Market Timing: There are only two types of investors

There are quite long periods when the market falls and takes a long time to regain previous highs. 

How shall we judge whether you should try to take advantage of this?



Market strategies:  Dollar Cost Averaging versus Absolute Bottom Buying Strategy

Dow Jones Industrial Average Index from 1970 - 2020.  This is a period of 50 years which spans inflationary and deflationary cycles and which has seen several crises and crashes as well as bull markets.  It seems like a long and fair sample period.

Imagine that over this 50-year period there are two competing investment strategies. 

1. One is to invest an equal amount every trading day throughout the period irrespective of market conditions - the so-called dollar cost averaging.
2. The other strategy requires enough foresight for the investor to invest the same amount daily, but to stop investing when the market turns down and save the cash.  This money is only invested when the Dow makes a new bottom, hitting its low point in any period of decline (hence why it is known as an "absolute bottom buying strategy").

This is a somewhat more realistic example of how you might apply foresight, rather than measuring what would happen if you had such certainty about the future you were able to sell everything just before the market turned down and then buy it back at the bottom.


Outcomes

Over the 50-year period, the second strategy would have produced returns 22 per cent higher than the first.

It sounds impressive - perhaps a little less so when you break it down to a 0.4 per cent outperformance per year 

But think of the time and effort you would have to spend monitoring markets to get those calls just right.



Possibly foregoing any significant gains

Since March 2013, the Dow is up just over 150 per cent in total, averaging 13.3 per cent per annum. 

Imagine if you had acted on market fears and taken your money out of equities or stopped investing ahead of that performance. 

Should you risk foregoing any significant portion of that gain for a maximum upside of 0.4 per cent per year.




Anticipation

Nobody has perfect foresight:  

• wrong about the events and 
• wrong about the market's reaction to events

In reality, attempt to implement the second strategy will almost certainly cause harm to your net worth as nobody has perfect foresight.  In your desire to time the markets, you will stop investing, or worse, sell and take money out when you expect the market to go down and instead it goes up.

Think back to Brexit and Trump's election.  We were told by most commentators that they wold not happen, but if they did, the markets would plunge.  Not only were they wrong about the events but they were also wrong about the market's reaction to events.  The markets soared.



There are only two types of investors

When it comes to so-called market timing, there are only two sorts of people: 

1. those who can't do it, and 
2. those who know they can't do it.  

It is safer and more profitable to be in the latter camp.

There is a lot to lose and little to gain from market timing.

Reference:  The Financial Times

There is a lot to lose and little to gain from market timing.

There is a lot to lose and little to gain from market timing.

When it comes to so-called market timing, there are only two sorts of people

1. those who can't do it, and
2. those who know they can't do it.

It is safer and more profitable to be in the later camp.



What is market timing?

With the Covid-19 pandemic dominating the news and recent volatility on world stock markets, you may have heard a lot about market timing again. 

Advisers and financial commentators will probably not use that actual term.  What they will talk about is whether you should sell some or all of your equity investments because of the economic effects of the coronavirus and the subsequent effect on the market.

All of this what is termed "market timing" in the jargon of the investment trade - holding back investment or taking some or all of your money out of the market when you anticipate a fall.



Problem of this approach:  Can you anticipate the markets?

The word "anticipate" indicates the first problem with this approach. 

Most people whom I encounter take their money out during or after a fall - as they did in March. 

[They are doing the equivalent of driving whilst looking in the rear view mirror (or at best, out of the side window of the car).  You need to look out of the windscreen in order to have the best chance of driving safely.  The trouble with doing that in terms of the stock market is that the visibility is often so poor, it feels like driving in fog.]



Markets are second order systems

Such approaches to investment are almost all futile.  Markets are second order systems.  What this means is that in order to successfully implement such market timing strategies:

1.  you not only have to be able to predict events - 

• interest rates, 
• wars, 
• oil price shocks, 
• the impact of the coronavirus, 
• the outcome of elections and referendums - 

2.  you also need to know what the market was expecting,

• how it will react and 
• get your timing right.  

Tricky.



Reference: Financial Times

Your Biggest Risk - The Traps of Trading. What are the 2 most dangerous words in investing?

Professional traders use highly sophisticated trading techniques driven by computer programs that analyze huge volumes of data almost instantly.  You are competing with them when you attempt to play the trading game, and you will probably lose.  Professional traders have a name for amateurs who believe they can win:  "dumb money."  With all of their technology and huge bankrolls behind them, not even all professional traders are successful for an extended period.

MARKET TIMING may be the two most dangerous words in investing, especially when practiced by beginners.  Market timing is the strategy of attempting to predict future price movements through use of various fundamental and technical analysis tools.  At its best, market timing is a risky business for professional investors.

The real danger exists for beginners who are tempted by what looks like easy money.  All you have to do is buy a stock today and sell it tomorrow for a "gut feeling it was going up."  Yes, this happens every once in a while, but somebody has to win the lottery, too (here's a hint:  it won't be you or me).

The Verdict on Market Timing

Many professional investors move money from cash to equities or to long term bonds on the basis of their forecasts of fundamental economic conditions.  This is one reason many brokers give to support their belief in professional money management.

John Bogle, founder of the Vanguard Group of Investment Companies said, "In 30 years in this business, I do not know anybody who has done it successfully and consistently, not anybody who knows anybody who has done it successfully and consistently.  Indeed, my impression is that trying to do market timing is likely, not only not to add value to your investment program, but to be counterproductive."

Over a fifty-four year period, the market has risen in 36 years, been even in 3 years and declined in only 15 years.  Thus, the odds of being successful when you are in cash rather than stocks are almost 3 to 1 against you.

An academic study by Professors Richard Woodward and Jess Chua of the University of Calgary shows that holding on to your stocks as long-term investments works better than market timing because your gains from being in stocks during bull markets far outweigh the losses in bear markets.  The professors conclude that a market timer would have to make correct decisions 70 percent of the time to outperform a buy-and-hold investor.  Have you met anyone who can bat 0.700 in calling market turns?


An examination of how mutual funds have varied their cash positions in response to their changing views about the relative attractiveness of equities.

