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

It is time in the market, not market timing, that counts.

There is no short-term timing strategy that works accurately and consistently

Many people believe that the fastest way to the highest market returns is by short-term trades that are accurately timed.  But many years in the investment arena, there is no short-term timing strategy that works.  

All nature of pundits have come and gone over the years.

• For a short time, any of them may be right and may make one or two amazingly accurate predictions.  
• Eventually, all of them lose the interest of the public when the predictions prove inaccurate.  

There is no sure way to accurately and consistently time short-term market movements, and again, the research of scholars have highlighted this.



Better in the market invested in value stocks than play the timing game

It is simply better to be in the market, invested in the value stocks that offer the highest potential return, than to play the timing game.

• Between 80 and 90% of the investment return on stocks occurs around 2% to 7% of the time.  
• It is a daunting task to find a way to reliably predict the 7% of the time stocks do well.  

As a long term investor, the real danger and threat to your nest egg is being out of the market when the big moves occur.  You simply have to accept that you must endure some temporary market declines.  

The reality is (and it has  been proven) that the biggest portions of investment returns come from short periods of time but trying to identify those periods and coordinate stock purchases to them is nearly impossible.  Two issues are at play here, both equally important:

(1) short-term timing doesn't work; and
(2) the highest returns are achieved by being fully invested in the market at nearly all times so that you can capture the times when stocks rise the most.  You have to be in the game to win it!



Long-term value investing is like flying long distance

Long-term value investing is like flying from Singapore to London.  While you may encounter some air turbulence over Europe, if your plane is in good shape, there is no reason to bail out.  You will eventually reach your destination safely, and probably even on time.

The same goes for investing.  If your portfolio is well constructed, a bit of market turbulence is no reason to bail.  You will reach your financial goals.




Predicting short-term stock market direction is a fool's game

Predicting short-term stock market direction, however, is a fool's game and is disservice to the investing public.

Long term, the market is going up.  Always has, and most likely always will.

Market timers like to think they can capture large returns by jumping in the market to profit during periods when stocks are up, and jumping out of the market when stocks are down. 

• It may get you ahead for a brief period but you will quickly give up gains when abrupt events that could never have been predicted (such as the tragedy of 9/11, geopolitical evens, and even weather cause brief downturns that are almost always followed by rising prices).  
• You will also give up your profits to the increased costs of trading from commissions to taxes.

The majority of investors buy high and sell low.

All manner of studies have proven, in many ways under many scenarios, that the majority of investors buy high and sell low.

1.  Peter Lynch, the legendary and highly successful manage of the Fidelity Magellan Fund for many years, once remarked that he calculated that more than half of the investors in his fund lost money.  This happened because money would pour in after a couple of good quarters and exit after a couple of not so good quarters.

2.  Nobel Prize winner William Sharpe found that a market timer must be right a staggering 82% of the time to match a buy and hold return. That's a lot of work to achieve that could be accomplished by taking a nap.

3.  Even worse, other research shows that the risks of market timing are nearly two times as great as the potential rewards.

• Between 1985 and 2005, the annually compounded rate of return for the Standard & Poor's 500 Index was 11.9%.  
• However, a recent research study concluded that the average investor only compounded at 3.9% over that period.  
• Why?  The research paper concludes that most investors head for the hills during period of market declines, thinking the decline will go on indefinitely. Once the market has rebounded, they return, having missed the best part of the rebound.

Day by day, minute by minute prices are so widely available

One of the more difficult factors in maintaining a long-term approach is that prices are so widely available.  We can check the value of all of our stock holdings day by day, minute by minute.   We can see how they fluctuate around short-term factors, and in many cases this information can make us a little nervous.

An example of a successful commercial real estate broker who saved at least half of his earnings each year.  His money was invested for the long term, and he could afford to leave it invested.  But he could not stand to see the prices of stocks rise and fall each day.  If he owned a stock and it closed down on a particular day, he was deeply upset.   He did not realise that bonds also fluctuate in price; but since he could not check their closing prices every day he was not worried.  He got his regular interest check, which he reinvested and was happy.  Over the ensuing 10 years, his municipal bond portfolio grew at an assumed interest rate of 5%.  If the same funds had been invested in the Standard & Poor's 500 index, he would have made 15.3% annually compounded rate of return.  His loss for not being invested in stocks was staggering.

