To win what I call, “the great game of investing,” investors must learn a fundamental truth; you don’t win by doing what everyone else is doing. I’ll admit that it took me a while to understand this concept, which is a little surprising given all the supporting evidence.

Think about it, if what everyone else is doing works so well, would 80% of investors with assets of over $500,000 say they’re disgusted with their advisor? If investors were satisfied, would financial services be vying with tobacco as the least loved industry? Would trade publications like Investment News continue to run articles with headlines like “Financial advisers face a crisis of confidence” and “Crisis challenges long held investing truths?”

For many years, “everyone else” has been more or less following the exact same strategy of buy and hold. But after being so soundly beaten by the latest bear market, even the staunchest buy and hold defenders are finally singing a different tune. Few still believe that buying and holding a diversified portfolio is a sound decision when other alternatives are available. Unfortunately, too many people are peddling investment vehicles and concepts that are as bad as (and oftentimes worse) than buy and hold. Among these is the idea of market timing. This concept of market timing is not only being hawked as a supposed cure for the buy and hold blues, but as a panacea for all investment woes.

Market timing requires using some means, maybe a formula, pattern or gut instinct, to try to predict the future direction of the market. In its purest form, market timing is switching between cash and stocks based on a price prediction. The promise is so seductive. After all, you simply put your money in the stock market when it’s about to rise, take it out before it goes down and you’re sure to receive a huge profit, right? The bad news is that market timing is a lie.

The good news is that the data surrounding market timing doesn’t lie. The data from study after study says that no one can predict market direction consistently over long periods of time. The truth is that an occasional market call is easy, but to do it consistently is impossible. Of course, the laws of chance allow all of us to get it right once in a while.

A couple of years ago, I went to the racetrack with my husband and a group of friends. I made a small bet on an obscure long shot in the fifth race named Caustic Remark. When he won, my $5 bet paid 17 to 1. (Guess who got to pay for dinner that night?) Before you’re tempted to think I have some special skill or insight, let me tell you a little secret. Earlier that day, I had a disagreement with our IT manager, who was as caustic as they came. That’s why I chose that horse. In other words, I got lucky.

I didn’t interpret this luck as a sign that I should make my living trying to pick ponies. When we win big at the racetrack, we recognize it for what it is – luck. When we get a market call right, suddenly we become geniuses.

The truth is that an occasional market call is easy, but to do it consistently is impossible. If someone tries to sell you their market timing ability, ask them for proof of their market calls, published contemporaneously, not after the fact, over a period of years. Then review their track record and measure its success.

A number of people publish their market-timing calls. The easiest to quantify are market timing newsletter writers because their market calls are in print and can’t be conveniently revised. Additionally, since these guys are paid by their subscribers for their ability to time to the market, the assumption is that they must be accurate. Let’s look at their results.

Since 1980, Mark Hulbert has produced the well-respected Hulbert’s Financial Digest, which tracks the performance of other newsletters. The results are generally pretty dismal. Hulbert’s data says that in any given year, 80% of newsletter writers under-perform the market. Furthermore, the one’s that manage to outperform market are not the same from year to year. In other words, just because someone beats the market one year doesn’t mean they’ll ever be able to do it again. Hulbert’s data specifically regarding market timing newsletters is worse. His data shows none of the market timing newsletters beat the market.

The data from the Dalbar Group, a well-respected investment research firm that analyzes the results of market-timing on an ongoing basis, shows the same results as Hulbert’s. Each year, since 1984, the Dalbar Group’s methodology is to evaluate the preceding 20 year period. For example, in the 20 year period ending in 2003, the average stock market timer lost 3.29%. In the same twenty years, the market itself went up an average 12.98% per year.

Despite this evidence, there’s a common belief that in bear markets, active-management techniques like stock-picking and market-timing tend to pay off. But a study in the Spring/Summer 2009 issue of Vanguard Investment Perspectives found the exact opposite. The author, Christopher Philips, found “contrary to popular belief, actively managed funds, on average, have tended to under-perform a broad market benchmark in bear as well as bull markets.”

Frankly, market timing is a compelling lure too many otherwise sensible investors have fallen for. What these investors have failed to understand is that the stock market makes dramatic moves up in relatively short periods. If you miss these moves, you effectively miss the majority of the gains.