Mutual fund managers have been incorrect in their allocation of assets into cash in essentially every recent market cycle.

Caution on the part of mutual-fund managers (as represented by a very high cash allocation) coincides almost perfectly with troughs in the stock market.

• Peaks in mutual funds' cash positions have coincided with market troughs during 1970, 1974, 1982, and the end of 1987 after the great stock-market crash. 
• Another peak in cash positions occurred in late 1990, just before the market rallied during 1991, and in 1994, just before the greatest six-year rise in stock prices in market history.
• Cash positions were also high in late 2002 and in March 2009, at the trough of the market.

Conversely, the allocation to cash of mutual-fund managers was almost invariably at a low during peak periods in the market.

• For example, the cash position of mutual funds was near an all-time low in March 2000, just before the market began its sharp decline.  

The ability of mutual-fund managers to time the market has been egregiously poor.  

Ref: A Random Walk Down Wall Street by Burton G. Malkiel

Two ways to profit from the market swings: Timing or Pricing

Since common stocks, even of investment grade, are subject to recurrent and wide fluctuations in their prices, the intelligent investor should be interested in the possibilities of profiting from these pendulum swings. There are two possible ways by which  he may try to do this:

• the way of timing and 
• the way of  pricing.

By timing we mean the endeavour to anticipate the action of the stock market—

• to buy or hold when the future course is deemed to be upward, 
• to sell or refrain from buying when the course is downward. 

By pricing we mean the endeavour

• to buy stocks when they are quoted below their fair value and 
• to sell them when they rise above such value. 

A less ambitious form of pricing is  the simple effort

• to make sure that when you buy you do not  pay too much for your stocks. 
• This may suffice for the defensive investor, whose emphasis is on long-pull holding; but as  such it represents an essential minimum of attention to market levels.

We are convinced that the intelligent investor can derive satisfactory results from pricing of either type. 

We are equally sure that if he places his emphasis on timing, in the sense of forecasting, he will end up as a speculator and with a speculator’s financial results. 

The Verdict on Market Timing

Over a fifty-four year period, the market has risen in thirty-six years, been even in three years, and declined in only fifteen.

• Thus, the odds of being successful when you are in cash rather than stocks are almost three to one against you.  
• An academic study by Professors Richard Woodward and Jess Chua of the University of Calgary shows that holding on to your stocks as long-term investments works better than market timing because your gains from being in stocks during bull markets far outweigh the losses in bear markets.  
• The professors conclude that a market timer would have to make correct decisions 70 percent of the time to outperform a buy and hold investor. I have never met anyone who can bat 0.700 in calling market turns.

The words of John Bogle, founder of the Vanguard Group of Investment Companies on the subject of market timing.

Bogle said,
"In 30 years in this business, I do not know anybody who has done it successfully and consistently, nor anybody who knows anybody who has done it successfully and consistently.  Indeed, my impression is that trying to do market timing is likely, not only not to add value to your investment program, but to be counterproductive."

"Time in the Market" versus "Timing the Market"

Dow Theory for Timing Purchases and Sales - As their acceptance increases, their reliability tends to diminish

In this respect the famous Dow theory for timing purchases and sales has had an unusual history.* Briefly, this technique takes its signal to buy from a special kind of “breakthrough” of the stock averages on the up side, and its selling signal from a similar breakthrough on the down side. 

• The calculated—not necessarily actual—results of using this method showed an almost unbroken series of profits in operations from 1897 to the early 1960s. 
• On the basis of this presentation the practical value of the Dow theory would have appeared firmly established; the doubt, if any, would apply to the dependability of this published “record” as a picture of what a Dow theorist would actually have done in the market.

A closer study of the figures indicates that the quality of the results shown by the Dow theory changed radically after 1938—a few years after the theory had begun to be taken seriously on Wall Street.

• Its spectacular achievement had been in giving a sell signal, at 306, about a month before the 1929 crash and in keeping its followers out of the long bear market until things had pretty well righted themselves, at 84, in 1933. 
• But from 1938 on the Dow theory operated mainly by taking its practitioners out at a pretty good price but then putting them back in again at a higher price.  
• For nearly 30 years thereafter, one would have done appreciably better by just buying and holding the DJIA.

In our view, based on much study of this problem, the change in the Dow-theory results is not accidental. It demonstrates an inherent characteristic of forecasting and trading formulas in the fields of business and finance. 

• Those formulas that gain adherents and importance do so because they have worked well over a period, or sometimes merely because they have been plausibly adapted to the statistical record of the past. 

But as their acceptance increases, their reliability tends to diminish. This happens for two reasons:

• First, the passage of time brings new conditions which the old formula no longer fits. 
• Second, in stock-market affairs the popularity of a trading theory has itself an influence on the market’s behavior which detracts in the long run from its profit-making possibilities. 
• (The popularity of something like the Dow theory may seem to create its own vindication, since it would make the market advance or decline by the very action of its followers when a buying or selling signal is given. A “stampede” of this kind is, of course, much more of a danger than an advantage to the public trader.)

Timing is of no real value to the investor unless it coincides with pricing

The farther one gets from Wall Street, the more skepticism one will find, we believe, as to the pretensions of stock-market forecasting or timing. 

• The investor can scarcely take seriously the innumerable predictions which appear almost daily and are his for the asking. 
• Yet in many cases he pays attention to them and even acts upon them. 

Why? Because he has been persuaded that

•  it is important for him to form some opinion of the future course of the stock market, and 
• because he feels that the brokerage or service forecast is at least more dependable than his own.*

A great deal of brain power goes into this field, and undoubtedly some people can make money by being good stockmarket analysts. But it is absurd to think that the general public can ever make money out of market forecasts. 

• For who will buy when the general public, at a given signal, rushes to sell out at a profit? 
• If you, the reader, expect to get rich over the years by following some system or leadership in market forecasting, you must be expecting to try to do what countless others are aiming at, and to be able to do it better than your numerous competitors in the market. 
• There is no basis either in logic or in experience for assuming that any typical or average investor can anticipate market movements more successfully than the general public, of which he is himself a part.

