“It is time in the market that matters, not market timing.”
This adage is trotted out regularly by fund managers. However they have an axe to grind. They do not want their clients to exit the market as they make no fees during these periods. Another related adage which they regularly peddle is:
“If you are not invested in the market at all times, you may miss the best performing days of the market.”
They fail to add that, if you are always invested in the market, you will also suffer the worst performing days of the market.
Curiously some value investors also believe that you cannot time the market. But value investing is about investing at times when shares are good value and avoiding (or selling) shares when they are bad value. That sounds like market timing to me.
Of course no system can predict precisely the top and bottom of market. However, it is possible to invest at times when there is a high probability of future market gains. In my book How to Value Shares and Outperform the Market I explained the system which I have developed for valuing the FTSE100. By using these valuations as signals for buying and selling the FTSE100 throughout the history index’s history, you would have achieved 94 times the capital growth during the invested periods than during the non-invested periods. This is even though the total time of the invested periods has been shorted than the non-invested periods.
I recently researched whether these FTSE100 valuations could be linked with a spread bet strategy to produce super-growth. This research involved creating daily spread bet prices for the invested periods. The optimum strategy was found to include a gearing multiple of 7, a stop-loss safety net of 25%, and the investment in interest-bearing cash of funds not required to cover the spread bet exposures.
Historically, from 1984 to the end of 2012, this strategy has certainly produced super-growth – 27.5% compound annual growth in fact. This is much higher than the performance achieved by any UK equity fund and considerably higher than Warren Buffett’s fabled 20% annual growth. To put it another way, £1000 invested in my spread bet strategy at the beginning of 1984 would have grown to £1,150,000 by the end of 2012. Most of that growth is accounted for by capital gains and is therefore tax-free within the spread-betting umbrella.
This strategy is only suitable for long-term investing, as in the short term the high gearing can produce large losses. Of 47 completed trades, 16 were unprofitable and, of these, 13 were stopped out at a 25% loss. On three occasions two stop losses were triggered in succession. Nevertheless, the profits on the profitable trades (average profit 39%) more than made up for these losses over the long term.
You can download the full details and track record of this strategy from the ShareMaestro website.