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Yes, You Can Time the Market!, by Ben Stein, Phil DeMuth
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Economist, actor, author, and former quiz show host Ben Stein teamed up with investment psychologist Phil DeMuth to examine a century of stock market data and discovered a profound and original investment truth: Yes, you can time the market! In their instant investment classic Yes, You Can Time the Market!, Stein and DeMuth show investors simple, readily available measurements that tell them when it's time to invest in stocks, bonds, real estate, or cash. Written for the investor who wants to preserve capital and build wealth steadily, this book offers prudent, bedrock advice for anyone who can no longer afford to play games with their money.
- Sales Rank: #611930 in Books
- Published on: 2004-09-29
- Original language: English
- Number of items: 1
- Dimensions: 8.80" h x .55" w x 5.65" l, .55 pounds
- Binding: Paperback
- 208 pages
From Publishers Weekly
Arriving a few years too late to slap some reality into the legions of day traders suckered by the stock market gold rush, TV game show host Stein's latest is still a smart, commonsense guide to investing. Stein and DeMuth's primary dispute is with the old adage that one can never tell when the market is going to go up or down, something they attempt to disprove with a wealth of charts showing how to buy stocks cheaply over the long term (as in decades). This is no get-rich-quick scheme, merely a case being made to, in essence, treat the Street like many fans treat baseball: work the numbers. In between the sizable chunks of data, Stein and DeMuth drop in bits of advice, e.g., pay more attention to the S&P 500's trends than frequently slippery P/E ratios; invest in bonds before stocks-they're more stable; and always, always buy low. Best of all is a three-page cautionary list that should be required reading for anyone even thinking of investing. Some of the better nuggets: "Does the word `synergy' appear in the prospectus?... Run!"; "Never accept any unsolicited financial advice"; and "Do not invest in a store because you see a lot of customers there at the mall or because you like the coffee or blue jeans or jelly beans. Sales do not equal profits." Again, where was this book when we needed it?
Copyright 2003 Reed Business Information, Inc.
Review
Arriving a few years too late to slap some reality into the legions of day traders suckered by the stock market gold rush, TV game show host Stein's latest is still a smart, commonsense guide to investing. Stein and DeMuth's primary dispute is with the old adage that one can never tell when the market is going to go up or down, something they attempt to disprove with a wealth of charts showing how to buy stocks cheaply over the long term (as in decades). This is no get-rich-quick scheme, merely a case being made to, in essence, treat the Street like many fans treat baseball: work the numbers. In between the sizable chunks of data, Stein and DeMuth drop in bits of advice, e.g., pay more attention to the S&P 500's trends than frequently slippery P/E ratios; invest in bonds before stocks-they're more stable; and always, always buy low. Best of all is a three-page cautionary list that should be required reading for anyone even thinking of investing. Some of the better nuggets: "Does the word 'synergy' appear in the prospectus?...Run!"; "Never accept any unsolicited financial advice"; and "Do not invest in a store because you see a lot of customers there at the mall or because you like the coffee or blue jeans or jelly beans. Sales do not equal profits." Again, where was this book when we needed it? (Apr.) (Publishers Weekly, March 24, 2003)
Stein may be known for the droll sense of humor he exhibits on his Comedy Central show, Win Ben Stein's Money, but it is hardly evident in this straightforward investment guide. Writing with coauthor DeMuth, an investment adviser, the former Nixon speechwriter counters the "conventional wisdom" that investors cannot time (or predict) their investment decisions to maximize profits. The authors cite a number of technical factors - e.g., Tobin's Q, price/earnings, dividend yield, price to cash flow, and price to sale - to show that careful study of these metrics demonstrates that some times are better than others for going into the market or buying a particular stock. They also show that protestations to the contrary, the "street" frequently times the market. Eighty tables and graphs are used to buttress their case. Stein's popularity and the use of his face on the book's cover may draw readers beyond the usual investment crowd, though some may find this joke-free treatment a bit too technical. Still, it is a competently written, well-argued case for a sensible investment approach and is quite suitable for academic and larger public libraries. — Patrick J. Brunet, Western Wisconsin Technology Coll., La Crosse. (Library Journal, May 1, 2003)
"...it's readable, coherent, sensible, good-natured..." (Barron's, May 26, 2003)
From the Inside Flap
Economist, financial fraud buster, writer, celebrity, and all-around smart guy Ben Stein teams up with investor advisor and psychologist Phil DeMuth to prove that Yes, You Can Time the Market! Though the common wisdom on Wall Street says market timing doesn’t work, the authors sifted through a hundred years of stock market data and discovered that fundamental valuation metrics clearly show when the market is over- or under-priced. In fact, timing the market is just a matter of patience–something Wall Street doesn’t have.
In this smart, simple book, Stein and DeMuth show you how to use the tools of technical analysis to determine the relative "cheapness" or "expensiveness" of the market as a whole at any given moment. They demonstrate that basic criteria like dividend yield and price to earnings ratio are like clocks that can tell you when it’s a good time to jump into an index fund, the stock market, or when you’d be better off putting your money in bonds, real estate, or cash.
You’ll find no gimmicks or get-rich-quick schemes here, just the information you need to tell a good investing climate from a bad one. Timing the market is safer and more profitable than keeping your money in stocks all the time. In fact, an investor using Stein and DeMuth’s system would have bought stocks in fifteen out of fifteen of the best investing years for long-term investors since 1926, while staying out of the market during the worst fifteen years. Market timing not only offers superior returns over the long run, but it can also protect you from short-term catastrophe.
Yes, You Can Time the Market! But don’t just take the authors’ word for it, see for yourself with charts, graphs, tables, and a wealth of stock market data. Stein and DeMuth have done all the heavy lifting for you. All you have to do is follow their advice and look forward to a more prosperous future. Written for those who want to preserve capital and build wealth steadily, this book offers prudent, bedrock advice for investors who can no longer afford to play games with their money.
Most helpful customer reviews
347 of 370 people found the following review helpful.
Can You Time the Market? These two did not!
By Abacus
The authors maintain you can use a 15 year moving average of various valuation indicators as a buy signal to invest in the S&P 500. The indicators include: Price level, P/E ratio, Price/Book Value, Price/Cash Flow, Price/Sales. Whenever the S&P 500 trades under its 15 year moving average on these indicators, it is a good time to buy.
They show that between 1977 and 2001 an investor using any of these indicators (P, P/E, P/B, P/CF, P/S) to invest in the S&P 500 whenever it traded lower than its 15 year moving average would have beaten an investor doing dollar cost averaging with monthly investments over the same period. One condition is that the market timer would invest $200 every month he had a buy signal, and not invest anything when he did not. Meanwhile, the dollar-cost-averager would invest $100 on a monthly basis. Over the entire period, the market timer gets to invest only $20,000 in the S&P 500 ($200 times 100 months). Meanwhile, the dollar cost averager invests $30,000 in the S&P 500 ($100 times 300 months). In each case, the market timer comes out ahead and ends up with more money in 2001.
The authors attempt to make a case that the market timer superior results (regardless of the indicator used) is due to buying into the market when it is low. But, the success of the market timer is due to his accelerated equity investment schedule. By early 1985, the market timer has made his full investment of $20,000 in equities. By the same date, the dollar cost averager has invested only $10,000. The dollar cost averager much slower investment schedule will never allow him to catch up to the market timer. The dollar-cost-averager average holding period of his stock portfolio is only 12.5 years compared to 21.5 years for the market timer. This is why the market timer wins.
The above example is repeated five times (once for each indicator) with the exact same flaw. The accelerated equity investment schedule follows an identical pattern regardless of the indicator used. What these guys did is called backtesting. The authors looked at various moving averages such as 5, 10, and 15 years. And, devised different investment rules until they came up with a combination of a moving average and a rule that would beat income averaging. They did it, but ran into a methodological flaw (the frontloading of the investment) they were not even aware off.
Additionally, this investment strategy is most unrealistic. Who could stomach investing twice as much as his regular investment schedule just when the market is experiencing a severe Bear market (that is what it takes for the market to go south of its 15 year moving average).
This strategy is not market timing. Following this strategy you would have been locked out of making any additional equity investments since 1985. Also, the authors do not have a "sell signal" spelled out because it would kill their strategy. The stock market only rarely goes south of its 15 year moving average (regardless of the indicatory used) and quickly goes back up north of it. Thus, with a sell signal you would never hold your S&P 500 holdings for long. Yet, the authors stress that their strategy does not show superior returns until 15 to 20 years out. The lack of a sell signal would have left you fully exposed on your S&P 500 holdings invested prior to 1985 to the crash of 1987, the downturn of 1989, and the severe Bear Market of 1999 to 2002.
The authors give great credit to the investing principles developed by Benjamin Graham, the father of value investing. Some of these principles include only buying companies who sell for less than their working capital and whose earnings yield is twice higher than their bond yield. The only problem is that you could not find any stock meeting these criteria since 1950s. These principles have become outdated as markets have become more efficient.
