy at the bottom. What I’m saying is such luck should be associated with winning the lottery or getting struck by lightning, not with a sound approach to reaching your financial goals.

Don’t seek the Holy Grail. Buy when things are cheap and accept that they will almost certainly get cheaper. Buy more if it gets cheaper. Rinse and repeat. In 5 to 10 years, you’ll be very happy you didn’t pursue the investing world’s Holy Grail.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.