The Profit Magic of Stock Transaction Timing by JM Hurst was published in 1970. Since then, many hundreds, perhaps thousands, of books related to investing or trading have been written. Few, however, no matter how recently published, can match Hurst’s work for clarity and comprehensiveness.
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 background or perhaps even the inclination to seek the theoretical basis underlying his technical commerce. Happily, JM Hurst focused his book on the application of principles, and one does not require as rigorous training or mathematical knowledge to understand and apply the method of stock trading that Hurst expounded 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 buying and selling of individual stocks, he first established the reasons why stocks go 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 likely create some discomfort for investors new to the art of technical analysis. How many times have we heard that you can’t time the market so don’t even try?
Hurst defined the process of stock price fluctuations as a price movement model. He determined that 75% of all stock price movement is due to relatively predictable fundamental factors related to the stock market as a whole, sectors and industries within the market, and individual stocks within industry groups.
As you can see, the Hurst price movement model, although it is a timing system, is not a repudiation of the adage about market timing, but rather a confirmation of it. 75% is a very big influence. And since the secular trend of US markets has at least been up for over 200 years, a Buy & Hold strategy makes a lot of sense in the long run. Hurst’s price movement model also maintains the integrity of fundamental analysis as a valuable exercise in stock market investing.
Perhaps most surprisingly, Hurst found that random macro events such as shocking news, which in his time would have been epitomized by the assassination of President Kennedy, and global events such as war, even when combined with random micro events such as a individual who liquidates a stock market. portfolio to buy a summer home, account for only 2% of the stock price movement in the price movement model. Hurst readily recognized that the short-term effect of purely random events on stock prices could be large, but that the movement would only be temporary.
The remaining 23% of stock price movement in the Hurst price movement model was determined to be the result of semi-predictable swings. These oscillations are caused by the aggregate sum of several (non-ideal) periodic fluctuations, better known as cycles. The nominal stock market cycles identified by Hurst are consistent with the periodicity of the cycles determined by researchers after the publication of Stock Transaction Timing.
In the next part, we’ll discuss how to take advantage of the 23% cyclical contribution and why it’s so important for achieving superior investment returns.