Market Timing: Taking advantage of the periodic bouts of market madness

The most important use of past information is to tell us when the market has moved too far out of line. 

By looking at the chart, you would have noticed that the price rises of 1972 or 1981 or 1987 (or 1993 or 1996 or 2007) were excessive and could not possibly be sustained.  If we were rational at that time, we should have liquidated our holding and got out of the market.  (wishful thinking!! worth a serious look into!!!)

Similarly, in 1975 or 1976/1978 or 1986 (or 1998 or 2008), by looking at the chart, we could have seen that the market had become very undervalued and we should have increased our holding, even if it meant that we had to borrow money to do so.  (shocking!!hmmm!!!)

For the rest of the time, we should buy individual shares as and when we believe they have become undervalued, keeping the chart in the background as a point of reference when we evaluate individual shares.  So long as the market as a whole is not too far above the trend line, we can purchase shares which are undervalued according to our computation.  Provided we are reasonably good in our valuation, the long-term improvement in the market should ensure that we make money over the long run.  (very sound advice indeed)

At times, the market may fall below or even well below the level at which we have made our purchases.  This should not worry us because we have based our purchases on good dividend yield and we do not need to sell.  Furthermore, we can take the opportunity to buy more shares and average down the prices of our investments. 

Occasionally, we may even stand to make a lot of money by selling out if our chart tells us that the market has gone mad, as it is prone to now and again. 

We are therefore practising a very defensive strategy, only buying if the shares are undervalued and quickly selling to take advantage of the periodic bouts of market madness when they occur.


Ref:   Stock Market Investment in Malaysia and Singapore by Neoh Soon Kean

Market timing: The relative position of a share's price to its own intrinsic value is of greater importance.

The market's movements are not perfectly reflected in the movement of the individual share. 

• Even during the sharpest decline, some of the shares hold their value very well. 
• During the bull run, some of the shares do not go anywhere. 
• At the same time, some shares magnify the movements of the market by two or three times, while others (mainly blue chips) only partially reflect the market movements. 
• Thus even if we get the market timing right, it is not possible to match exactly what is achieved by the market. 
• The relative position of a share's price to its own intrinsic value is of equal if not of greater importance. 

Market timing is more an art than a science. 

• There are some people who are highly gifted and are able to make good market timing decisions.  And yet precisely because market timing decisions only have to be made once every 5 years, it is critical that they are made in the correct way.  
• One wrong decision can either leave one out of the market for several years (i.e. after missing the start of a new bull run) or suffer heavy losses (i.e. missing the start of a new bear run).  
• There are few of us who can be like Warren Buffet who made two timing decisions in 15 years and both of them were nearly spot on. 
• We can never hope to be like Warren Buffett but we can use records of past market movements to help our investment decision making.

Market Timing is difficult

Some of you may be tempted to think that it is easy to carry out market timing.  They may think that all one has to do is to take an index chart and draw in the trend line, making purchases or sales whenever the market price gets too far from the trend. 

There are, however, two enormous difficultites in trying to make market timing decisions based on past prices.

1.  First, there is the problem of future changes in the companies' business and political environment.

• The world of business is never static.  There will always be changes, some small and some large to the environment which the companies operate in. 
• In order for the stock market to perform as well as it had done in the past, the country must continue to prosper and the political climate has to be stable.  How can we be sure that the future growth trend will be the same as in the past? 
• In order to be a good forecaster, one must have a very good knowledge of economics and political science.  This is hardly a qualification that is within the reach of laymen.  Even with such qualifications, forecasting can still be very difficult.  Professional economists and moneymen can make collective forecasting errors very frequently.

2.  Second, there is the problem of not knowing in advance how far will the market move above or below the trend. 

• As we have seen from past records, the distance the market moved from the trend had been irregular and unpredictable. 
• We can take the 1983, 1987, 1993, 1996 and 2007 booms as examples.  Many professional market-watchers, did not anticipate correctly the heights to which the market went. 
• Similarly, very few market-watchers anticipated the severe market declines of 1973, 1985, 1987, 1997, 2001 and 2008.

Market Timing

The fundamental approach to investment requires one to work out the intrinsic value of a share before its purchase. 