There is one aspect of the “timing” philosophy which seems to have escaped everyone’s notice.

• Timing is of great psychological importance to the speculator because he wants to make his profit in a hurry. 
• The idea of waiting a year before his stock moves up is repugnant to him. 

But a waiting period, as such, is of no consequence to the investor. 

• What advantage is there to him in having his money uninvested until he receives some (presumably) trustworthy signal that the time has come to buy? 
• He enjoys an advantage only if by  waiting he succeeds in buying later at a sufficiently lower price to offset his loss of dividend income. 
• What this means is that timing is of no real value to the investor unless it coincides with pricing—that is, unless it enables him to repurchase his shares at substantially under his previous selling price.

Market Timing - If you absolutely must play the horses

Though Benjamin Graham in no way recommend trying it, he did say that there is a way to combine market timing and value investing principles.

However, Graham noted, the method makes heavy demands on human fortitude, and it can keep an investor out of long stretches of a booming market*.  It sounds simple.  Yet for those who realize how difficult it is to follow, this strategy can diminish the risk of trading on market movements.

Here is the way it works:

1.  Select a diversified list of common stocks (for example, buying undervalued stocks).
2.  Determine a normal value for each stock (choose the PE ratio that seems appropriate).
3.  Buy the stocks when shares can be bought at a substantial discount - say, two-thirds of what the investor has established as normal value.  As an alternative to buying at one target price, the investor can start buying as the stock declines, beginning at 80 percent of normal value.
4.  *Sell the stocks when the price has risen substantially above normal value - say 20 percent to 50 percent higher.

The investor thus would buy in a market decline and sell in a rising market.


Comment:
*When you buy wonderful companies at fair prices, you often do not need to sell.  You may consider selling some or all when the stock prices are obviously very overvalued.  In these situations, the upside gains are limited and the downside losses are high.  These will impair the total returns of your portfolio.  However, even in such overvalued situations, you should only consider selling when the prices have risen very substantially above their normal values, for example, >> 50% over their normal values.  Also, remember to reinvest the money back into other wonderful companies at fair prices that offer a higher reward/risk ratio and that promise returns commensurate with your investment objective.

Investing in volatile times

Investing in volatile times    

July 2010

When stock markets are volatile, what should unit trust investors do? Should they take on more risks and ride on the economic and market recovery? This article examines the issues that investors should look out for.

At the peak of the financial crisis in 2008, the FBM KLCI fell from an all-time high of 1,516 points in January 2008 to about 800 points in October 2008. With the index having rebounded to current levels of 1,361 points as at end July 2010, an investor would have made a handsome return of almost 70% if he had invested when the market was at its lowest point.





However, it is impossible to predict the bottom of the crash and therefore timing the market is virtually impossible for normal investors. With no crystal ball in hand, the ringgit-cost averaging method could provide retail investors with reasonable returns as markets recovered. This is provided that investors have a long-term perspective and are patient enough to ride through the market’s ups and downs.

Ringgit-cost averaging strategy is designed to reduce volatility by investing fixed dollar amounts at regular intervals, regardless of the market’s direction. Thus, as prices of securities rise, fewer units are bought, and as prices fall, more units are bought.

Depending on the risk profile and objectives of their funds, professional fund managers may capitalise on market volatility by bargain-hunting oversold stocks and divesting stocks that have become overvalued. By doing so, they seek to take advantage of mispricing of assets during volatile times. Given the sophistication of these investment strategies, unit trust investors should focus on a regular investment plan and let the fund managers deal with the volatility of markets.

How should unit trust investors respond to volatility?

Past performance of unit trust funds should be evaluated based on returns and volatility. Investors should try to assess whether a funds’ volatility is caused by market conditions which affect the performance of similar funds across the board or whether it is caused by the fund managers’ investment decisions to take on more risks.

It is quite clear that the primary reason for equity funds to be volatile in recent years is due to market volatility in various financial assets. As mentioned earlier, global stock markets sustained heavy losses as the US subprime crisis spread across the world in 2008, causing global financial institutions to write off US$1.7 trillion in debts. Subsequently, equities have rebounded in 2009 following signs of a recovery in economic activities in response to the fiscal and monetary stimulus measures undertaken by governments and central banks around the world.

The commodity bubble also burst in mid-2008, led by escalating crude oil prices which hit a high of US$147 per barrel in July 2008 before plunging to US$33 per barrel in December 2008. Volatility was also seen in the foreign exchange market as the financial meltdown forced U.S. investors to withdraw offshore funds to be repatriated back home, causing the US$ to strengthen in 2008. Subsequently with the recovery in equity markets, the US$ weakened in 2009 as investors were willing to take on more risks.

With volatility still in the current market, how can investors plan their investments before putting money into unit trusts?

Volatility is often viewed as negative as it is associated with risk and uncertainty. However, with a disciplined and consistent approach, investors can position themselves to achieve potential long-term returns from the market. In general, investors seeking above-average returns should be prepared to accept higher risks in their investments.

Before investing into a unit trust, investors should evaluate whether a fund’s volatility suits his or her risk appetite. They can start by reading the fund's prospectus and annual report, and compare its year-to-year performance figures. The figures can tell investors whether the fund earned most of its returns within a short period or whether its returns were achieved on a more consistent basis over time.

For example, over ten years, two funds may have gained 12% per year on average, but they may have taken drastically different routes to get there. One might have had a few years of spectacular performance and a few years of low or negative returns, while the performance of the other may have been much steadier from year to year.

Fund volatility factor

To assist investors in their fund selection, the Federation of Investment Managers Malaysia (FIMM), formerly known as the Federation of Malaysian Unit Trust Managers (FMUTM), introduced the fund volatility factor and fund volatility classification for funds with three years track record, which is assigned by Lipper.

While historical performance may not predict future returns, it can tell you how volatile a fund has been and reflect a fund manager’s track record. In using the fund volatility factor, unit trust investors should keep in mind to compare the volatility of funds against their annualised returns. In addition, they should evaluate the returns and volatility of funds within the same peer fund category and not across different categories of funds.

