When Is The Best Time To Liquidate A Long-Held Stock The Profit Magic of Stock Transaction Timing by J.M. Hurst – Review (Part I)

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The Profit Magic of Stock Transaction Timing by J.M. Hurst – Review (Part I)

The Profit Magic of Stock Transaction Timing by J.M. Hurst was published in 1970. Many hundreds, perhaps thousands, of investment or trading related books have been written since then. Few, however, no matter how recently published, can match Hurst’s work for its clarity and completeness.

Hurst was a physicist and worked as an aeronautical engineer for more than 25 years. He was careful to provide the mathematical references for his work although few readers would have the academic training or perhaps even the inclination to pursue the theoretical basis underlying his trading technique. Happily, J.M. Hurst focused his book on the application of the principles and no such rigorous training or mathematical background is required to understand and apply the stock trading method which Hurst laid out in Stock Transaction Timing.

Since, as the title tells us, Hurst set out to create a trading method based on timing the market, or more accurately timing the buy and sell of individual stocks, he first established the reasons that stocks move up and down in price over time. His reasons are the product of nine years of research and 30,000 hours of computer analysis, and he expresses them in the book with a sense of scientific certainty that would probably create some discomfort in investors new to the art of technical analysis. How many times have we heard that you cannot time the market so don’t even try?

Hurst defined the process of stock price fluctuations as a price-motion model. He determined that 75% of all stock price movement is due to relatively foreseeable fundamental factors pertaining to the stock market as a whole, to sectors and industries within the market, and to individual stocks within the industry groups.

As you can see Hurst’s price-motion model, although it is a timing system, is not a repudiation of the adage about market timing, but more of a confirmation of it. 75% is a very large influence. And because the secular trend of the US markets at least has been up for more than 200 years a Buy & Hold strategy makes eminently good sense over the long haul. Hurst’s price-motion model also maintains the integrity of fundamental analysis as a worthwhile exercise of stock market investing.

Perhaps most surprisingly Hurst determined that macro random events, like news shocks, which in his time would have been epitomized by the assassination of President Kennedy, and global events such as war, even when combined with micro random events, like an individual liquidating a stock portfolio to buy a summer house, account for only 2% of stock price movement in the price-motion model. Hurst readily acknowledged that the short term affect of purely random events on stock prices could be large but that the movement would still be only temporary.

The remaining 23% of stock price movement in Hurst’s price-motion model was determined to be the result of semi-predictable oscillations. These oscillations are caused by the aggregate sum of several (non-ideal) periodic fluctuations, better referred to as cycles. The nominal stock market cycles identified by Hurst are consistent with the periodicity of cycles determined by researchers subsequent to the publication of Stock Transaction Timing.

In the next part we will discuss how to take advantage of the 23% cyclic contribution and why that is so important for achieving superior investment returns.

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