"Why don't we just wait until the whole market is low enough and then go in and buy a wide selection of shares?" 

This question suggests that one invests by means of "market timing". If practical, it will surely save us a lot of time and effort. 

• Is it possible to carry out consistently correct market timing? 
• How easy or difficult is the art of of market timing?

Good stock selection and timing works well in any stock market

The stock markets are very unpredictable.  It can collapse in the midst of prosperity just as it can zoom upwards in the midst of recession.  Some stock markets are often subjected to manipulations.  The small investors can lose a very large percentage of their capital if they invest blindly.  On the other hand, if the small investors can pick the correct stocks at the correct time, they can make a great deal of money.

Good stock selection and timing works well in any stock market, whether it is American, British or Malaysian.  However, good stock selection usually requires careful and meticulous work.  Some of the masters of the art take more time while others take less but they all have to work at it consistently.  The amount of work they need to put in would depend on how gifted they are.  Even the great Warren Buffett works onit on a full-time basis.

Many are very interested in buying shares as an investment.  However, many do not have the time or inclination to spend a few hours on it every day.  Even if they have the time and inclination, some may not have the necessary training to read company or economic reports and understand what has been written. 

It would be much easier for them if they can just pick up newspapers or magazines and follow their advice and recommendations.  Almost all newspapers have a columnist or two writing on business or stock market affairs.  In addition, there are business magazines which also carry regular features on the stock market and individual companies. 

However, experts are also not immune to making serious errors of judgement.  In the final analysis, investors will have to draw their conclusions regarding the usefulness of relying upon professional advice.

Ian Cowie: Try to time stock markets at your peril

Ian Cowie: Try to time stock markets at your peril
Anyone who acted on the old City adage – sell in May and stay away until St Leger's Day – should be feeling a bit foolish as the gee-gees run in the race of that name at Doncaster.

By Ian Cowie
Published: 1:21PM BST 11 Sep 2009

Never mind the first anniversary of the collapse of Lehman Brothers bank, which falls next Tuesday, marking the point at which the credit crunch turned into a global crisis. That sad event will be a good day for stock market bears to hold a picnic but the facts are already so well-rehearsed that they are the subject of a BBC TV drama.

No, from the viewpoint of an estimated 21m people in Britain who are aged over 50, next month's sharp increase in the maximum value of individual savings account (Isa) inputs is of potentially far greater significance. Unlike younger investors, these silver savers will be allowed to shelter 40pc more of their money in the Isa tax shelter from October 6.

While there is nothing we can do about the past, investment is one area where anyone who can afford to set something aside can have a go at influencing the future – at least for themselves and their families. Raising the maximum Isa investment from £7,200 to £10,200 per person will substantially boost savings placed beyond the grasp of HM Revenue and Customs (HMRC).

Unfortunately, many people are in no position to consider saving more in these difficult times. But, despite all the bad economic news, most people remain in work and many do not need to spend everything they earn.

The over-fifties are also the age group with most reason to save hard, now the end of their working careers is no longer unimaginably distant. It is estimated that nearly three quarters of investors who place the current maximum in Isas are aged over 50. If only half those in this age group invest half next month's increase in the Isa limit, that would mean an extra £16.5bn a year will be out of reach of HMRC.

Better still, the magic of compounding means the £3,000 extra that can be put in an Isa next month could be worth much more than that in years to come. For example, if the money grows at 5.5pc per annum net of charges – which is not unreasonable with long-term gross returns from shares at around 7pc a year, less annual charges of 1.5pc – then the extra £3,000 could be worth £5,124 after 10 years and £11,440 after 25.

Compounding works even better if you invest the extra £3,000 each year from now on. Again assuming 5.5pc per annum net returns, that would add £39,767 to the value of your Isas after 10 years and an eye-stretching £157,992 after a quarter of a century.

Against all that, many people may fear that this is hardly a good time to invest in shares, when the FTSE 100 has risen by more than 40pc from its low-point of 3,512 in March. They will include those who mocked long-term bulls like me, who pointed out how cheap shares were back then.