Would you take a minute-by-minute pricing approach with anything else you own?  

How would you react if your house was priced every day and the quotes listed in the local newspaper?  Would you panic and move if you lost 2% of your home's value because a neighbour didn't mow his lawn?  Would you rejoice and sell if it went up 5% in one day because another neighbour finally painted his house.

A collection of businesses bought at  excellent prices is no less a long-term asset than a piece of real estate and should be treated the same way.  Prices will fluctuate both up and down.  What is most important is that you own the right stocks when the market does go higher.  

You have to play  to win.  

Using the tenets of value investing and always keeping in mind the margin of safety, the odds of winning with our approach are a bit better than playing the lottery and is is far more remunerative than sitting on the sidelines.

Missing the 10, 30 and 50 best days in the market

According to an investment study, if you had ridden out all the bumps and grinds of the market from 1990 to 2005, $10,000 invested would have grown to $51,354.  

If you have missed the 10 best days over that 15-year period, your return would have dropped to $31,994. 

If you had missed the 30 best days - one month out of 180 months - you would have made $15,739.  

Had he missed the 50 best days you would have come out a net loser, and your $10,000 would now be worth only $9,030.



The evidence is clear.

It is pretty close to impossible to consistently make money market timing, and you are better off investing for the long term, riding out the bumps. 

Value investors have the extra security of knowing that they own stocks that have one or more of the characteristics of long-term winners  and that they have paid careful attention to investing with a margin of safety.

It is a marathon, not a sprint.

Market Fluctuations as a Guide to Investment Decisions (2) - Timing or Pricing

Stock Brokers and the Investment Services

As a matter of business practice (or perhaps of thorough-going 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.

The investor can scarcely take seriously the innumerable predictions which appear almost daily and are his for the asking.

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.

This attitude will transform the typical investor into a market trader and will bring the typical investor nothing but regrets.



Timing in a Bull Market

During a sustained bull movement, when it is easy to make money by simply swimming with the speculative tide, he will gradually lose interest in the quality and the value of the securities he is buying and become more and more engrossed in the fascinating game of beating the market.

He begins by studying market movements as a "commonsense investment precaution" or a "desirable supplement to his study of security value"; he ends as a stock-market speculator, indistinguishable from all the rest.


Market Forecasting (or Timing)

A great deal of brain power goes into this field.

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.

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 and the Speculator

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.



Timing and the Investor

But a waiting period of 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.

Timing is of little 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 Fluctuations as a Guide to Investment Decisions (1) - Timing or Pricing

Common stocks, even of investment grade, are subject to recurrent and wide fluctuations in their prices.

Should the intelligent investor be interested in the possibilities of profiting from these pendulum swings?

There are two possible ways he may try to do this:

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

Timing

By timing, the investor try 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.


Pricing

By pricing, the investor endeavours

• to buy stocks when they are quoted below the 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.


Pricing or Timing?

The intelligent investor can derive satisfactory results from pricing of either type.

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.

Arguing against market timing

1.  While waiting for the market to fall, it is possible to miss out on growth in companies with good prospects (some ten-baggers made their biggest moves during bad markets).

2.  Following the fashionable trend may lead to serious mistakes in the choice of investment targets.


The market is overvalued when there are no suitable investments at suitable prices.

There is no reason to worry about an overvalued market.

The way you will know when the market is overvalued is when you cannot find a single company that is reasonably priced or that meets your other criteria for investment.  (Lynch and Rothchild, 2000)

Peter Lynch holds the same view as Buffett on market timing.

Lynch doesn't believe in predicting markets, but believes in buying great companies - "especially companies that are undervalued, and/or under-appreciated."

"Things inside humans make them terrible stock market timers.  The unwary investor continually passes in and out of three emotional states:  concern, complacency, and capitulation."

Both investors prefer falling markets.

A good 300 point drop creates some bargains that are the "holy grail of the true stock picker."

The loss of 10 to 30% of  net worth in a market sell-off is of little importance.

Peter Lynch views a correction not as a disaster, but as an opportunity to add to a portfolio at low prices:  

"This is how great fortunes are made over time."

