Sometimes, lessons on investing come from the most unexpected places. Maybe you saw the news this week that rap artist 50 Cent came into a “Bit” of a windfall. According to a Wednesday article by TMZ, one of the payment methods the artist accepted for his 2014 album, Animal Ambition, was Bitcoin. At the time, one of the crypto coins was worth between $650 - $700, and the rapper took in about 700 of them in sales.
Fast forward to today, with each Bitcoin worth $10,000, er, $12,000, uh, $11,000…oh, you get the point, and his stash is now worth somewhere around $8,000,000! Thus, leading to what is sure to become one of the most famous investing quotes of all time, “Ima keep it real, I forgot I did that $#!+, lol.”
As it turns out, forgetting can be an effective investment strategy. Anecdotes such as 50 Cent's, or another one about a “study” at Fidelity Investments that showed investors that forgot about their accounts outperformed other investors, are interesting, but aren't the type of compelling evidence we seek for our investment strategies.
Fortunately, researchers at DFA have investigated market timing in several ways over the past few years. In 2014, Jim Davis demonstrated in 780 simulations across 14 different global stock markets that timing rules using the idea of mean reversion, or that good performance follows bad or vice versa, failed to beat a buy and hold strategy 99.8% of the time.[i] Then, in a 2016 paper, Wei Dai ran 680 simulations that showed buying and holding outperformed timing strategies based upon relative valuation 97.6% of the time.[ii] Most recently, in a December 2017 research paper, Warwick Schneller exhibited that market timers produced more extreme returns, higher trading costs, and potentially higher taxes, which are additional hurdles they must overcome to outperform.[iii]
With results that lose more than even random chance would suggest, plus higher costs and taxes, why would anyone think they could successfully time the market? Probably the same reason some seemingly smart guy or gal can convince us that the world is ending or that we are about to miss out on the opportunity of a lifetime, all in one 5-minute segment or article. As PT Barnum would say, there is one of us born every minute.
One smart guy I always look forward to hearing from is Weston Wellington, another DFA personality that seems to always have a way of explaining things for those of us without PhDs. Hopefully you will enjoy his non-technical article, Nine Experts, Four Surprises, and One Million Dollar Bet, as much as I did.
As always, if you would like to discuss anything further about this week’s topic, your portfolio, or financial plan, get in touch.
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[i] Mean Reversion in the Dimensions of Expected Stock Returns, James L. Davis, PhD
[ii] Premium Timing with Valuation Ratios, Wei Dai, PhD
[iii] Market Timing: The Built-in Hurdle, Warwick Schneller