I don't believe in EMH (Efficient Market Hypothesis) either, but
your statement that
[no]one can beat the market in the long run by trying to time being
in and out of it.
is a pretty good summary of the weak form of EMH. To summarize the
forms of EMH:
weak form: past prices cannot be used to predict future prices
semi-strong: weak form + published news cannot be used to generate
profits (already discounted)
semi-strong: semi-strong + even unpublished news cannot be used to
generate profits (already discounted)
The weak form implies that technical analysis does not work, and the
semi-strong and strong forms imply that fundamental analysis is
flawed.
There has been at least some attempt to justify EMH empirically (such
as the well-touted fact that 85% of actively-managed funds failed
to beat the S&P 500 index during 1995-1997), but the basis of the
theory rests on theoretical grounds, namely that stock price changes
are stochastic. The only non-random trend, according to EMH, is
the long-term growth of the economy, which the stock market
supposedly reflects.
So EMH does not claim that long-term price trends cannot be
identified. Even the most stalwart efficient markets theorist
would probably agree that there are some economic climates (low
inflation, declining interest rates, rising productivity) that
are more favorable to stocks than other climates.
But, since you do not believe in EMH I assume that you are implying
that it is unwise to try to leap out of every bull market correction.
I agree with this statement. The opportunity cost is much greater
than any possible benefit (on average, at least). But a bear
market is a different animal (pardon the pun). A bear market is
a period where the stock market greatly underperforms most other
asset classes, including cash), due to fundamental economic
conditions. Note that only the strong-form EM theorist would say
that it is not possible to time the market using fundamental analysis
models.
Why do I not believe in EMH? Because it ignores the essentially
irrational nature of humans: we are usually either too hopeful
or too fearful, and fail to judge risks properly. Jay, at what point
would your faith in the market be shaken? That is, what would need
to happen - not that it ever would - to change your mind about
remaining fully invested in the stock market at all times?
It is obvious that some people beat the market by a wide margin
consistently; whereas, most players underperform. I would guess
that the distribution of returns among the players in the market is
shaped like a negative exponential distribution. IMO, this means
that it is possible to outperform the market, either through
stockpicking, or asset allocation.
AA
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