344 of 366 people found the following review helpful
on August 29, 2003
Format: HardcoverVerified Purchase
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
on October 29, 2003
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.
29 of 34 people found the following review helpful
on June 11, 2003
Format: HardcoverVerified Purchase
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.
27 of 32 people found the following review helpful
on July 21, 2005
Ben Stein is a "celebrity" of sorts, and his name is associated with money, hosting the TV game show Win Ben Stein's Money. It is only natural for him to write an investment book. I don't know why Stein and his co-author decided to promote this particular investment strategy. Nevertheless, I think this book would familiarize novice investors with some essential terms and concepts, so it might be a good introductory lesson in investing.
For a system to use for real investing, I would recommend perusing the columns of Paul Merriman and Mark Hulbert on the CBSMarketWatch website. They have tracked the performance of a simple moving average market timing system. It is about as good as buy and hold, but with less risk, because it takes you out of the market in severe downturns. You have to religiously follow it, of course, even when all your emotions are telling you the opposite. This is a problem with any trading system, of course.
Another system followed by Hulbert is seasonal investing -- only being in the market at certain times of the year when gains are most likely.
With a little effort, one can find better market timing systems -- the information is free on the web. However, I've read Stein's books for basic knowledge. I refuse to follow his ideas slavishly, and I wouldn't recommend anyone else do so, either.
18 of 21 people found the following review helpful
on September 8, 2003
Format: HardcoverVerified Purchase
Stein and DeMuth succeed impressively in their primary aim, which is to prove that there are better times than others to invest in the stock market, and that a market timer who pays attention to the signals they describe can achieve significantly higher returns than a steady investor who buys in regardless of price. To determine whether the market is over- or under-priced, they rely upon valuation methods that will please the heart of a classically trained economist or business school student: price, P/E ratio, dividend rate, and price-to-book, comparing today's figures to the 15-year moving average. Examining the performance of the S&P 500 over the past century, they convincingly prove that a strategy of doubling up investments in "buy" (under-valued) years and avoiding investing in over-valued years delivers superior performance to a buy-and-hold (or dollar cost averaging) strategy.
Although what Stein and DeMuth have proven seems like common sense from one angle (buy heavily when prices are low), it is not what most of Wall Street and the financial press urges investors to do. Nor is it emotionally easy to follow this advice, since it means buying at times such as the middle of the Great Depression, when the popularity of stock market investing is at its lowest ebb, and it means avoiding buying when the market is zooming to the moon, and it seems as though every neighbor of yours is making a fortune in Internet and telecom stocks (the late Nineties). Stein and DeMuth do a great job describing these situations, to provide the internal fortitude needed to follow a buy low strategy.
The debate over this book arises over how applicable it is to the average individual investor (its target audience). All the research conducted by Stein and DeMuth concerns the S&P 500, and they freely admit that the conclusions they draw do not necessarily apply to other indices, markets, or individual stocks. Furthermore, they look at 20-year results, so the final verdicts for the last 20 years (including the bull market of the `90s) are not in yet.
However, Stein and DeMuth cite many others studies that are aligned with their general strategy of buying under-valued stocks, and summarize the superior results that these other studies report. Because of this, and the book's sharp wit and hard-hitting style, this book is a great introduction to value investing and the fundamental methods of valuing stocks. The boom and bust of the late Nineties and early 2000s prove that far too many investors (and professionals) don't pay enough attention to stock market valuation.
This book won't tell you how to make a quick fortune. It won't tell you how to identify the next Microsoft or Dell Computer. But it does tell you how to identify better times to invest in stocks, and can help you avoid huge losses from investing in bubbles. Because of the strength of the book's advice, which recent history proves is so often ignored, and the fact that it is a short and entertaining read, I highly recommend it.
30 of 38 people found the following review helpful
on June 27, 2003
Although the book's title leads one to believe that this book is about market timing, it is not. It is basically the buy and hold approach with a few twists. This book will not help the average investor time the market, since buy and sell signals may not occur for years. In the interim their portfolios can get decimated.
The premise of the book and statistical tables provided in the book are all very interesting, and are food for thought. And the writing style is easy to read. But in the end the value to this approach to today's investor is dubious.
The authors use a 15-year moving average with monthly prices of the S&P 500 Index (pg. 27) going back 100 years to generate buy and sell signals. The last buy signal according to this chart was given in late 1984 to early 1985 with the S&P near 325. So investors would have been invested for the last 18 years.