But the best summer rally since 1933, according to analysis by Deutsche Bank, is likely to have caused even the most thick-skinned bears to wind their necks in a bit. Anyone who acted on the old City adage – sell in May and stay away until St Leger's Day – should be feeling a bit foolish as the gee-gees run in the race of that name at Doncaster today.

Unfortunately, the summer's share price hikes do not diminish the awkward possibility that bears who were wrong in March may prove right today. Reasons to be fearful include the fact that the average price of FTSE shares are currently at nearly 16 times earnings, or more than double the price/earnings ratio of 7 in March.

So the sensible course of action for anyone who is going to lose sleep at night if the stock market falls – as it will, from time to time – is to stick to cash Isas, which are simply tax-free bank or building society accounts.

Those who are willing to accept higher risks in pursuit of higher rewards may take some comfort from the statistics which demonstrates that time in the market is more likely to generate profits than worrying too much about when you buy and sell. According to research by Fidelity International, £1,000 invested in the FTSE All-Share index continuously over the last 20 years would have rolled up into £4,325 by last month.

However, if you missed just the 10 best days during those two decades by not being invested when shares rose most, you would miss nearly half those gains to finish with a total return of £2,325. If you missed the two best days a year, you would have ended the two-decades a loser with only £775 to show for your original £1,000 stake.

With commendable understatement, Sanjeev Shah, manager of the Fidelity Special Situations Fund, observes: "It can be tempting during times of stock market uncertainty to delay making investment decisions or to sell existing holdings. Attempting to move in and out of the market can be a costly affair, though.

"In many cases, investors can often be better served by remaining fully invested during the entire period; enduring near-term pain but not missing out on the subsequent rebound.

"Today's low growth and low interest rate environment is good for equities. We have seen a strong rally since the low in March and while a correction of sorts is likely at some stage, I think the bull market will continue for some time and it is not too late to invest."

Yes, I know that cynics may say Mr Shah's analysis begs the Mandy Rice-Davies riposte: "He would say that, wouldn't he?"

But the figures – and this summer's extraordinary rally – demonstrate the difficulty of timing turning points in stock markets; not least because share prices tend to rise most sharply immediately after confidence hits a low-point. So, for investors with no faith in prophets, hanging on for the long term would appear to be the best way to buy a share of future profits.


http://www.telegraph.co.uk/finance/personalfinance/comment/iancowie/6168973/Ian-Cowie-Try-to-time-stock-markets-at-your-peril.html

Learn from the Worst: Market Timing - The Most Dangerous Game

Every day, millions of investors, try to discern where the market will head tomorrow, next week, or next month.

Market timing occurs when people move in and out of the stock market with the intent of taking advantage of anticipated short-term price movements.

Market timing can be

• as simple as you want it - maybe you've heard from a friend that the market is about to take off, so you invest in stocks - or
• as complex as you want it - perhaps you've developed an elaborate model that uses various economic indicators to predict which way the market will go in the next month.

Whatever way you go about it, though, it's not likely to end well, because the market is simply too complex and irrational in the short-term for anyone to correctly and reliably predict its movements.

Want proof that market timing doesn't work?

1. Research performed by Dalbar, Inc (in its 2007 Quantitative Analysis of Investor Behaviour): The firm notes that the S&P has grown an average of 11.8% per year from 1987 through 2006, an impressive gain. During this period, however, the average equity investor averaged a return of just 4.3%.

• The reason? As markets rise, the data shows that investors "pour cash" into mutual funds, and when a decline starts, a "selling frenzy" begins.
• In other words, the research shows that investors tend to do the opposite of the old stock market adage, "Buy low, sell high."

2. A few years ago, the investment research company Morningstar began tracking mutual fund performance in a new way. Normally, mutual fund returns are reported as though an investor remained invested in the fund throughout the full reporting period. A fund's three-year return, for example, is reported as the percentage increase or decrease an investor would have seen if he had been invested in the fund for the entire three previous years.

In a methodology paper ('Morningstar Investor Return'), Morningstar says it found that this "total return" percentage doesn't accurately portray how well investors in a particular fund really fare.

• The reason: While the "total return" percentage measures how a fund does over a specific period, people often don't stick with the fund for that entire period; instead, they jump in and out of it.
• And, according to Morningstar, the returns that the typical investor in a particular fund actually realizes (the "investor returns") tend to be lower than the fund's total return - implying that people pick the wrong times to jump in and out of the fund (or the market).

3. While investors themselves deserve some of the blame for this, mutual funds sometimes don't help. In its investor returns methodology paper, Morningstar states that if firms encourage short-term trading and trendy funds, or if they advertise short-term returns and promote high-risk funds, they may not be looking out for their investors' long-term interests.

• Their investors' actual returns will likely be lower than the fund's total return.
• (The fees mutual funds charge also don't help, something Bogle stresses; those costs make it so that the fund manager has to beat the market just for his client to net market-matching returns.)

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.

Predicting short-term market movements (Market Timing) will cost you money or opportunities

Any attempts to try to predict the direction of the stock market are called market timing. Academicians and professionals as a group agree that it cannot be done; in fact, it will cost you money or opportunities.

Fear, greed, and a basic human desire to think we can know or control our future all drive us to try to predict short-term market movements.

If you flip a coin ten times and it comes up heads ten times, that is random luck, not a 'system'. We know that over time it will be 50-50, heads and tails. Many who guess which way the market will move and guess correctly think they have a system and really can do it. Yet if you guess correctly and try to time the market a number of times in succession, it most likely that you will guess wrong at some point and more than wipe out your prior gains and be well behind (see the Long-Term Capital Management story). This is also evident from reading academic studies on the subject and from observing what has happened in the markets over the decades.

Therefore, avoid timing the market. How then to resist the temptations posed by events or rapid market moves?

First, and most important, is to have buy and sell disciplines, and right after that, a proper time horizon. Emotions are an important step, for as soon as you feel the pull of fear in a down market or a down stock, you know that you do not have enough knowledge to know what to do. Knowledge, disciplines, and your buy and sell disciplines can be called upon to resist emotion-driven timing.

Computers and sophisticated software programs for determining weather changes or changes in the direction of the stock market have been developed and refined over the last two decades. But computer software cannot properly account for all of the linked factors that influences weather changes or market changes.

Mistakes to Avoid - Trying to Time the Market

Trying to Time the Market

Market timing is one of the all-time great myths of investing.

There is no strategy that consistenly tells you when to be in the market and when to be out of it, and anyone who says otherwise usually has a market-timing service to sell you.

Consider an interesting study in the February 2001 issue of Financial Analysts Journal, which looked at the difference between buy-and-hold and market-timing strategies from 1926 through 1999 using a very elegant method.

They compared the results of a buy-and-hold strategy with all of the possible market-timing strategies to see what percentage of the timing combinations produced a return greater than simply buying and holding.

The answer? About one-third of the possible monthly market-timing combinations beat the buy-and-hold strategy. You may be thinking, "I have a 33% chance of beating the market if I try to time it. I'll take those odds!" But before you run out and subscribe to some timing service, consider three issues:

1. The results in the paper cited previously OVERSTATE the benefits of timing because they looked at each year as a discrete period - which means they ignore the benefits of compounding (as long as you assume that the market will generally rise over long periods of time, that is).

2. Stock market returns are highly skewed - that is, the bulk of the returns (positve and negative) from any given year comes from relatively few days in that year. This means that the risk of NOT being in the market is high for anyone looking to build wealth over a long period of time.

3. Not a single one of the thousands of funds Morningstar has tracked over the past two decades has been able to consistently time the market. Sure, some funds have made the occasional great call, but none have posted any kind of superior track record by jumping frequently in and out of the market based on the signals generated by the quantitative model.

That's pretty powerful evidence that market timing is not a viable strategy because running a mutual fund is a very profitable business - if someone had figured out a way to reliably time the market, you can bet your life they'd have started a fund to do so.

Ref: Richard J. Bauer Jr. and Julie R. Dahlquist, "Market Timing and Roulette Wheels," Financial Analysts Journal, 57(1), pp. 28-40

Time In the Market and Timing the Market

Time In The Market:

I believe time in the market, with proper asset allocation, is preferable to "timing the market," which is a fool's game. In my view, time in the market refers to:

• investing early,
• investing often, and
• staying in for the long-term.

