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.