In his latest Perspective article titled – (So) What If You Miss the Market’s N Best Days?, Cliff Asness cuts to the chase. The argument that “you only have to miss the N best days to totally ruin your long-term returns” is, as Asness puts it, “very dumb.” Or, to be “as charitable as possible, the answer is very obvious and very useless.”
Here’s the deal: “If you time the market and all you ever do is N times sell all your stocks and go to cash for a day, and precisely the next day, one the best days ever in market history occurs, then that would be bad. That is, a super radical market timing strategy, executed perfectly and presciently incompetently, is a disaster. Film at eleven.”
But why stop there? Asness flips the script: “Someone, quite stupidly, arguing in favor of market timing could just as easily produce the ‘what if you missed the worst N days?’ table – which would argue, again quite stupidly, that you should definitely time the market and do it bigly. Just look at the huge potential gains!” The reality? “The results are basically symmetric.”
The original 1999 paper held up over 25 years of out-of-sample evidence. “It turns out that the 1999 paper held up amazingly well over the next quarter century. Actually it’s not that amazing, it was kind of obvious that it would. But still cool.” The data shows the same pattern: miss the best days, and your returns suffer. Miss the worst days, and they soar. “The effects of being out of the market during the best months are indeed great. However, they are commensurate with the gains from being out of the market during the worst months (in fact they are slightly larger!).”
So, what’s the takeaway? “The very question ‘what if I miss only the N best days?’ is, how do I put this nicely, very dumb.” It’s a strawman. “The common conclusion is that if you are pathologically bad at something and you make huge bets, then this is a recipe for disaster. Investors who engage in market timing, by definition, should think they are good at it, and should bet proportional to their perceived skill.”
Asness isn’t advocating for market timing. “This paper is not an argument in favor of market timing. It is a refutation of the most common argument against market timing.” The real issue? “The reason to avoid it is that you’re likely bad at it and doing it without skill is actually harmful, as you are randomly deviating from a properly diversified portfolio.”
The bottom line? “Market timing, like any active investment decision, should be undertaken by an investor only if they believe they have some edge in predictive ability.” Otherwise, “the often quoted results of missing the best months for stock returns might be interesting, but they are neither relevant or shocking.”
So next time someone trots out the “miss the N best days” argument, hit ’em with this: “It’s gibberish. You may say it’s a terrible, silly, embarrassing argument. but at least it is in the service of helping people because market timing is still very likely harmful. Ok, so make the argument another way. A more honest way.”
Or, as Asness would say: “Respect whomever you are talking to.”
You can read the entire Perspective here:
Cliff Asness – (So) What If You Miss the Market’s N Best Days?
For all the latest news and podcasts, join our free newsletter here.
Don’t forget to check out our FREE Large Cap 1000 – Stock Screener, here at The Acquirer’s Multiple:
