IDEAS home Printed from https://ideas.repec.org/a/iad/wpaper/0620.html
   My bibliography  Save this article

An Argument Against Stock-Picking and Market-Timing: An Empirical Approach

Author

Listed:
  • Enrique Rafael González Pozo

    (Universidad Privada Boliviana)

Abstract

This paper’s objective is to demystify the world of investing, first by showing and exposing the results the greatest money managers in the Wall Street have obtained over the last years compared to the performance of their benchmark indexes. Index investing represents a passive investment strategy of holding hundreds of stocks instead of the active management approach used by these experts. After exposing said results, a theoretical framework will be presented that explains why money managers have such a difficult time outperforming their benchmark indexes. Later on, a back-test experiment will be presented and thoroughly explained showing five different hypothetical investment scenarios over several 20-year periods with the attempt to quantify the potential benefit of perfectly timing the market and compare it to the cost of waiting for a better time to invest. The results find shows that the cost of waiting is much greater that the potential benefit of perfectly timing the market and the best alternative would be to invest available cash immediately regardless of market or economic outlook.

Suggested Citation

  • Enrique Rafael González Pozo, 2020. "An Argument Against Stock-Picking and Market-Timing: An Empirical Approach," Investigación & Desarrollo, Universidad Privada Boliviana, vol. 1(1), pages 93-106.
    • Handle: RePEc:iad:wpaper:0620
    as