The authors strategy is almost as outdated as Benjamin Graham value investing principles. The difference is that Graham wrote his book 30 years before his investing guidelines became obsolete. Meanwhile, the authors wrote their book 18 years after their strategy was outdated in 1985.
They actually belittle the sound concepts of asset allocation and portfolio rebalancing. They pretend that asset allocation has no merit because no one knows the future returns from equities and bonds. However, we can construct a directionally correct asset allocation for different risk levels by inputting the respective equities and bonds returns historical mean, standard deviation, and correlation with each other. On portfolio rebalancing, they suggest it is worthless since two investors who would have started the prior century with a 50/50 split, the one not rebalancing his portfolio to a 50/50 position yearly would have ended up far richer at the end of the century than the other one who did rebalance his portfolio yearly. But, the investor who let his allocation drift from 50/50 to 99/1 (equity/bonds) incurred a far greater risk. The authors ignored all that. Asset allocation and portfolio rebalancing are far more important to your capital preservation than their unusable market timing proposition.
76 of 89 people found the following review helpful.
A systematic way to stay cool-headed, but with big flaws
By Orson Wang
The stupendous collapse of the NASDAQ is still fresh in many people's minds. This book offers a way to systematically avoid such euphoria in the future.
Simply put, they advocate buying only when key indicators (such as price to earnings or price to book ratios) fall below their 15-year moving average. When such indicators are higher than their 15-year moving average, stay on the sidelines with Treasuries. Ample evidence is supplied to show how this approach would have netted a hypothetical investor much more than conventional dollar-cost-averaging over the past 100 years.
However, some big flaws lurk in the margins that are not addressed. By utilizing a 15-year moving average, they have effectively reduced the number of unique supportive data samples to 7. There are only seven 15-year windows within a 100 year period. It is true that they utilize a moving average, thus generating an infinite number of 15-year averages, but the point is that the 15-year average of the years 1970-1984 is not fundamentally independent from the 15-year average of the years 1971-1985 because they share 14 years worth of data. Only the windows 1945-1969 and 1970-1984 are actually unique 15-year data windows. So the question is, do you trust an experiment based on only a tiny few data points?
The other larger and more substantial flaw is that the strategy proposed by the authors is stained by the same flaw as every other simple and mechanical investment strategy: it uses a strategy perfected through data mining. That is, their ultimate strategy recommendation was selected from a field of nominated strategies and the assumption is made that what worked best in the past will work for the future. This is a classic academic's assumption flaw that has been repeatedly highlighted by the failure of other back-tested strategies such as the once popular "Dogs of the Dow" strategy. Many simple mechanical investment strategies have been invented over the decades and none has ever stood the test of time. I do not see a reason why this strategy will be different.
That said, this book is useful for the nuggets of healthy skepticism that everyone should adopt towards any investing endeavor.
30 of 35 people found the following review helpful.
Good Graphic Use of Statistical Data
By dennis wentraub
In 1929 an investor owning a basket of stocks representing the S&P 500 Index would have seen a return of 84%...in twenty years. Making the same investment just two years later would have produced an 818% move. Timing is important. Investing for the 'long run' is no excuse for buying stocks when they are expensive. Stein and DeMuth make the case that an investment may be a bargain when its current price is lower than its long-term average. This is simply due to the fact that points of data tend to follow their own laws of gravity and "regress" to long-term averages after periods of sharp out/under performance. Let's define long-term as a fifteen year period. Let's also invest in the market using indexed securities and specifically one key market index, the S&P 500 Index, because of the singular unpredictability of individual stocks.
Here are some conclusions: By almost all historical measure today's stock market is still overvalued. The index average of the S&P 500 and S&P 500 dividend yield appear to be the most reliable indicators of whether the market is over or undervalued. Own bonds and avoid stocks when they are expensive relative to their long-term averages. The always touted benefits of dollar cost averaging, and mechanical portfolio rebalancing to a preconceived percentage allocation, miss the point. Investments can be timed.
The difficulty in all this is that the authors' findings point to the "general direction" of the market over "long periods of time". Investors will need the patience of Job and a steely discipline to be in or out of the market for multi-year periods. Meanwhile, experience shows us that much money is also made and lost in the margins, in the short-term. Using the data, investors would have begun moving out of the market in the mid to late 1980's thus avoiding the sharp break in the market in 1987 and the extended bear market that began in 2000. But investors would have also missed the spectacular blow-off gains in the 1990's. Investors would be smart to use this book as a guide for adjusting their allocation to a variety of asset classes and use long-term trends to temper short-term emotion.
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