Albert Einstein called compounding interest "the most powerful force in the universe" and it represents "time in the market" at its best.

Here's a classic example: Which would you rather have -- $1million today or one penny doubled every day for one month? If you chose the penny doubled then you are the "winner" with $5,368,709.12. Time exponentially expands the compounding effect. With less time to invest, even the most skilled traders will find themselves at an enormous disadvantage to compounding interest...

Timing the Market / Investment Outcome:

Since "timing the market" is intended to control the "investment outcome," I combine them into the same points: As for timing the market, of course it is a "controllable" investing variable and it is possible to accomplish successfully but how prudent can it be to attempt when the vast majority of investors are not successful at doing it?

Where investors are commonly misled here is with their own perception of investment gains and "chasing performance."

For example, if you invest $100,000 into a stock and it returns 30% in the first year and loses 10% in the second, is your average return 20 percent? No. After the first year, you'll have $130,000 and after the second, you'll have $117,000 for a total gain of 17% (or roughly 8.5% compounded). If you just earned an "average" 10% per year, you'd have $121,000 at the end of year two.

Now consider that you were the "average" investor and your "friend" earned 30% in the first year. Are you going to hold to your allocation earning "just" 10% or will you be tempted to jump to your friend's "strategy?" Being "average" has its merits...

While anyone can throw darts at a wall and beat the markets over a short period of time, the markets are too efficient to outperform consistently over longer periods time. Investors should not use stocks as short-term investment vehicles, anyway, and any person calling themselves a "financial philosopher" would not partake in such pursuits.

In summary, investing should be a means of making money work for you not a means of making you work for it. As author, Mitch Anthony, puts it, "life is not about making money, money is about making a life."

Now get on with your life...

You may see this blog post and others like it at the Carnival of Financial Planning.

Source:
http://financialphilosopher.typepad.com/thefinancialphilosopher/2007/06/asset-allocatio.html

Is now the time to bail out?

Is now the time to bail out?
A volatile market isn't necessarily a bad market. But selling when stocks are down is usually a bad idea.

By the Mole, Money Magazine's undercover financial planner

October 29, 2008: 5:47 AM ET

NEW YORK (Money) -- Question: I know market timing is a loser's game. However, I do think there is abundant evidence that the next 12-18 months are going to be very difficult for equities. Do you see any merit in trimming some equity holdings, parking the proceeds in short-term bonds or cash, and committing to immediately dollar-cost averaging back into the market on a monthly fixed schedule?

The Mole's Answer: Your question is a very sophisticated way of asking whether you should bail from the market right now. While I don't know your total situation, I can tell you that selling after equities are down by 40% is usually a bad thing.

First of all, I wholeheartedly agree with your statement that market timing is a loser's game. Many studies have shown the systematically bad job that individual investors do of timing the market.

We are constantly testing the market winds. When conditions are favorable, we increase our exposure. When conditions become so far from favorable that they're in another zip code, such as what we're currently experiencing, we decrease our exposure.

Unfortunately, we tend to do both of these things after the fact. Truth be told, we all want stock returns during bull markets and money market returns in bear markets. But as much as we may want them, no one really knows exactly how to get them, since we can't predict when bear markets and bull markets are beginning or ending.

Second, when you state that the next 12-18 months are likely to be "difficult" for equities, I'm not sure I agree with you. If by "difficult," you mean volatile, then you are probably right.

The last few weeks in the stock market has set all sorts of records for volatility. Emotions are running wild and there is a likelihood that this volatility will not end anytime soon.

But I would not agree that this translates into a bad period for the stock market. Primarily because the stock market is a better buy today than it was last year. In fact, I can quantify it by saying it's a 40% better value.

Which begs the question, why wasn't I getting as many inquiries about selling last year when the market was hitting new highs?

But that's a rhetorical question - the answer is that we humans have a tendency to predict the future based on the recent past.

This "recency bias," as it's known in the financial planning world, has us thinking inside the box of current events. If the market is thriving, as it was between 2003 and 2007, then we believe it will always be thriving. And in times like these when the sustained market dive is giving us all nose bleeds, we believe we'll never pull out of it.

