Timing the market

[Musicwhiz]

I personally feel we are in phase 2 right now. I completely missed phase 1, so I do not have the margin of safety that some of the more experienced members here have. Currently I'm 100% vested (my investment fund). Looking to buy some value dividend stocks in 2011.

Any comments?

My comments are that it's not that simple to spot these so-called 3 phases of a bull market. In theory, yes, it sounds well and good and each phase has these distinctive characteristics, but in reality there could be a mish-mash of different "signs" occurring during different phases, making "reading" the market all the more difficult (if not impossible).

I'm not trying to say that one cannot identify macro-economic trends and valuations accurately; I think the problem is more of how to react and what to do should you base your decisions on these. How to define over and under-valued? And who's to say there won't be a sharp correction now and then? (So should you buy or sell in panic?). So these are not easy questions to answer even for a value investor, much less a person who is trying to incorporate some semblance of TA or Dow Theory into his forecasts/predictions.

I do agree with Arthur though - don't focus too much on market timing per se, and focus more on how businesses are run, and what generates their cash and profits. You'd be much better off in the long run.

And yes, sadly, there will always be a new crop of investors who succumb to the old problem of speculation and bull market mania. Apparently, participation in the stock market is becoming somewhat more widespread now (in 2H 2010) as compared to say 2H 2009. More new investors show up on forums and more investment blogs are started. The scary thing is that everyone is in the green and everyone is happy and proud to have a "growing" and "stable" portfolio. Such portfolios have not been tested by fire, unfortunately, and therefore cannot be assumed to have any measure of margin of safety unless one has done a thorough and rigorous analysis of the business, numbers and prospects. So far, there have been very few blogs which present a very compelling argument as to why purchases were made, or why divestments were performed, which (to me) shows that speculation is building up and the reasons for purchase are becoming more flimsy (assuming there are any good reasons at all).

Many people are now becoming gung-ho and are ignoring the risks of their investments failing them, should macro-economic factors change (e.g. interest rates). High yields sometimes do come with corresponding higher risks, which are conveniently ignored in the persuit of high returns (as opposed to decent yet more sustainable returns). Penny stocks are making the top volumes list and many of these are companies without a compelling business model and sustainable competitive advantage.

Perhaps I've said too much. Let's see how things go in 2011, shall we?

[Contrarian]

> I'm not trying to say that one cannot identify macro-economic trends and valuations accurately
> I think the problem is more of how to react and what to do should you base your decisions on these.
> How to define over and under-valued? And who's to say there won't be a sharp correction now and then?

M W san, u are in the market for a while now, so I think u shd be able to know if a stock u own is cheap or not.

Market cycle and timing are not easy to predict, but u can see the warning signs e.g. stock mkt correction, banks raising capital. But if u have the guts to bet big during down cycle, the rewards are significant.

Bought a D10 condo last year, within 4 mths I flipped it.

Boustead came down to 50cts, I bought at tt level. ARA came down to 55cts, I added to my holding. Too bad I never dump in my entire fortune. But then if the economy become like US and Europe, I may pee in my pants.

So now I keep 50% in cash till I find a good solid bet. Whatever yield u lose, u will win it back multiple folds over and over.

The key change i made now is I move more towards mid caps. So far this year has not been good, except for ARA which I added 30% more holding in May sell off.

[mrEngineer]

Boustead came down to 50cts, I bought at tt level. ARA came down to 55cts, I added to my holding. Too bad I never dump in my entire fortune. But then if the economy become like US and Europe, I may pee in my pants.

haha.. exactly same holdings and almost same price..

[Musicwhiz]

Well, Contrarian, to be honest I've only been through one full bull/bear cycle and have yet to fully understand and appreciate how valuations move and shift. There are so many factors which affect valuations that it's quite a tough exercise to determine and decipher at which point we are at, to justify either pervasive pessimism or unrealistic exuberance.

Which is why I am trying my best to learn as much as I can about valuations, so that I can more accurately make a judgement call as to whether to buy or sell. I admit I've been lucky not to buy in 2007 and sell in 2008, as my gut feel about valuations seemed to turn out correct after all.

To be able to repeat the "feat" of surviving another bull/bear cycle is far from easy, I think; and I cannot afford to be complacent and must always be willing to learn. That's what you guys are here for - so that I can learn! Hehe.....

[Satchmo]

To me, I will just set a target. Once the share price reaches it, I will sell off some to lock in some gains. Then let the rest ride on any further upside, depending on the present situation.

One important thing I learnt which is hard(for me) to put into practice is the ability to cut loss. Big paper losses can really affect one psychologically.

And newborn1000 is right about buying dividend stocks on the low. Coming next recession, I will try to load 20-30% of my portfolio with these and probably some bank shares

[Contrarian]

> One important thing I learnt which is hard(for me) to put into practice is the ability to cut loss. Big paper losses can really
> affect one psychologically

What I do is ask myself "Is the apple (stock) I picked rotten or going to turn bad?" If it is, why am I keeping in the fridge?" If yes, I throw it away.

In May I sold all the my REITs and weak stocks , plough into my biggest bet ARA. So far this method works.

So sell the losers, keep the winners.

[littlecupid]

There's no need to time the market, just react to the market lol

[Musicwhiz]

I think this year would be a year where more and more people will try to time the market......

[Big Toe]

I would agree that the market follows a pattern,
somewhat like spring summer autumn and winter.
We have passed winter, it is now looking more like spring.

Having said that, the market is a very dynamic place, it could be a harsh winter
(which is what is happening in certain parts of the US now)
followed by a short spring/summer. There is no certainty in this.

I have very basic rules to guide me. I like it simple.
Invest during doomsday and sell during heyday.

For me, it's not difficult to identity doomsday and I did invest
during doomsday. Problem is I don't have deep pockets and every month the
market grew bleaker and I bought more.... to a point I am out of $ and it is still sinking.

I am not exactly a newbie and I have learnt the hard way to respect Mr Market.
I could be right but will I be able to last through winter? I maybe frozen dead before spring arrives.
Or I could be burnt badly by the short summer.

[Bored in Melbourne]

I think that many people here are getting away from the real philosophy of Value Investing.

Once we have done all our homework on the particular company and we are confident of the IV that we are accepting for that share, we should at least make some attempt to time our entry and exit for that share (if in fact we want to sell at all, however markets get over value so taking profit before re-entry can be worth doing).

Looking at the great economy and the noise of the market is a big distraction as it may not have much effect on the particular business that you want to have in your portfolio. So you need to accept that the market tends to over react as many are late to the party and will buy in too high or sell out too low. These are the traders that the Value Investor needs to do business with.

So in terms of timing, we need to let the market tell us. When you see that your intended purchase is trading well below the IV and your are happy with the Margin of Safety, just be patient and watch until you see that the trend has hit a bottom. Even if you do not get the absolute bottom do not worry, you are in for the longer term ride up. So the key of the true bottom is when the trend starts back up again. Time to buy in then. You cannot guess the market as the traders are not rational like a value investor they are emotional so unpredictable behaviour abounds.
You need to do the same at the top. When you are well above the IV and the market have over reacted as it normally does, you might consider taking profit. Once the top is hit you will know it from the turn around in the trend, time to think about getting out unless you just want to hold on. Nothing wrong with taking a profit and getting back in when the market again over reacts the the price is back down below the IV, if you still believe you need that company in your portfolio.

It should be as simple and as complicated as that, the noise of the market, the media, and the outside economy are not always related to the share that we want to own so try to block it out and use the IV and the judgement of the market trend to guide your decision.