Considered from the selfish perspective of increasing one's personal investment return rather than helping others, is it a good idea to spread the concept of market timing? In other words, is market timing an investment strategy that loses effectiveness as it becomes widely adopted? Some investment strategies are zero sum arbitrage-type opportunities, where profit comes only to the extent that other people are not aware that a difference in price and value exist. Come to think of it, is there any investment strategy where discretion isn't important in preserving profit potential?

What about Markowitz's free lunch — Diversification? To find out, let's consider a simple world where there are six investors and five asset classes. The five asset classes have different returns and different volatility, and the first five investors (A-E) each invest in only one asset. Return and volatility for investors A-E is determined solely by their assigned asset class. The sixth investor (M) buys a portfolio composed of all five asset classes and rebalances it through time. Those of us who have read A Random Walk Down Wall Street know that M enjoys lower volatility for return in his (please pardon the parochial pronoun) investment and therefore greater long term return.

But Holy Yale Endowment, Batman! What if investors A-E aren't stupid and they read investor M's book? In this new world (world 1.1) all six investors have diversified into all five assets. In world 1.1, when markets are going up (don't they always go up over the long term?) all six investors enjoy the free lunch. Differences in intermediate term return depend only on each investors system of diversification, their desired return/volatility mix. Same thing happens when markets go down, because our six model investors are unflinchingly Rational. The only long term net change in the sleepy environment of world 1.1 comes from a slow transfer of wealth from higher volatility investors to lower volatility investors (I'm not sure that this last point is actually true, but I think it is).

Of course in the real world investors are not unflinchingly rational, and there is a seventh investor, Pigman (P), who invests with huge leverage in a narrowly diversified portfolio. What happens in world 1.2 where investors A-E + M are diversified in all five asset classes and P suddenly crashes one of them? If investors A and B get a twitchy prisoner's dilemma feeling, they may decide to start selling indiscriminately. Since market prices are set at the margin, suddenly the prices of all five investments are correlated, and plunging. Everyone loses money, except maybe investors A and B. Ouch! In world 1.0 investor P's antics would have only hurt the investors assigned to his targeted asset classes. In world 1.0 investor M would have rebalanced, picked up some cheap shares of A and B's assets, and continued sailing along the diversified course to prosperity. Unfortunately, due to complete diversification in world 1.2, all five asset classes now resemble a single asset class with a volatility driven by P's leverage. A metaphor about the development of antibiotic resistance in bacteria comes to mind, but investor P is probably already evolved to survive nearby thermonuclear detonations, so I'll turn back to the original question.

What happens in a world like 1.2, where P is crashing asset classes, and investor A is market timing? It's really not different from world 1.2 because in the scenario outlined above when investors A and B got twitchy they were market timing. What if everyone in world 1.2 were market timing? Well, someone has to hold the bag when prices drop, which means that the investor with the slowest trigger finger loses the most if absolutely everyone is timing. But what about world 1.3 where investor M owns such a huge share of the assets that he can't market time without collapsing the price of his own holdings? Seems like investors A-E can market time to their hearts content, and leave M holding the bag every time. M's best strategy to avoid holding the bag in world 1.3 would be to convince A-E to adopt his own strategy of diversification and holding, or maybe just holding. M would want A-E to leave real diversification to pros, like him. Maybe M would even write a book about Modern Portfolio Management for A-E to read.

My uncle Pat told me in his first race, as he entered a sharp corner in the middle of the peloton, the grizzled veteran he was rubbing shoulders with on the next bike said, "Take it easy kid... easy, now."