Warren Buffett on The Dangers of Timing the Market

Warren Buffett Tells You How to Turn $40 Into $10 Million

By Patrick Morris 

Warren Buffett is perhaps the greatest investor of all time, and he has a simple solution that could help an individual turn $40 into $10 million.

A few years ago, Berkshire Hathaway CEO and Chairman Warren Buffett spoke about one of his favorite companies, Coca-Cola, and how after dividends, stock splits, and patient reinvestment, someone who bought just $40 worth of the company's stock when it went public in 1919 would now have more than $5 million.  

Yet in April 2012, when the board of directors proposed a stock split of the beloved soft-drink manufacturer, that figure was updated and the company noted that original $40 would now be worth $9.8 million. A little back-of-the-envelope math of the total return of Coke since May 2012 would mean that $9.8 million is now worth about $10.8 million.

The power of patience

I know that $40 in 1919 is very different from $40 today. However, even after factoring for inflation, it turns out to be $540 in today's money. Put differently, would you rather have an Xbox One, or almost $11 million?

But the thing is, it isn't even as though an investment in Coca-Cola was a no-brainer at that point, or in the near century since then. Sugar prices were rising. World War I had just ended a year prior. The Great Depression happened a few years later. World War II resulted in sugar rationing. And there have been countless other things over the past 100 years that would cause someone to question whether their money should be in stocks, much less one of a consumer-goods company like Coca-Cola.

The dangers of timing

Yet as Buffett has noted continually, it's terribly dangerous to attempt to time the market:

"With a wonderful business, you can figure out what will happen; you can't figure out when it will happen. You don't want to focus on when, you want to focus on what. If you're right about what, you don't have to worry about when" 

So often investors are told they must attempt to time the market, and begin investing when the market is on the rise, and sell when the market is falling.

This type of technical analysis of watching stock movements and buying based on how the prices fluctuate over 200-day moving averages or other seemingly arbitrary fluctuations often receives a lot of media attention, but it has been proved to simply be no better than random chance. 

Investing for the long term

Individuals need to see that investing is not like placing a wager on the 49ers to cover the spread against the Cowboys, but instead it's buying a tangible piece of a business.

It is absolutely important to understand the relative price you are paying for that business, but what isn't important is attempting to understand whether you're buying in at the "right time," as that is so often just an arbitrary imagination.

In Buffett's own words, "if you're right about the business, you'll make a lot of money," so don't bother about attempting to buy stocks based on how their stock charts have looked over the past 200 days. Instead always remember that "it's far better to buy a wonderful company at a fair price."

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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."

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.

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 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.

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.

Market Analysis and Market Traders

Investors are continually bombarded with market analyses, all of which fall into one of two categories:

1. The first approach is backward looking. It constitutes "chart reading" of past behaviour.
2. The second is forward looking. It anticipates interest rate changes, industry cycles, business and political conditions that might impact corporate earnings or investor attitude.

Trading on market movements seems easier and maybe more PROFITABLE IN THE SHORT RUN, but it is MORE DIFFICULT FOR MARKET TRADERS to ACCUMULATE LONG-RUN PROFITS AND HOLD ON TO GAINS.

In market analysis there are NO margin of safety; you are either right or wrong, and if you are wrong, you lose money.

Benjamin Graham took a conservative approach to investments. He viewed the stock market as a RISKY PLACE where investors can make money as long as they keep their heads about them.

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

The best time to buy shares is not about timing the market but rather about time in the market.

Many people who decide they need shares as part of their investment portfolio often hesitate when it comes to actually buying the shares; usually because they're not sure if it is the best time to buy or they feel they still have a lot to learn about the sharemarket.

The best time to buy shares is not about timing the market but rather about time in the market.  No one, not even the famous sharemarket guru and one of the world's richest people, Warren Buffett, knows whether a particular share or the market as a whole will rise or fall in the near future.  What he does know is that it will rise AND fall, and that short-term volatility does not matter as long as it rises over the medium to long term.  

You can learn about the sharemarket by observing and keeping an eye on how your shares perform under different market conditions.



Long term investors aim to capture an upward trend in market value.



Short term investors try to capture value from the volatility in the sharemarket.

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/