FOOL'S EYE VIEW
Timing the Market

By James Carlisle
August 30, 2001

My esteemed colleague TMFJane wrote on Tuesday how, after telling the rest of us about ISAs for the last couple of years, she'd finally got round to buying one herself. It may or may not be a co-incidence, but statistics issued by the Association of Unit Trusts and Investment Funds (AUTIF) on the very same day, suggest that she might well have got her timing about right.

Timing?

Yes, I know. You can't time the markets. The Motley Fool is always at pains to say that there's no best or worst time to invest in the Stock Market. It constantly discounts peoples' best guesses about the future so, at any time, it ought to be priced fairly. All good stuff.

The thing is that despite all this, just about every one of us wants at least to have a go at getting the timing right. And why not? If we expect the market to tend to be fairly priced, then there can't be much harm in trying. Or that's what you'd have thought.

The trouble is that private investors tend to be pretty bad at it. Overly influenced by recent events, we tend to "chase the market". When the market's gone up a lot, then it appears attractive. When it's gone down a lot, then it looks awful. "Gorr! That Stock Market looks like an horrible thing. Shares going down all the time. I don't know. I wouldn't want to have any of my money in there." A couple of years later when it's flying past record highs, you get "That Bill from number 37. Oooh! He's made a packet on that Stock Market. I fancy a piece myself."

The empty auction room

Imagine that you want to buy some paintings in an auction. If you were a trader in paintings, then you might like to see a crowded auction room to give you confidence of being able to sell the paintings on soon after buying them. But the confidence is illusory. Someone will be left holding the paintings when the other punters start to leave. That person will suffer enough pain to make up for everyone else's gains. Moreover, the commissions that they've all had to pay to the auction house for transferring the pictures between them will leave the traders poorer as a group to the same degree as the auction house is richer.

Someone who's confident of the long-term value of paintings and plans to buy some and stick them up on the wall would far prefer an empty auction room. The same can be said of shares. There are very good reasons for thinking, as well as solid evidence, that they make a good long-term investment. If you want to tuck some away for the long-term, the best time to do it is when no one else wants them.

Retail Fund Sales

Back at the end of 1999, shares were flying upwards and it looked almost as if the market could only go one way. According to AUTIF, sales of retail investment funds in November 1999 leaped 33% on the previous month, "boosted by a spectacular 200% rise in technology fund sales. In all over £247m flooded into the Global Specialist sector, 90% of which went into technology funds... This surge of funds into the Global Specialist sector was the work of IFAs, who were the impetus behind 90% of all retail sales in the sector."

Retail fund sales peaked at £16.1b in the first quarter of 2000, still partly driven by very strong sales of technology funds. These peaked at over £300m for each of March and April 2000 (still about 80% of which went through IFAs). It's fair to say that the auction room was very busy back then and we all know how that's worked out.

Of course March and April, which sandwich the end of the tax year, are well known for being big months for ISA sales, but the pattern has been for steady growth in retail fund sales and 2001 looks like being the first year to see a fall since 1995 (which, co-incidentally followed a gloomy 1994 and beginning of 1995 in the market, but which preceded a long run up to 1998).

Is the market overcrowded?

So, it seems to be the case that the auction room gets more people in every year, but some year more than others. The room represents the economy, but that metaphor is beginning to get a little stretched, so I'll call the auction room the market! The market tends to grow because the economy tends to grow as we become more productive and can generate more capital from the capital we already have. The economy gets bigger and the market can fit more investors in. Investors, though, rush in and out, and some years much more than others. What we don't want is to be rushing into the market in one of those years when it's getting overcrowded.

So is it overcrowded now? It's really impossible to say. Some will say that it's been filling up more quickly than the space has been increasing for at least a decade and that it's still looking a tight squeeze, notwithstanding a bit of emptying over the last couple of years. Others will tell you that there's more than enough room for everyone, because new technology is making the economy more productive and the market's "space" is increasing very quickly. Most people aren't sure either way.

The current level of the market reflects the balance of all these views (and I dare say several more). No one knows where it's going next. So, no, you can't time the market, but shares make good long-term investments and, if it means anything, things look a lot less squashed than they did a year or two ago.

More: The Fool's ISA Centre