The Challenge of Stock Market Timing

As long as speculators miss the best trading days by 1% to 2%, even in the best bull market, they won't make a penny. And it is very difficult to judge the rise and fall of the market within a day, let alone in thousands of trading days in a bull market, to make continuous accurate judgments? Therefore, those who truly earn excess returns in the long term are often value investors.

Value investment master Howard Max has a famous saying: "The time of holding stocks is more important than the timing of picking the rise and fall of stocks." That is to say, if we come in and out of the market, trying to avoid the decline and catch the rise, it is often not worth the loss.

On the contrary, only by holding stock assets for a long time can we more likely earn the money of value growth.

Many speculators always feel that they can earn more money than long-term value returns by picking the best trading days and avoiding the worst trading days through "smart stock market timing". Although there are very few people who have made a fortune through this approach, even Jesse Livermore, who is known for speculation, eventually lost most of his property and ended up committing suicide (although many supporters of Livermore argue that his suicide was caused by depression caused by emotional problems, not investment failure, it is hard to say that there is no relationship between the two, after all, poverty and inferiority lead to all kinds of sorrows), but the theory of speculative timing still has countless supporters.

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Speculation is not advisable.

Now, let's look at a set of data to understand how harmful speculation may be in the stock market. We divide the market into every 5 years and think about a question: if we miss a small part of the highest return trading days in frequent trading, how many such trading days will we miss, which will lead to our return rate being zero or even less than zero in these 5 years?

In this article, I have counted three representative indices: the SSE 300 index representing large-cap stocks, the ChiNext index representing small and medium-sized enterprises, and the S&P 500 index representing the global market. The results show that for the stock market, as long as we miss 1% to 2% of the most profitable trading days in frequent trading, we will lose all returns even in a bull market.

Let's first look at the situation of the SSE 300 index. From 2005 to 2024, divided into four groups every 5 years, the SSE 300 index can be divided into four groups. In these four groups, only the group from 2021 to 2024 has a negative return, and the other three groups all bring positive returns.

In the first group, that is, from 2005 to 2010, the SSE 300 index rose by 213%, with a total of 1457 trading days. It can be said that this is a typical bull market. However, in this bull market, as long as we miss 19 of the highest return trading days, we will lose 226% of the increase, leading to a negative total return for the remaining trading days. And these 19 trading days only account for 1.30% of 1457 trading days.

The situation is the same in the two positive return periods from 2011 to 2015 and from 2016 to 2020. In these two 5-year periods, the SSE 300 index's return rates are 19% and 40%, with a total of 1214 and 1218 trading days respectively. As long as we miss 3 and 8 trading days respectively, accounting for 0.25% and 0.66% of the total trading days, it will lead to a negative overall return.So, is it because the CSI 300 Index is a blue-chip index that it is not easily speculated on? Data from the ChiNext Index tells us that even with small-cap stocks, the situation is the same.

From 2010 to 2024, the ChiNext Index can be divided into three phases with a 5-year interval. The first phase was a clear bull market, with a cumulative increase of 171% over 1,356 trading days. However, if we miss just 18 trading days, or 1.33% of the total, in speculation, we would miss a full 180% return on investment, turning the remaining overall return into a negative.

In the long-standing S&P 500 Index, we can also find the same pattern. Between 1928 and 2024, the S&P 500 Index has gone through a century of history. If we take a 5-year cycle, the S&P 500 Index can be divided into 20 intervals, of which only 4 intervals (which means an annualized return of over 12.5%) had an overall return of more than 80%, accounting for 20% of the 20 intervals. This proportion is similar to the bull market proportion of the aforementioned CSI 300 Index and ChiNext Index.

The four bull market intervals of the S&P 500 Index are located in 1951-1955, 1991-1995, 1996-2000, and 2016-2020. In these four intervals, the S&P 500 Index achieved returns of 123%, 87%, 114%, and 84%, respectively. If investors miss the best trading days, which account for 4.15%, 2.85%, 1.82%, and 0.87% respectively, they would not make any money in such a bull market interval selected from 20.

Value investing has a greater chance of winning.

It can be seen that making money by speculation in the stock market is really not an easy thing. As long as speculators miss the best trading days by 1% to 2%, they will not make any money, let alone in a bull market with the best market conditions, not to mention a worse market with fluctuations or even a bad bear market. Judging the rise and fall of the market within a day is very difficult, let alone making continuous accurate judgments in thousands of trading days of a bull market?

In fact, from the records of investors who have made money in history, we can also clearly see that those who have truly earned excess returns in the long term are often value investors.

Compared with value investors, there are very few people who can make a lot of money in the long term by speculation. Even a few lucky speculators who make money have a thrilling road to wealth, which is completely different from the leisurely pace of value investors. In that case, why don't we choose a more winning investment method in the market?