TITLE: Market Timing and Learning AUTHOR: Eugene Wallingford DATE: November 28, 2006 1:28 PM DESC: ----- BODY: I am a dinosaur who still keeps track of our family finances by hand. (But not for long; one of my Christmas break projects is to convert to Quicken.) While going through some brokerage statements over the long Thanksgiving weekend, an analogy between investing the stock market and learning occurred to me. Let me know what you think. "Market timing" is the attempt to invest money in a stock or a market when it is near its lowest price and then to cash out when the price is near its peak. With a perfect model, I could invest when the price is at its minimum and divest when the price is at its maximum, with a maximal profit as my perfect prize. Market timing is a risky endeavor that almost always fails. Why? Because no one has a very good idea about how to recognize maximum and minimum prices. That may not seem so bad; even with prices only near their minimum and maximum, an investor could do quite well. But the risk is much worse than that, Many investing gurus are keen to point out that most of the gain in the stock market over the last 80 years or more have occurred on relatively few days. In the past I have seen a list of the ten days with the largest gains in the history of the New York Stock Exchange and the Dow-Jones Industrial Average Any investor who was out of the market on these days missed out on a significant percentage of the market's gain over the last century. I can't seem to find such a list on the web just now, but I did find this page that tells a similar tale:
Consider, for instance, the returns on small company stocks between 1925 and 1992. If you had been invested in small company stocks over this period, your average annual return would have been 12.1%. If you sat out the single best month during that 67 year period, you would have only made 11.2% a year. If you missed out on the best five months, well, forget it... you would have only notched gains of 8.5%. Finally, if you had missed the best ten months -- something all sorts of market timers managed to do in 1995 -- you would have only retained 6.3% annual gains, almost half of what you could have made had you been fully invested.
I think that learning works the same way. Once before, I related this phenomenon to negative splits in running: the gains a learner makes may be relative small early in a course and relatively larger later in the semester, as the material steeps in her mind and is processed both consciously and subconsciously. I first experienced this is a course as an undergraduate when I plodded along for eight weeks before I somehow "got it". As near as I can tell, the day on which one gets it is often unpredictable. Sure, some courses and some kinds of material can be learned steadily through a methodical process. But most of the best kind of learning involves a shift in how we see problems or how we see understand solutions, and this kind of learning usually seems to bear an a-ha! moment. If I think of my effort studying a new topic or learning a new technique as an investment of mental energy, then I don't want to find myself in the position to "time the market" -- trying to guess the right day or few right days to be thinking hard about the material or practicing the skill. The a-ha! moment will come when I least expect, and if I am "out of the market" that day -- waiting until next weekend to start my programming assignment, or skipping a day of study to work on something else, or doing the work but merely going through the motions -- then I will miss the chance to make the big stride to the next level of understanding. And like the investing sort of market timing, the risk is pernicious. Not only won't I end up with the big gain; I may end up with nothing at all to show for my study, just a time spent and no understanding of anything of consequence. Learning is cumulative, and unless we give it a chance to accrue and to reinforce itself, we don't accumulate anything. Sadly, today's students often operate under conditions that require a random sort of market timing. Many of them work far too many hours to allow them to work each day on each of their courses, at least not in a full-engaged way. Some of them take too many classes, in an effort to graduate "on time" or as soon as possible. (The rush is sometimes driven by financial considerations, but sometimes by misplaced ambition.) Many students come to college these days with many other interests, curricular or extracurricular, that interfere with their classwork. The result is hit-or-miss study, too many days without thinking about a particular course, and little understanding. I think that this analogy applies to teaching, too. Unless I stay engaged with my course and my students throughout the semester, then I will likely be unprepared when opportunity's knock. Indeed, opportunity probably knocks at all only because we stay engaged and make the conditions possible for a visit. -----