Why Most Investors Fail and Why You Don’t Have To

There are many very sophisticated investors who will tell you that it is neither necessary nor possible to time the market. This is a very short book that will show you why they are wrong.

Total returns from the stock market have averaged 12% over the past 125 years, but no one could claim that these returns were consistent. During the 5 best 10-Year runs, the market averaged more than 240%, while in the 5 worst 10-Year runs it averaged -40%. If you were caught with too much of your money in stocks during any one of those drawdowns near or after retirement, your life could be literally be ruined. As a matter of historical fact, timing the market has been imperative for almost every generation of investors.

Unfortunately, most market timers do not really help. In my view, most of them are trying to solve the wrong problem with the wrong tools and have conducted far too little research. They get caught up in the minute details of short-term price movements and never see the big picture. For many more reasons that will be discussed in more detail later in this book, you’ll see why this kind of market timing probably is impossible, and is certainly unnecessary.

But if we look at much longer-term trends, we can see a very obvious pattern that anyone can follow and completely crush the markets without extensive knowledge or trading skill. Every single one of those best five decades mentioned above was preceded by a price/trend earnings ratio of less than 7x, while every single one of the worst decades was preceded by a price/trend earnings of more than 15x. There were no exceptions. If you paid more than 15x the trend earnings, you lost money over the next ten years. If you paid less than 7x, you achieved above average returns during the next decade. The only real mystery is why more people haven’t been more successful at noticing this.