Apart from the fund managers’ investing style, the volatility of unit trusts differs depending on the assets that the funds are invested in. Commodities and equities are seen as more volatile compared to bonds and fixed deposits.

For equities, industry and sector factors can cause increased market volatility. For example, in the plantation sector, a major weather storm in an important plantation area can cause prices of crude palm oil to jump up. As a result, the price of palm oil-related stocks will rise accordingly.  This increased volatility affects overall markets as well as individual stocks.

There are unit trusts that invest in specific countries or regions such as China, Australia, Vietnam, and the emerging markets such as BRIC (Brazil, Russia, India and China). These funds are prone to country risks such as political risk and financial events in the country. Investors have to be aware of the volatility of foreign stocks and bonds. Regional and country-specific economic factors, such as tax and interest rate policies, also contribute to the directional change of the market and thus volatility.

Investors of a commodity fund would normally look at demand and supply conditions to access the outlook for the commodity market. In 2008, the rally in commodity prices was partly due to growing demand from energy-hungry China and other emerging countries. However, a sharp increase in speculative demand among hedge funds for selected commodities helped to drive up these commodity prices to record levels that were out of line with their fundamentals.

Following the financial crisis, hedge funds were scrutinised for their role in the speculation. Meanwhile, global demand of commodities is expected to increase in line with the economic recovery but there is no guarantee that the hedge funds will not return and create speculative demand.

In response to the financial crisis, central banks around the world have slashed interest rates to record lows to spur economic growth. However, selected regional central banks had started raising interest rates in the first half of 2010 to curb potential inflation as economic conditions improve.

In conclusion, unit trust investors can apply the ringgit-cost averaging method in a volatile market environment. This strategy would effectively reduce volatility risks as it does not time the market. Ringgit-cost averaging is most suitable for long-term investors as it requires investors to stay invested regardless of the market’s direction. For investors with higher risk appetite, they would need to understand specific factors that affect volatility in different asset classes and geographical areas and select their funds accordingly.


www.publicmutual.com.my

http://www.publicmutual.com.my/LinkClick.aspx?fileticket=KIgoaupKUnU%3d&tabid=86

Stock Selling Strategies: The Buy and Hold Strategy

Stock Selling Strategies
The Buy and Hold Strategy

The selling strategy of what is commonly called the buy and hold approach to investing can be expressed in one word - don't! And the arguments in its favour are strong ones. For one, it has a solid record of success. Such famous names as Warren Buffett and John Templeton made their fortunes with it.

Or consider the remarkable case of Anne Scheiber. She represents, not only the superb returns that can be enjoyed from a skillful buy and hold strategy, but also the pluck to jump back in the game after losing everything.

In 1933 and 1934, at the height of the depression, 38 year old Anne invested most of her life savings in the stock market. She let her broker brother make the picks and they were good ones. Unfortunately, his company went bankrupt and she lost everything. But Anne did not give up.

On her modest salary as an auditor for the Internal Revenue Service (just over $3000 a year), she managed to save another $5000 over the next ten years. In 1944 she invested in the stock market again. When she died in January 1995 at the age of 101, that modest investment had grown to $20 million. That's not a misprint. $20 million! That represents an annual compounded rate of return of 17.5%, ranking her among the top investors of all time.

Her secret? Miss Scheiber invested in stocks of companies that she knew and understood. Companies whose products she used. She loved the movies. So she invested in Loew's, Columbia, Paramount and Capital Cities Broadcasting. She drank Coke and Pepsi and bought shares in both. She invested in the companies that made medications she took - Schering Plough and Bristol Myers Squibb. And so on. And she hung on to them through thick and thin for over forty years. Through the bear market of 1973-1974. Through the crash of 1987.

Miss Scheiber left virtually the entire fortune to New York's Yeshiva University. By the time the estate was settled in December of 1995, it had grown to $22 million. You'll find links to her story and to investing tips based on her approach after this article.

The Buy and Hold approach to investing focuses on the buying, not the selling. The aim is to buy stock in companies that are solid and growing with long term potential. It focuses on the underlying value of the stock.

The approach is often considered synonymous with value investing. It ignores the stock market, the general economic climate, and prevailing sentiment.

Warren Buffett, considered by many to be the greatest investor of all time, has said that he pays no attention to the stock market, and in fact, would not mind if the market shut down for a few years. He buys stock in a company as if he was buying the entire company. It's the value of the company that interests him, not the value assigned to it by the market. He wants companies that generate consistently growing profits.

Value investors tend to focus on buying undervalued stocks. And value investing is not completely averse to selling a stock, though the preference is to hold. As the Templeton Fund puts at their website, "Templeton buys stocks with the intent to hold them until they reach their "fair" value-- typically five years."

Buy and hold investors do sell when the fundamentals of a company change or when a stock becomes so grossly over-valued by the market that it would be foolish not to take profits. But in general, short term market fluctuations are ignored.

Downside to Buy and Hold

Of course, while buy and hold investing has definite advantages, there is a downside.

There have been major bear markets in the past and such markets tend to drag down all stocks, even those of good companies. If such risks can be minimized, wouldn't it be worth it?

The question is, can it? In the June 19, 2000 issue of the Hulbert Financial Digest, Mark Hulbert points out that there are newsletters who have been able to minimize investor losses during severe market corrections. Five in particular stand out. These five market timers were able to keep their readers' losses to one or two percent during each of the last five major market corrections since August 1987 (while the Wilshire 5000 averaged a 15% loss and the NASDAQ Composite lost 20%).

But...and here's the rub - those five newsletters failed to capture the tremendous gains made during the up cycles. Their average returns for the entire period from August 31, 1987 to May 31, 2000 ranged from 2.3% to 7.2% while the Wilshire averaged 14.3% and the NASDAQ 17.1%. Safety comes at a serious price!

In fact, Buy and Holders disparage the notion of market timing. It is folly, they say. And a pamphlet from the Templeton Fund in 1997 demonstrates that better than anything. Follow the link below for a summary.

