Market timing doesn't work. If all the bubbles and all this mispricing really exist, how come so few people see it before it turns out that way?
Interpretation
Market timing is unreliable, and few people can consistently predict market movements before they happen.
Eugene Fama's quote emphasizes the challenges of timing the market and suggests that if bubbles and mispricings are truly prevalent, it is puzzling that so few investors can foresee such events before they materialize. Fama's perspective aligns with the efficient market hypothesis, which argues that asset prices reflect all available information and that trying to predict market fluctuations is a difficult, if not impossible, endeavor.
In practice
During a finance seminar, discussing the unpredictability of market timing.
The problem that people don't understand is that active managers, almost by definition, have to be poorly diversified. Otherwise, they're not really active. They have to make bets. What that means is there's a huge dispersion of outcomes that are totally consistent with just chance. There's no skill involved it. It's just good luck or bad luck.
After costs, only the top 3% of managers produce a return that indicates they have sufficient skill to just cover their costs, which means that going forward, and despite extraordinary past returns, even the top performers are expected to be only as good as a low-cost passive index fund. The other 97% can be expected to do worse.
There's quite a bit of evidence that even professionals don't show any ability to pick stocks or to predict market rollbacks. Most of the people we identify as skilled based on returns have probably just been lucky.
It is important for investors to understand what they do and don't know. Learn to recognize that you cannot possibly know what is going to happen in the future, and any investment plan that is dependent on accurately forecasting where markets will be next year is doomed to failure.
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