Economist: Timing vital for beating the market

The Wall Street Journal

Before the bubble burst, Yale economics professor Robert Shiller warned investors the bull market was doomed to end in tears in his prescient book, "Irrational Exuberance," published in March 2000.

Now he has another gloomy prediction: Though stocks are at a five-year low, they remain historically expensive and could end the decade where they began.

But investors can still make a profit, he suggests, by trying something derided by many others as irrational: market timing, or hopping in and out of the market, selling during the upswings and buying on downswings.

"Market timing has gotten an excessively bad reputation," he says. "Conventional wisdom holds that it's a fool's errand. It's certainly not an exact science, but I think people will come back to it."


While Shiller doesn't say specifically when is the right time to jump back into stocks -- and won't predict how much further stocks could fall -- he suggests largely avoiding them until valuations, based in part on improved earnings, revert to their historical averages. He also advises watching for anecdotal signs that investor confidence has bottomed.

Shiller is something of a market timer, albeit on a very long-term horizon. In 1982, at the start of the bull market, all his savings were in stocks.

But shortly after Fed Chairman Alan Greenspan pronounced in December 1996 that the market had fallen victim to "irrational exuberance," Shiller began to sell down his positions. By 1999, he had only about 2 percent of his savings in stocks.

With his profits, he sought the safety of bonds and land: real-estate investment trusts, a real-estate investment fund, Treasury bonds and other fixed-income securities.

Although stocks have plummeted in the past two years, the time isn't right yet to jump back into the stock market, he says. First, he wants to see the questions about the trustworthiness of corporate earnings resolved and for valuations to revert closer to historic norms.

"The market isn't just driven by profit expectations," he says. "It's also dependent on a public willingness to hold stocks."

Shiller thinks there are still too many investors who contend that stocks always go up in the long run. As the market ebbs and flows over the coming decade, he suggests, one by one people will abandon this belief and sell down their positions.

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