The Folly of Market Timing

Summary of Advantages and Disadvantages
of the Buy and Hold Strategy

Advantages	Disadvantages
Don't have to worry about the market.	Doesn't protect against bear markets and corrections.
Don't have to worry about the economy.	Stocks should be extensively researched and carefully chosen.
Don't have to pay attention to short term fluctuations.	Long term strategy.
Easy to manage portfolio.	No quick short term profits.
Ideally, don't have to sell at all.
Notable success stories and history.

http://breakoutreport.com/investingcanada/library/weekly/2000a/aa062900.htm

QUICKIES: Seven investment myths you should not fall for

Text: Prerna Katiyar | ET Bureau

Pick this stock, it's trading at 52-week low.' 'That stock is a multi-bagger, trading at such a low PE.' 'Penny stocks make fortunes while stocks trading below book value are a sure pick for making quick bucks.'

Haven't we all heard such statements at some point in our lives? If you are one of those who believe in such assertions, read on. For, these are among the many myths in investing.



Here we list seven of them


Myth No 1: Stocks trading below book value are cheap

Book value (BV) is the actual worth of a stock as in a company's books/balance sheet, or the cost of an asset minus accumulated depreciation.

BV depends more on historical cost and depreciation and often has little correlation to the current share price.

Shares of industries that are capital intensive trade at lower price/ book ratios, as they generate lower earnings. On the other hand, those business models that have more human capital will fetch higher earnings and will trade at higher price/book ratios.

"Price/book (ratio) of below 1 may be cheap but one should see other aspects such as earnings forecast, guidance, management and debt on the books of the company ," says Angel Broking's equity derivatives head Siddarth Bhamre.


Myth No 2: Stocks trading at low P/E are under-valued

Price to earning ratio (P/E) is one of the most talked about ratios in the market. This is based on the theory that stocks with low P/Es are cheap.

However, P/E alone doesn't tell much about the stock price. P/E multiples may be a quick way to value a stock but one should look at this in correlation with expected growth earnings, the risk factors involved, company's performance and growth potential .

"This is surely a myth. It is also an indication of uncertain future earning of the stock concerned," says Birla Sunlife Mutual Fund CEO A Balasubramanian.

The idea behind dividing price with earnings is to create a levelplaying field where some kind of comparison can be made between high- and low-priced stocks.

Since P/E ratios vary across sectors, with growth stocks consistently trading at higher P/E, one can only compare the P/E ratio of a stock to the average P/E ratio of stocks in that sector.


Myth No. 3: Penny stocks make good fortunes

Penny stocks by nature are lowpriced , speculative and risky because of their limited liquidity, following and disclosure.

If it's easy to invest in penny stocks - as here you shell out much less money per share than you would require for a blue-chip firm - it's also easy to lose.

Says Bhamre, "Fortune can be made by high-denomination stocks also. Denomination has nothing to do with the rationale for picking a stock. Generally , retail investors are fond of stocks that are at sub- Rs 100 levels. But there may be stocks that may be trading in Rs 1,000-plus price but may well be cheap. Clarity on earnings is more important here. Anytime, I would be more comfortable buying an ICICI Bank (currently trading at Rs 1,038) than an IFCI at Rs 45. One should look at earnings visibility."


Myth No. 4: The worst is over in the stock market

Timing the market, a common strategy among investors, means forecasting and that should best be left to astrologers and tarot readers.

If one has done one's valuation studies, one shouldn't worry about timing the market. No one had predicted the bull run would take the Sensex from a level of 10,000 in February 2006 to over 21,000 in January 2008 - just as no one had any idea of the following crash, which saw the same index plummeting to 9,000 in March 2009.

"Timing the market is more of a gut feeling. It's more on the basis of perception, as there is no such thing (that the worst is over) when the future is uncertain. One can never surely time the market. The worst is over is more of a probability than a certainty. Timing the market is very difficult as market is driven not just by earnings but also by sentiments ," says Balasubramanian.


Myth No 5: Stocks that give high dividends are the best bet

This comes from the notion that regular dividends are extra income in the shareholder's hand. This may not always be true.

While a company may be making decent payouts every year, the share price appreciation may not be comparatively high. Before investing in companies paying high dividends, it's important to analyse if the company is reinvesting enough profit to grow its earnings consistently.

Says Brics Securities' research VP Sonam Udasi: "It's not dividend that matters but the yield. For eg, a company may pay a 100% or even a 300% dividend on a stock with face value of Rs 10.

So, the investor may receive Rs 10 or Rs 30 per share when the stock may be currently trading at Rs 800 or Rs 1000. This would translate into an yield of 1% or 3% only. Also, such companies may not necessarily be reinvesting their earnings in the business to generate future earnings and so there may be no stock movement. The dividend may be high but the EPS and growth per se may be constant."



Myth N0 6: Index stocks are the best stocks

If this was true, most investors would safely park their money in such stocks in anticipation of maximum profit without looking out for other value stocks.

Most indices are a collection of stocks with the highest market cap. Take, for eg, the Sensex.

Companies that make up the index are some of the largest, with stocks that are highly traded based on their free-float.

"Index stocks may not necessarily be the best stocks as they are mostly based on market-cap or free-float of the company and not earnings. This doesn't mean that all stocks of the Sensex are highearning stocks. One must take a stock-by-stock call," says Balasubramanian of Birla Sun Life Mutual Fund.

The stock price of a company depends on its earnings. One can find high-earning stocks outside the key indices as well, he says. The risk is certainly less with index stocks as they are well researched and leaders in their respective sectors, but, again, the margins may not be very high. So it's better to keep your eyes open to other stocks, too.



Myth No 7: Stocks trading at 52-week low are cheap

Says Udasi: "There may be a time in the economic cycle when a blue-chip stock may hit a 52-week low.

But the first thing that should come to one's mind is why did the stock hit the 52-week low.

There must be something fundamentally wrong with the stock if it has hit a 52-week low, and chances are they may hit a new 52-week low.

52-week low in itself guarantees nothing. If at all one is picking stocks at 52-week lows, they should have a long-term horizon so that when the economic cycle turns, the stock is able to recover."