    Download full text from publisher

    File URL: http://www1.upb.edu/RePEc/iad/wpaper/0620.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Oppenheimer, Henry R. & Schlarbaum, Gary G., 1981. "Investing with Ben Graham: An Ex Ante Test of the Efficient Markets Hypothesis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(3), pages 341-360, September.
    2. Zatlavi, Lior & Kenett, Dror Y. & Ben-Jacob, Eshel, 2014. "The design and performance of the adaptive stock market index," Algorithmic Finance, IOS Press, vol. 3(3-4), pages 189-207.
    3. Thomas Delcey, 2019. "Samuelson vs Fama on the Efficient Market Hypothesis: The Point of View of Expertise [Samuelson vs Fama sur l’efficience informationnelle des marchés financiers : le point de vue de l’expertise]," Post-Print hal-01618347, HAL.
    4. La Porta, Rafael, et al, 1997. "Good News for Value Stocks: Further Evidence on Market Efficiency," Journal of Finance, American Finance Association, vol. 52(2), pages 859-874, June.
    5. Guy Metcalfe, 2018. "The mathematics of market timing," PLOS ONE, Public Library of Science, vol. 13(7), pages 1-12, July.
    6. LeRoy, Stephen F, 1989. "Efficient Capital Markets and Martingales," Journal of Economic Literature, American Economic Association, vol. 27(4), pages 1583-1621, December.
    7. Henriksson, Roy D, 1984. "Market Timing and Mutual Fund Performance: An Empirical Investigation," The Journal of Business, University of Chicago Press, vol. 57(1), pages 73-96, January.
    8. Dellva, Wilfred L & DeMaskey, Andrea L & Smith, Colleen A, 2001. "Selectivity and Market Timing Performance of Fidelity Sector Mutual Funds," The Financial Review, Eastern Finance Association, vol. 36(1), pages 39-54, February.
    9. Brock, William & Lakonishok, Josef & LeBaron, Blake, 1992. "Simple Technical Trading Rules and the Stochastic Properties of Stock Returns," Journal of Finance, American Finance Association, vol. 47(5), pages 1731-1764, December.
    10. Ravi Lonkani & Theeralak Satjawathee & Kandiah Jegasothy, 2013. "Selectivity and Market Timing Performance in a Developing Country’s Fund Industry: Thai Equity Funds Case," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 3(2), pages 1-6.
    11. Fama, Eugene F., 1998. "Market efficiency, long-term returns, and behavioral finance," Journal of Financial Economics, Elsevier, vol. 49(3), pages 283-306, September.
    12. Thomas Delcey, 2019. "Samuelson vs Fama on the Efficient Market Hypothesis: The Point of View of Expertise [Samuelson vs Fama sur l’efficience informationnelle des marchés financiers : le point de vue de l’expertise]," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01618347, HAL.
    13. Fama, Eugene F, et al, 1969. "The Adjustment of Stock Prices to New Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 10(1), pages 1-21, February.
    14. Sweeney, Richard J., 1988. "Some New Filter Rule Tests: Methods and Results," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(3), pages 285-300, September.
    15. repec:cdl:ucsbec:13-89 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, December.
    2. Fernando Rubio, 2005. "Eficiencia De Mercado, Administracion De Carteras De Fondos Y Behavioural Finance," Finance 0503028, University Library of Munich, Germany, revised 23 Jul 2005.
    3. Alexander S. Sangare, 2005. "Efficience des marchés : un siècle après Bachelier," Revue d'Économie Financière, Programme National Persée, vol. 81(4), pages 107-132.
    4. Stephan Schulmeister, 2000. "Technical Analysis and Exchange Rate Dynamics," WIFO Studies, WIFO, number 25857.
    5. Meredith Beechey & David Gruen & James Vickery, 2000. "The Efficient Market Hypothesis: A Survey," RBA Research Discussion Papers rdp2000-01, Reserve Bank of Australia.
    6. An, Suwei, 2023. "Essays on incentive contracts, M&As, and firm risk," Other publications TiSEM dd97d2f5-1c9d-47c5-ba62-f, Tilburg University, School of Economics and Management.
    7. Kothari, S. P., 2001. "Capital markets research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 105-231, September.
    8. Stephan Schulmeister, 2009. "Technical Trading and Trends in the Dollar-Euro Exchange Rate," WIFO Studies, WIFO, number 37582.
    9. Błażej Prusak & Marcin Potrykus, 2021. "Short-Term Price Reaction to Filing for Bankruptcy and Restructuring Proceedings—The Case of Poland," Risks, MDPI, vol. 9(3), pages 1-14, March.
    10. Nordier, Jean-Pierre, 2021. "Identifying possible misspecification in South African soybean oil future contracts," Research Theses 334756, Collaborative Masters Program in Agricultural and Applied Economics.
    11. Sadok El Ghoul & Omrane Guedhami & Sattar A. Mansi & Oumar Sy, 2023. "Event studies in international finance research," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 54(2), pages 344-364, March.
    12. Dionysia Dionysiou, 2015. "Choosing Among Alternative Long-Run Event-Study Techniques," Journal of Economic Surveys, Wiley Blackwell, vol. 29(1), pages 158-198, February.
    13. Thomas Delcey, 2019. "Samuelson vs Fama on the Efficient Market Hypothesis: The Point of View of Expertise [Samuelson vs Fama sur l’efficience informationnelle des marchés financiers : le point de vue de l’expertise]," Post-Print hal-01618347, HAL.
    14. Chia-Lin Chang & Jukka Ilomäki & Hannu Laurila & Michael McAleer, 2018. "Long Run Returns Predictability and Volatility with Moving Averages," Risks, MDPI, vol. 6(4), pages 1-18, September.
    15. Kevin Krieger & David Peterson, 2009. "Predicting stock splits with the help of firm-specific experiences," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 33(4), pages 410-421, October.
    16. Pereira, Robert, 1999. "Forecasting Ability But No Profitability: An Empirical Evaluation of Genetic Algorithm-optimised Technical Trading Rules," MPRA Paper 9055, University Library of Munich, Germany.
    17. Ryan Sullivan & Allan Timmermann & Halbert White, 1999. "Data‐Snooping, Technical Trading Rule Performance, and the Bootstrap," Journal of Finance, American Finance Association, vol. 54(5), pages 1647-1691, October.
    18. David J. Brophy & Paige P. Ouimet & Clemens Sialm, 2004. "PIPE Dreams? The Performance of Companies Issuing Equity Privately," NBER Working Papers 11011, National Bureau of Economic Research, Inc.
    19. Groening, Christopher & Kanuri, Vamsi Krishna, 2013. "Investor reaction to positive and negative corporate social events," Journal of Business Research, Elsevier, vol. 66(10), pages 1852-1860.
    20. Jonathan A. Milian, 2015. "Unsophisticated Arbitrageurs and Market Efficiency: Overreacting to a History of Underreaction?," Journal of Accounting Research, Wiley Blackwell, vol. 53(1), pages 175-220, March.

    More about this item

    Keywords

    Market -Timing; Market Efficiency Hypothesis; Portfolio Management; Investment.;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:iad:wpaper:0620. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ricardo Nogales C. (email available below). General contact details of provider: https://edirc.repec.org/data/ciupbbo.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.