Onto your question of whether you should sell now with a commitment to buy back in with periodic purchases, also known as dollar-cost averaging. As sophisticated and well thought out as this sounds, it still means selling your equities after they are down by 40%, and still equals market timing.

A better time to consider selling would have been last year after equities had more than doubled.

I can't tell you how the stock market will perform over the next 12 -18 months. No one can. It may very well turn out to be the right thing to do but the odds are very much against you.

Studies actually quantify that we pay an average penalty of 1.5% annually for timing the stock market and chasing the hot performers. Many of us come up with all sorts of rationale for doing what we're doing, but it ultimately just results in outsmarting ourselves.

The fact that you say you will commit to buying back periodically is a bit confusing. I'm glad you realize the market doesn't signal to us that we have hit bottom and that now is the time to buy, but it also hasn't sent you a signal that now is the time to sell.

Systematic rebalancing would have had you selling some of your stocks between 2002 and 2007, as they were skyrocketing. Now is probably when you should be buying.

My advice: Find an asset allocation that is right for you and stick to it. Try to rebalance in times like these, which actually means buying more stocks. Remember that investing during a rough economy can be the right thing to do. If someone tells you that you can have the upside of the market without the risk, don't believe them.

The Mole is a certified financial planner and certified public accountant who - in the interest of fairness - thinks you should know what goes on behind the scenes in financial planning. Want to make contact? E-mail him at http://money.cnn.com/2008/10/28/pf/Ask_the_mole.moneymag/mailto:themole@moneymail.com. Send feedback to Money Magazine



Find this article at: http://money.cnn.com/2008/10/28/pf/Ask_the_mole.moneymag/index.htm

Market Fluctuations as a Guide to Investment Decisions

What does the past record promises the investor - in either:

• the form of long-term appreciation of a portfolio held relatively unchanged through successive rises and declines, or,
• in the possibilities of buying near bear-market lows and selling not too far below bull-market highs.

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 endeavor 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 endeavor 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.

This distinction may seem rather tenuous to the layman, and it is not commonly accepted on Wall Street.

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.

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 this own.

*

A great deal of brain power goes into this field and undoubtedly some people can make money by being good stock market 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 yers 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.

Timing is of Psychological importance to the speculator

There is one aspect of the "timing" philosophy which seems to have escaped everyone's notice.

Timing is of great psychological importance to the speculators 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 uninveted 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.

Ref: Intelligent Investor by Benjamin Graham

Investment merit at a given PRICE but not at another

Investment Policies (Based on Benjamin Graham)

PRICE: is frequently an essential element, so that a stock (and even a bond) may have investment merit at one price level but not at another.

______________________________________

Having selected the company to invest based on various parameters, the next consideration will be the price we are willing to pay for owning part of its business.

Price is always an important consideration in investing. At a certain price, the company can be acquired at a bargain, at a fair price or at a high price. Each scenario will impact on our investment returns.

We should ALWAYS buy a good quality company at a BARGAIN PRICE (margin of safety). This allows us to lock in our potential gains at the time of buying at a favourable reward/risk ratio. This maybe when the upside gain: downside loss is at least 3:1.

There maybe FEW exceptional occasions when we may be willing to pay a FAIR PRICE for a good quality company. This is often the case when a good quality company is fancied by many investors and is often quoted in normal time at a high price.

However, we should NEVER (NEVER, NEVER) buy a good quality company at HIGH PRICE, whatever its earnings and growth prospects maybe. To do so will not only diminishes our potential investment returns, but may even results in a loss of our capital due to the unfavourable reward/risk ratio.

Don't time the market, it is difficult. However, there will be time when the market is on sale and the prices of stocks are at a bargain and there will be time when the market is exuberant and the prices of stocks are high or very high.

The market will always be there and we should choose when to buy and when to sell. We should only buy a stock when the PRICE IS RIGHT FOR US and sell a stock when the PRICE IS RIGHT FOR US.


(What is market timing? Timing is a term that refers to investing by buying everything or selling everything on the basis of the (faulty) assumption that one can predict the market's next move. Attempts to time are common, but academicians and practitioners have concluded that success happens through luck only on occasions that are quickly reversed and very costly.)