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.
I am more and more impressed with the possibilities of history's repeating itself on many different counts. You don't get very far in Wall Street with the simple, convenient conclusion that a given level of prices is not too high.
Entrepreneurs or international conglomerateurs, or large financial institutions buy or create mutual fund management companies to create a return on their own capital. It's capitalism at work, where the rewards tend to go to the managers rather than the investors.
We believe that according the name 'investors' to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a 'romantic.'
The stock market really isn't a gamble, as long as you pick good companies that you think will do well, and not just because of the stock price.
It's difficult to make your clients understand that there are certain days that the market will go up or down 2%, and it's basically driven by algorithms talking to algorithms. There's no real rhyme or reason for that. So it's difficult. We just try to preach long-term investing and staying the course.
Finance is not merely about making money. It's about achieving our deep goals and protecting the fruits of our labor. It's about stewardship and, therefore, about achieving the good society.
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