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Rupert Hargreaves
Rupert Hargreaves
Articles (1367)  | Author's Website |

Peter Lynch: The Perils of Market Timing

Peter Lynch's advice on why it does not make sense to try and time the market

October 05, 2020

There is a vast amount of research showing that trying to time the market is generally a waste of time and effort. That does not stop investors and Wall Street analysts from trying.

Almost every day, analysts and public figures recommend that investors buy or sell stocks based on price levels or fundamental values, which suggests the asset or equity is overvalued.

The problem here is when investors think they are smarter than the market. It's tough to sit back and not tinker with a portfolio when this notion comes into play.

Anyone who has been an active investor for more than a few years will know this to be true. Even though it has been well-publicized that trying to time the market is a waste of time, we still try to do it. That's why I like to try and remind myself that timing the market does not work regularly.

Peter Lynch on market timing

I recently stumbled across some advice from the legendary fund manager Peter Lynch on market timing. The Magellan Fund's former manager at Fidelity Investments used to write an investment column after he retired from the Magellan Fund in 1990. In 1997, he wrote a response in one of his articles to a reader who had taken "exception" to the successful investor's comments on market timing.

Lynch presented a stream of facts and information to support his conclusion. Specifically, he noted that if investors "had missed the 40 biggest up months on the Standard & Poor's 500 Stock Index in the past 40 years," their return on stocks would have dropped from 11.4% to 2.7%.

He went on to give the following example:

"I've gone through this before, but let me give you another example based on actual stock-market performance from 1965 through 1995, a period with good years and bad. Imagine three investors, each of whom puts $1,000 into stocks annually over these three decades.

Investor 1, who is very unlucky, somehow manages to buy stocks on the most expensive day of each year. Investor 2, who is very lucky, buys stocks on the cheapest day of each year. Investor 3 has a system: She always buys her stocks on January 1, no matter what.

You'd think that Investor 2, having an uncanny knack for timing the market, would end up much richer than Investor 1, the unluckiest person on Wall Street, and would also outperform Investor 3.

But over 30 years, the returns are surprisingly similar. Investor 1 makes 10.6% annually; Investor 2, 11.7%; and Investor 3, 11%. Even I am amazed that perfect timing year after year is worth only 1.1% more than horrible timing year after year."

The data may be out of date, but the point remains the same. Trying to time the market is generally a waste of time and effort. It's not when you buy that matters. It's how long you own the securities for, or to put it another way, it's time in the market, not timing the market.

Lynch was one of the greatest active investors of all time, so you might think he would have supported market timing, but he did not. Despite his highly active portfolio stance, the fund manager knew it was not when you bought that mattered, but what you bought.

Indeed, Lynch liked to buy stocks when he could. That meant if he found something he liked, he would buy it, it as long as it had growth potential. Lynch would then buy more if the price declined.

This approach certainly worked for him. Between 1977 and 1990, Lynch averaged a 29.2% annual return by buying a broad array of growth stocks and holding them as they developed.

Disclosure: The author owns no share mentioned.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

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