Needless to say, quality matters most while buying any stock.


http://economictimes.indiatimes.com/seven-investment-myths-you-should-not-fall-for/quickiearticleshow/9438662.cms

44% of people plan to never invest again

JUNE 6, 2011 · 

A recent survey shows that 44% of people plan to never invest money in the stock market again.

“Prudential, which polled more than 1,000 investors between the ages of 35 and 70 online earlier this year, found that 58% of those surveyed have lost faith in the stock market. Even more alarming, 44% said they plan to never invest in stocks. Ever.”

Think about that for a minute.

That decision is not the well-reasoned response of someone who has carefully evaluated the risk and reward ratio of investing.

It is an emotional response born out of fear (“I don’t want to lose my money!!!”) and ignorance (“this stock market is a crock!”).

Here are a few notes to consider:

• Perhaps the worst financial move you could make would be to withdraw from the stock market. These are some of the same people who will complain about money their entire lives, never stopping to realize that their own behavior — decades prior — caused their financial situation
• If you’re truly risk-averse, you have other options to mitigate risk, such as investing in lower-risk investments or changing your contribution rates. However, this assumes you are rational and will “understand” the options. The truth, of course, is that discontinuing investments is anything but rational.
• I don’t only blame these people, by the way. Although we are responsible for our own actions, the financial education in this country has failed us.
• Ironically, as the Wall Street Journal notes, “It looks as though many of the retail investors now getting back into stocks are the same people who bailed from the market just before the start of a historic bull run.” What’s the takeaway? You will never be able to time the market accurately over the long term. This is where some crackpot commenter will say, “DUH RAMIT, I SAW THE HOUSING CRASH COMING A MILE AWAY AND PUT ALL MY MONEY IN RED BRICKS!! NOW IT’S SAFE!! HA HA AHAAHAHA.” You may get lucky with timing once. But eventually, you will lose
• If you’re in your 20′s and 30′s, your time horizon allows you to withstand temporary downturns and still come out ahead by retirement age
• The idea that “I don’t want to lose my money” ignores the fact that by not investing, you will also lose money — it will just be an invisible loss that will only be realized decades later
• Older people who lost everything in the stock market should never have been in that position — their asset allocation failed them
• The investment strategy for the vast majority of individual investors should be passive, buy-and-hold investing. There’s no need to obsessively monitor investments or day-trade. I check my investments every 6-12 months as I have better things to do than micro-monitor these numbers.
• Target-date funds make sure your asset allocation is always age-appropriate with little/no effort from you. It is one of the finest automation strategies in life.

If you’re curious how to set up an automatic investing plan — including which investing accounts I use and how I chose my asset allocation — pick up a copy of my book. Here’s the print version and Kindle version.

Results from the book:

“Thanks for the advice. Have been able to build 25k in a roth, 7k in a 401k, automate all my finances and live a bliss life thanks to your book.”
–Adrian S.

“Since I bought your book, I’ve cleared five thousand in credit card debt and twenty thousand in student loans. I’m maxing out my roth and my 401k, have a savings plan and negotiated my way into six figures.”
–Nicholas C.

“After buying your book, my personal finances have changed completely…all of my credit cards (which I pay off in full each month) are completely automated. I also rolled both 401ks into a Vanguard IRA.  Yesterday, I was able to put enough money into the IRA to max it out for the year 2010…something I didn’t think I’d be able to do for a few years.  I’m setting up an autopayment plan to put my 2011 IRA payments on cruise control.”
–Steve K.

http://www.iwillteachyoutoberich.com/blog/44-of-people-plan-to-never-invest-again/

Think You Can Time the Market? (Conclusion)

Jul-6-2011

Think You Can Time the Market? (Conclusion)

Past performance is no guarantee of future results

On a recent episode of Matson Money Live, we discussed a very important segment of the difficulties of market timing and why it isn’t a right for any investor to try. We even dusted off some deleted scenes from the Navigating the Fog of Investing movie from Dr. Lyman Ott.


http://www.matsonmoneylive.com/?p=2923

Nobody Ever Calls It Market Timing! (video)

http://www.matsonmoneylive.com/index.php?paged=2

Aug-26-2011

Nobody Ever Calls It Market Timing!

The lure of market timing is strong, appealing to our instinctive nature to move toward that which helps our survival and away from painful market conditions.

(Episode 111, Part 3)

Temperament of an investor: Timing or Pricing

Stock prices rise and fall, so it is human nature to look for a way to profit from such volatility.

There are two possible ways to do so:

1.  Timing:  To anticipate the rise and fall of the market and of the prices of individual stocks.  To buy or hold when they are expected to rise, and to sell or refrain from buying when they appear to be heading down.

2.  Pricing:  To buy stocks that are priced by the market below their fair value of the underlying business and to sell, or refrain from buying when they are priced above fair value.

Benjamin Graham was convinced that an intelligent investor could profit from focusing on pricing.  He was equally convinced that anyone with their emphasis on timing, in the sense of believing their own (or others') forecasts, would end up as a speculator and be doomed to poor financial results over time.

Despite the wisdom of such convictions, Graham also understood most would not listen.  "As  a matter of business practice, or perhaps of thoroughgoing conviction, the stock brokers and the investment services seem wedded to the principle that both investors and speculators in common stocks should devote careful attention to market forecasts."

Four ways investors go wrong

If you are one of those people who suffered heavy losses over the past decade, it was most likely due to one of the following four reasons:

1. Bad market timing. I fear that too often investors attempt to time the markets, which is extremely difficult even for professional money managers.

As I have pointed out many times over the years, it is one thing to identify trends but quite another to pinpoint when they will result in major market turns. Sometimes, the time lag can be many months or even years. Being on the wrong side of the market during that period can prove to be very costly.

2. Aggressive asset allocation. Although it has been repeatedly proven to be the most important single factor in investment performance, many investors fail to use the principles of asset allocation in constructing their portfolios. This frequently results in a higher level of risk than is appropriate [because investors tend to] overweight stocks and/or equity mutual funds and underweight fixed-income securities.

I have seen many cases where people in their sixties and seventies had equity weightings of more than 75% and then were stunned when they lost a lot of money in the market bust of 2008 and 2009. For most people, a disciplined asset-allocation approach is the first step to successful investing.