They would have had to sit through the debacle of October 1987, and the drops in 1990, 1994, and the terrible markets during the past three years. The S&P 500 Index peaked at 1527.46 on March 4, 2000, and dropped to 776.76 on October 9, 2002. Thus, investors would still be holding their investments using Stein and DeMuth's approach. As of June 26, 2003 the S&P was at 986. If you looked at their S&P chart with the 15-year moving average, you would see that a sell signal would not occur until the S&P drops below 800. Having such a slow moving average does not allow an investor to take profits at market highs. Moreover, who in the right mind wants to give back a large percentage of the profits.
The authors main thesis is that by using specific fundamental data - metrics - as they call them, either individually or with better results in combination, the investor can be long the market during uptrends and in cash or equivalents during down trends.
They provide statistical information on using fundamental analysis measurements - arrayed from high to low values-to ascertain whether the stock market is overvalued and undervalued. The measurements presented in this book include:
· Dividend yield
· P/E ratio
· Tobin's Q (measure of fundamental value)
· Price-to-sales ratio
· Price-to-cashflow ratio
· Bond yields
Each of the measurements mentioned above is discussed in a separate chapter showing the performance of investing with that strategy from 1902 - 2001, when the measurement was at a high and low reading. Performance of each metric is shown for 5-, 10-, 1-5 and 20-year periods from each year. Typcially when the market is undervalued according to that metric, the performance in those just mentioned time periods is superior to the years when the market is designated as overvalued.
Also, included was a comparison of lump-sum investing vs. dollar-cost averaging. Most of these measurements are shown in monthly line chart with a 15-YEAR moving average imposed on them. Interestingly the buy and sell signals - crosses above and below the moving average- of all these measurements are infrequent and occur around the same time.
Overall this book should be of interest to value investors with very long time horizons. It has no value for investors who want to time the market.
11 of 13 people found the following review helpful
on March 30, 2007
Format: HardcoverVerified Purchase
I had previously read, and definitely recommend, a book by the same authors "Yes, You Can Still Retire Comfortably!". It was straightforward, practical, to the point. And in that book, they referred many times to this earlier book of theirs. I thought ... wow! ... if these guys can make market timing as simple as they made retirement planning, the world is a wonderful place.
I was wrong. Simple? Yes. Totally simple. But, let me save you the time. While making a convincing case, they "prove" that only a fool (and I do not mean that with a capital F) would have bought stocks since about 1984. If you believe that, buy this book.
In short ... buy their retirement book. Skip this one.
10 of 12 people found the following review helpful
on June 28, 2003
Okay, we all know Ben Stein is a smart guy from Win Ben Stein's Money. What I did not know was that he and apparently his co-author Phil DeMuth know a fantastic amount about investing. He has studied it at Yale and Columbia and been a major commentator about it in Barrons for twenty years. The results are impressive. This is a book about investing for the long term, and it makes total sense. It says not to base your buys on fads and chat rooms or day trading gambles, but to use the basics of earnings, dividends, book value, sales,and long term price trends
to find out whether stocks are cheap or expensive, and what your prospects are for major long term gains based on historical criteria, not on guesswork.
If I had known this stuff I would never have gotten caught in the bursting of the bubble in 2000 and with it, I will never get caught with my pants down again.
If I had to recommend only one book to long term investors, it would be Yes, You Can Time The Market. I think the people who gave it bad reviews must be day traders looking for the next bubble. This book is not for them. Yes, You Can Time The Market is for serious investors who want to make money without taking insane risks. get it and grow rich slowly but surely.
7 of 8 people found the following review helpful
on November 16, 2003
This is not a book for traders, but for long-term investors. With wit and wisdom, Stein and Demuth prove their point: long-term investors must pay attention to market cycles. If you buy when the market is high, you are all but guaranteed to wind up under water. You could be buying the best company in the world--it does not matter. Pay too much, and you'll be burned.
The investors of the 90s forgot about market-timing.Wall Street told them it didn't matter, and they followed that advice-- to their eternal regret. As another reviewer has pointed out, Wall Street's salesmen want to sell stocks now. Caveat emptor if you pay too much.
Maggie Mahar's "Bull! A History of the Boom, 1982-1999: What Drove the Breackneck Market and What Every Investor Needs to Know About Financial Cycles" fleshes out the story and gives investors some sound advice on what to do next. Read both books.
14 of 18 people found the following review helpful
on August 24, 2003
According to the backward looking evidence presented in this book - the answer is an unqualified yes. All you have to do is live to be 200 years old so that you can take advantage of the optimal buying opportunities that occasionally present themselves.
Seriously, I bought this book because I enjoy Stein's humor, and there wasn't enough of it in evidence here. The techniques the authors advocate could have been expressed in a 15 page brochure and are basically useless to the typical investor with a 20 year accumulation period.
Want to buy this book? Wait until it appears in the bargain basket at your local B&N or Borders Books. It won't be long before you can find it there.