Thanks for the response. I may have communicated my points in a poor way,

"I would think that denying that the investor loses out on the ERP would be equivalent to either believing that your evaluation of market value is better than the markets OR that stocks will not have a positive return going forward. "

Here I was suggesting that the only way missing 31 days could be a coin-flip would be if one of the quoted assumptions were true. I was not trying to imply you said these things.

"What stock market theory would suggest that your assumption is true?"

I should have clarified, by "your assumption" I meant the assumption that missing 31 days was a coin flip.

I actually regret even including that first paragraph in the post, I think it is a more convoluted way to make my point, which is:

If the stock market goes up over time, and you cannot time the market, any period will tend toward a positive expected return.

And I think that is taking Buffett out of context. Let's pretend the IRS changes the rule to 6 months. Would you be comfortable using the same logic to stay out of the market for 6 months? It must also be a coin flip?

To answer your questions, I would be afraid of staying in cash because I would lose 1/12 of the ERP and I perceive very little risk to TLH with similar but different funds. I wouldn't be concerned about timing the bottom, because I do not try and time the market. If I TLH and the market went 10% lower the next week I would consider the risk-reward tradeoff of TLH once again. I don't think predicting the bottom really has much to do with this discussion either. Since we cannot time the market, TLH should always be evaluated at current prices, if the market goes lower, re-evaluate.

Let me state the problem in a different way. Why is someone afraid of staying in cash for 31 days? Because he/she is afraid that the bear market bottom is going to appear in the next 31 days and the market will be higher forever after 31 days are over. It's this fear of missing the boat, fear of missing the best days. If that's not the case, this investor can always get back to the same fund at the same or lower price point after 31 days. Now, what do you think the chance is for any investor to successfully predict that the bear market bottom will appear in the next 31 days? Not good, precisely because nobody can call the bottom.

You put out lots of good work and I appreciate your site, but I disagree with the bulk of this post.

I would think that denying that the investor loses out on the ERP would be equivalent to either believing that your evaluation of market value is better than the markets OR that stocks will not have a positive return going forward. What stock market theory would suggest that your assumption is true?

Think about Larry's ERP statement in an expected value sense. If you TLH every year, you are only in the market for 11/12 of the time, why would you think you would receive anything other than 11/12 of the ERP.

And 12:11 is not a coinflip.

Of course Larry's statement looks bad over the past 10 months, VTI is down 30%! As others have said, I would recommend gathering as much data as possible, you can get 20 years of vfinx on yahoo, probably do even better if you are more resourceful. The calculation is just a few click and drags whether you calc for 1 year or 100.

Lastly, depending on your wash sale rule interpretations and the price you pay for trades, buying a similar fund without waiting can be very low risk. I was hoping this post might address alternatives to avoid any wash-sale worries. For example, you wouldn't replace VFINX with FSMKX, but you might be comfortable replacing it with VTI, VV, or MGC. Suggesting best-alternatives for TLH could be an interesting post.

Keep up the good work. I appreciate it very much even if I only comment when I disagree.

Matt

Stocks go up in the long term. We can have some degree of certainty of saying stocks will be up in 30 years. But our degree of certainty comes to close to a coin toss if we are talking about a short period like 31 days. Just for kicks, I'm going to pull the same data for 2003-2007 and see what it looks like in years when the market went up. Stay tuned. Keep in mind though tax loss harvesting opportunities don't come up as often in bull markets.

As TSM is still on a downward trend this year, you data is skewed towards holding the money in cash for 31 days. Your conclusion would probably be different for 2003, 2004, 2005, 2006, 2007 or if TSM starts recovering for the rest of 2008.

The fact is nobody knows when the bottom will be reached, and for me, I find it hard to go to cash for the 31 days.

If your goal is to time the market using a "sell low, buy lower" strategy, then follow whatever strategy you like. You may want to base your conclusions on more than hindsight in the current bear market, though.