3. Flawed advice. I just read another study purporting to show that Canadians who use financial advisors are better off than those who don't. This one came from the Investment Funds Institute of Canada (IFIC), most of whose products are sold by advisors.

[According to the report,] households with an advisor had 68 per cent of their money in "market-sensitive" securities (equities and mutual funds) and 32% in "conservative" vehicles (term deposits, savings accounts, bonds).

Those who did not use an advisor were split almost equally—51 per cent market-sensitive to 49 per cent conservative. I suspect that a similar U.S. study would produce comparable results.

Financial advisors, like all other professionals, aren't perfect. Sometimes the guidance they offer simply isn’t appropriate, either because it is inconsistent with a person's objectives and risk tolerance or because it is motivated at least in part by commissions. So, it is always a good idea to ask questions and be sure you understand exactly what you're buying before taking the plunge.

4. Pure speculation. Some people like to gamble, pure and simple. I have always said that the place for that is a casino, not the stock market, but there are investors who can't resist. Occasionally, they make a big score. More often, they lose their stake.

Successful long-term investing requires patience and discipline. That may not seem exciting, but it will pay off over time and you won't end up sending me e-mails bemoaning your losses.

Gordon Pape is editor of the Canada Report.

http://www.theglobeandmail.com/globe-investor/investment-ideas/four-ways-investors-go-wrong/article1730868/

You've Sold Your Stocks. Now What?

We have just been through a severe market downturn in 2008.  Many market players and investors cashed out of their equity portfolio when the market was going down relentlessly.   Having cashed out, what did they do with their cash?  Did they park it in another asset or remain in cash or its equivalent?  Did they re-invest into equity when the market was lower or when the market started to turn?

Timing the market is difficult.  To profit from this strategy, you need to buy (or sell) at the "right time" and to sell (or buy) at the "right time" of a particular stock.  On what criteria do you determine when is the right time?  A profitable trade in a particular stock requires the "timing" of these two actions to be "correct".   Let us assume that you are "very good" at timing the market and that each time you buy or sell, you have a high probability of being right 80% of the time. Even with this high probability, the chance of your transaction being profitable for any particular stock is at best only slightly above that of flipping a coin (that is, 80% x 80% = 64%).

In fact, Benjamin Graham has written on this in his classic book, The Intelligent Investor.  His suggestion is to abandon timing and to focus on pricing.  Buy and sell based on price (valuation).  This advice sounds more logical and intelligent too.  Those who grasp this concept would have profited hugely.

----

You've Sold Your Stocks. Now What?

Friday, March 13, 2009


Back in the summer of 2007, Ben Mickus, a New York architect, had a bad feeling. He and his wife, Taryn, had invested in the stock market and had done well, but now that they had reached their goal of about $200,000 for a down payment on a house, Mr. Mickus was unsettled. “Things had been very erratic, and there had been a lot of press about the market becoming more chaotic,” he said.

In October of that year they sat down for a serious talk. Ms. Mickus had once lost a lot of money in the tech bubble, and the prospect of losing their down payment made Mr. Mickus nervous. “I wanted to pull everything out then; Taryn wanted to keep it all in,” he said. They compromised, cashing in 60 percent of their stocks that fall — just before the Dow began its slide.

A couple of months later, with the market still falling, Ms. Mickus was convinced that her husband was right, and they sold the remainder of their stocks. Their down payment was almost completely preserved. Ms. Mickus said that in private they had “been feeling pretty smug about it.”

“Now our quandary is, what do we do going forward?” Ms. Mickus said.

Having $200,000 in cash is a problem many people would like to have. But there is yet another worry: it’s no use taking money out of the market at the right time unless it is put back in at the right time. So to get the most from their move, the Mickuses will have to be right twice.

“Market timing requires two smart moves,” said Bruce R. Barton, a financial planner in San Jose, Calif. “Getting out ahead of a drop. And getting back in before the recovery.”



It’s a challenge many investors face, judging from the amount of cash on the sidelines. According to Fidelity Investments, in September 2007 money market accounts made up 15 percent of stock market capitalization in the United States. By December 2008, it was 40 percent.

“In 2008 people took money out of equities and took money out of bond funds,” said Steven Kaplan, a professor at the Booth School of Business at the University of Chicago.

He cited figures showing that in 2007 investors put $93 billion into equity funds. By contrast, in 2008 they took out $230 billion.

Michael Roden, a consultant to the Department of Defense from the Leesburg, Va., area, joined the ranks of the cash rich after a sense of déjà vu washed over him in August 2007, as the markets continued their steep climb. “I had taken quite a bath when the tech bubble burst,” he said. “I would never let that happen again.”

With his 2002 drubbing in mind, he started with some profit taking in the summer of 2007, but as the market turned he kept liquidating his investments in an orderly retreat. But he was not quite fast enough.

“When Bear Stearns went under I realized something was seriously wrong,” he said. The market was still in the 12,000 range at that time. When the Federal Reserve announced it would back Bear Stearns in March 2008, there was a brief market rebound. “I used that rally to get everything else out,” he said.

Mr. Roden said he had taken a 6 percent loss by not liquidating sooner, which still put him ahead of the current total market loss. Now he has about $130,000, with about 10 percent in gold mutual funds, 25 percent in foreign cash funds and the rest in a money market account.

“I am looking for parts of the economy where business is not impaired by the credit crunch or changes in consumer behavior,” he said. He is cautiously watching the energy markets, he said, but his chief strategy is “just trying not to lose money.”

As chief financial officer of Dewberry Capital in Atlanta, a real estate firm managing two million square feet of offices, stores and apartments, Steve Cesinger witnessed the financial collapse up close. Yet it was just a gut feeling that led him to cash out not only 95 percent of his personal equities, but also those of his firm in April 2007.

“I spent a lot of time trying to figure out what was happening in the financial industry, and I came to the conclusion that people weren’t fessing up,” he said. “In fact, they were going the other way.”

Now, he said, “We have cash on our statement, and it’s hard to know what to do with it.”

