Markets can detach from fundamentals for long periods

Warren Buffett, say that the markets can detach from fundamentals for periods as long as a year or even longer. Therefore market timing is a form of gambling. It is easier to understand a stock you know well, and value that stock with reasonable accuracy, particularly if it is for a time horizon of a couple of years.

These days, minor market-moving news and events are more and more frequent and could have you trading (at a dizzying and counterproductive pace) into and out of some of the companies that you would want for long-term investing and wealth.

There are countless small but violent moves in the markets, let alone the many corrections and periodic bear markets that occur. Using knowledge and disciplines instead of being driven by raw emotion and using a 'timing approach' were the keys to investment success.

Over the years, volatility in market averages and individual stock prices has increased, not decreased, so that there have been many more sharp moves and many more reversals. Many factors are responsible. Some of the reasons are:

• computerised stock trading,
• huge increases in the size of the largest institutional portfolios,
• the proliferation of aggressive hedge funds, and
• the complexity of the task of properly interpreting information that develops at a dizzying pace in our globalised markets.

Interestingly enough, there are typically more 3 percent and 5 percent daily upward moves in stock market averages during bear markets than in bull markets. The basic nature of market moves, and the psychology that affects those moves, coupled with the complex financial variables, makes the process of trying to determine the short-term direction of markets a very tricky game of chance, and one that can be immensely costly.