Monday, November 2, 2015

Timing Stock Market Peaks

Active stock pickers like I was for many years often feel regret when they fail to sell a stock at its peak. We almost always leave money on the table. However, expecting to hit the peak just isn’t reasonable. As a case study, I look at the one stock that made me the most money. Despite my fantastic luck, I was still nowhere near selling at the peak.

The stock market bubble in the late 1990s was a crazy time when even the dumbest investors felt like geniuses because just about everything they bought went up in a hurry. During that time I bet crazily on one stock and won. My portfolio return for 1999 was almost 200%!

Every way I look at the numbers, I conclude that I was just plain lucky. I left a huge percentage of my net worth in one stock and it happened to pay off. But even so, I often think back to what could have been if I had held onto all of it and sold at the absolute peak.

Instead of selling at the stock’s peak, I sold it off in blocks primarily between mid-1998 and mid-2000. It turns out that my total profits were only 22% of what they could have been if I was clairvoyant and had sold at the peak. That certainly doesn’t sound lucky, but I assure you that in this case it was lucky. For a stock with a huge run up and spectacular fall, selling it all at the top is nearly impossible.

What about mechanical selling strategies? What if I had set some maximum percentage of my net worth to put in this one stock? The idea is that each day I could have calculated how much of my net worth was in this stock and sold some if necessary to get below a target percentage. I decided to crunch some numbers to see what would have happened.

I calculated the profits for different net worth percentage thresholds. The profits are expressed as a percentage of the gains from selling at the absolute peak price.

We see that there is a huge gap between the peak and any of the selling patterns I examined. As shown in the chart, my actual share sales netted me about 22% of the peak amount. If I had set a maximum for this stock at about 50% of my net worth, I would have made 18% of the peak. (Putting 50% of your net worth in one stock is insane, but I actually had a much higher percentage in this stock for a while.)

None of the thresholds for a mechanical strategy would even have netted me as much as my actual sales. This speaks to just how lucky I was.

Whether it’s trading in one stock or market timing the entire stock market, expecting to sell at a peak price is just unrealistic. I’m a much more relaxed and realistic investor now that I’m an indexer.


  1. Is this somehow a damning condemnation of my own financial strategy of "Blind Luck" and "Falling ass backwards into Money!" ?!?! Some of us can't have "the only winning investing strategy" like those smart guys on the infomercials. Next thing you'll be saying that Lottery Tickets aren't a viable retirement plan?!?

    1. @Big Cajun Man: Lottery tickets become a more viable retirement plan when you combine them with smoking.