Having suffered through a real estate market crash in Los Angeles in the early 1990s, Mr. Cesinger is cautious to the point of re-examining the banks where he deposits his cash. “Basically, I’m making sure it’s somewhere it won’t disappear,” he said.

The F.D.I.C. assurance doesn’t give him “a lot of warm and fuzzy,” Mr. Cesinger said. “My recollection is, if the institution goes down, it can take you a while to get your money out. It doesn’t help to know you’ll get it one day if you have to pay your mortgage today.”

His plan is to re-enter the market when it looks safe. Very safe. “I would rather miss the brief rally, be late to the party and be happy with not a 30 percent return, but a bankable 10 percent return,” he said.

Not everyone is satisfied just to stem losses. John Branch, a business consultant in Los Angeles, said his accounts were up 100 percent from short-selling — essentially betting against recovery. “The real killer was, I missed the last leg down on this thing,” Mr. Branch said. “If I hadn’t missed it, I would be up 240 percent.”

Mr. Branch said he had seen signs of a bubble in the summer of 2007 and liquidated his stocks, leaving him with cash well into six figures. Then he waited for his chance to begin shorting. The Dow was overvalued, he said, and ripe for a fall.

Shorting is a risky strategy, which Mr. Branch readily admits. He said he had tried to limit risk by trading rather than investing. He rises at 4:30 a.m., puts his money in the market and sets up his electronic trading so a stock will automatically sell if it falls by one-half of 1 percent. “If it turns against me, I am out quickly,” he said. By 8, he is off to his regular job.

Because Mr. Branch switches his trades daily based on which stocks are changing the fastest, he cannot say in advance where he will put his money.

And if he did know, he’d rather not tell. “I hate giving people financial advice,” he said. “If they make money they might say thank you; if they miss the next run-up, they hate you.”

http://finance.yahoo.com/focus-retirement/article/106735/You

How to Time The Market

COMMON SENSE
SEPTEMBER 25, 2010
How to Time The Market

By JAMES B. STEWART

Is the stock market losing its predictive powers?

We know the market anticipates economic activity, which is why it is pointless to buy stocks only after good news has been published. Stock prices are one of the leading economic indicators. The rule of thumb has always been that stocks anticipate the broad economy by about six months.

But now that it is official, and we know from the National Bureau of Economic Research that the Great Recession began in December 2007 and ended in June 2009, the market's crystal ball is looking a little cloudy.

The Standard & Poor's 500-stock index peaked at 1565 in October 2007. By Nov. 23 it had dropped nearly 8%, a painful fall but not the bear-market drop of 20% or more that traditionally signals a recession. As the recession actually started, the market actually rallied, with the S&P reaching 1427 in May 2008. The market gave investors little or no warning of the grave crisis to come.

The S&P hit a bottom of 677 in March 2009, less than three months before the recession ended, and rose a sharp 30% by May. That was a pretty clear signal, although the forecast came three months late.

Given that it reflects the collective wisdom of millions of investors, the market may be the best prognosticator we have. But it's just not good enough. These recent results reinforce my belief—and a fundamental premise of this column—that no one can predict the future. It is not only futile but counterproductive to invest based on our feelings about where the market is headed next. Sadly, for most investors that approach leads to buying high and selling low, which is anathema to the Common Sense system.

I believe in a disciplined approach to personal investing that minimizes emotions in decision-making, respects the past, which is knowable, and never tries to predict the future, which is not. I share my decisions in this column and the results are on display for all to see.

By following the Common Sense system, I never buy stocks at a market peak, and I never sell at a bottom. Like all investors, my aim is to buy lower and sell higher. I don't claim to have perfect timing. No one can identify markets tops and bottoms with any consistency. But my goal is to earn a profit, and over the long term, beat the market averages. So far it's worked. (A hypothetical portfolio using the strategy would have outperformed the S&P 500 even during the most volatile stretch of the financial crisis.)

The Common Sense system is also simple to execute. It requires no computers or high-speed trading capacity. Indeed, it doesn't require much trading at all, which is why you won't find a stock tip in this column every week. It's designed for average investors, not professionals.

I am a working journalist, not a stockbroker or hedge-fund manager. But I firmly believe anyone can manage their own investment portfolios and outperform a simple buy-and-hold index approach.

Here is how the system works: When the market is dropping, I buy stocks at intervals of 10% declines from the most recent peak. When it is rising, I sell at intervals of 25% gains from the most recent low.


These figures are roughly one-half the historical average losses of 20% in bear markets and gains of 50% in bull markets since 1979. They are round numbers and the math is easy to do in your head.

I use the Nasdaq composite index as my benchmark, partly because I had mostly Nasdaq-listed stocks when I began the system, and also because the Nasdaq is a little more volatile than the S&P 500 or Dow Jones Industrials, which provides more trading opportunities. Investors who want to buy and sell a little less often might prefer another index, but the Nasdaq has worked well for me.

I always alert readers when a new threshold is reached and share my decision to buy or sell. The current targets are about 2025 and 2600, respectively.

Easy as this system sounds—and it is simple in concept—it is amazing how it difficult it sometimes feels. I remember vividly being at a cocktail party in October 2008. Everyone was boasting about their recent decision to bail out of the stock market. When my turn came, and I said I had bought stocks that very morning, they looked at me like I was from Mars. The S&P 500 was trading at about 840 that day. On Friday, it closed at 1149.

Of course there is much more to this column than reacting to broad moves in the market averages. As a journalist, I am constantly translating news into investment strategies that I both implement myself and share with readers. My overall exposure to the market may be constant, but I often substitute stocks and sectors.

Most of all, I find investing and thinking about markets to be both stimulating and fun. It is an adventure and a learning experience as well as financially rewarding. I hope you will continue to share it with me.

—James B. Stewart, a columnist for SmartMoney magazine and SmartMoney.com, writes weekly about his personal-investing strategy. Unlike Dow Jones reporters, he may have positions in the stocks he writes about. For his past columns, see: www.smartmoney.com/commonsense.

http://online.wsj.com/article/SB10001424052748704062804575509811560989940.html?mod=WSJ_article_related