Timing the market

[shuoyanz]

May I share my investing philosophy for all to comment on. I have not been "tested by fire" before, so would like advice before I get burnt.

1) I do not believe in holding cash. If you have spare cash lying around, it goes into buying SGS bonds (or other bonds that you are confident about). That way, if the market moves sideways for many years, at least you got 2-4% interest on it.

The other upside is that, based on history of the previous few recessions, SGS bond prices will shoot up 5-10% during the recession. This will let you buy more stocks during the recession.

2) My idea of market timing is that even if you are doing value investing, it is still in your interest to time the macro market movement. Let me give an example:

Year 1: You determined that Stock A is fundamentally sound and undervalued and bought at $1.

Year 3: Stock A rises to $2, before a recession strikes and the value falls to $1.20.

In this case, you should have sold when the price had fallen to $1.80, and bought it again at $1.20. You just unlocked $0.60 of 'profit', compared to not doing anything. I think this is easier to achieve than other market timing, because the news of recession is already out. Based on the data I have, during previous recessions it took 2-3 months for STI to lose its first 10%. Enough time to confirm and double-confirm that a recession is happening.

[opmi]

What if Stock A drops to $1.8 (when u sold), then go straight up to $5?

Or what if stock A drops to zero after you re-enter at $1.20?



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[shuoyanz]

Hello opmi,

By waiting until you can confirm that it is going to be a recession before selling, I do not think the price will go up during recession. (Anyone have counter example?)

Then by your fundamental analysis, you know that the company is undervalued at $1.20 thats why you buy. That risk is still there if you held the stock through the recession.

Then the next question is, how do you know to buy at $1.20 and not wait for $1.10? I have no answer to that. But no matter what, you had made some 'profit' by selling at $1.80!

[brattzz]

No risk no gain/loss, risk = gain/loss too!

[CityFarmer]

May I share my investing philosophy for all to comment on. I have not been "tested by fire" before, so would like advice before I get burnt.

1) I do not believe in holding cash. If you have spare cash lying around, it goes into buying SGS bonds (or other bonds that you are confident about). That way, if the market moves sideways for many years, at least you got 2-4% interest on it.

The other upside is that, based on history of the previous few recessions, SGS bond prices will shoot up 5-10% during the recession. This will let you buy more stocks during the recession.

2) My idea of market timing is that even if you are doing value investing, it is still in your interest to time the macro market movement. Let me give an example:

Year 1: You determined that Stock A is fundamentally sound and undervalued and bought at $1.

Year 3: Stock A rises to $2, before a recession strikes and the value falls to $1.20.

In this case, you should have sold when the price had fallen to $1.80, and bought it again at $1.20. You just unlocked $0.60 of 'profit', compared to not doing anything. I think this is easier to achieve than other market timing, because the news of recession is already out. Based on the data I have, during previous recessions it took 2-3 months for STI to lose its first 10%. Enough time to confirm and double-confirm that a recession is happening.

The strategy works only IF your timing of the recession is consistently right, NOT occasionally right.

BTW, what is your definition of recession?

[Temperament]

Nobody can time the market consistently. How about let the market times for you? Is it more consistent if you let the market time for you?
And WB can afford to hold cash as a call option with no time limit and strike price. Can you afford to do like him?

[weijian]

I think this is easier to achieve than other market timing, because the news of recession is already out. Based on the data I have, during previous recessions it took 2-3 months for STI to lose its first 10%. Enough time to confirm and double-confirm that a recession is happening.

They say the discipline of investing is blurred between Art and Science. In your case, it seems that recessions (i assume a double QoQ or YoY contraction in quarterly GDP numbers) can be captured by hard numbers (Science).

There is nothing wrong with this observation though. Nonetheless, to calculate correct base rates, you might need a bigger sample size than what you have observed, ie. you will need to observe all 10% drop events, rather than simply focusing on the recession events only.

Happy observing and investing!

[specuvestor]

IMHO timing the long term trend is part of execution. In my experience it can also give psychological comfort.

Timing a short term move is foolhardy. Thats where the misunderstanding about market timing comes about.

[Henri]

May I share my investing philosophy for all to comment on. I have not been "tested by fire" before, so would like advice before I get burnt.

1) I do not believe in holding cash. If you have spare cash lying around, it goes into buying SGS bonds (or other bonds that you are confident about). That way, if the market moves sideways for many years, at least you got 2-4% interest on it.

The other upside is that, based on history of the previous few recessions, SGS bond prices will shoot up 5-10% during the recession. This will let you buy more stocks during the recession.

2) My idea of market timing is that even if you are doing value investing, it is still in your interest to time the macro market movement. Let me give an example:

Year 1: You determined that Stock A is fundamentally sound and undervalued and bought at $1.

Year 3: Stock A rises to $2, before a recession strikes and the value falls to $1.20.

In this case, you should have sold when the price had fallen to $1.80, and bought it again at $1.20. You just unlocked $0.60 of 'profit', compared to not doing anything. I think this is easier to achieve than other market timing, because the news of recession is already out. Based on the data I have, during previous recessions it took 2-3 months for STI to lose its first 10%. Enough time to confirm and double-confirm that a recession is happening.

The strategy works only IF your timing of the recession is consistently right, NOT occasionally right.

BTW, what is your definition of recession?

We cannot time the market nor can we predict recession or financial crisis, anyway the term itself is quite subjective...

What I will do is to realize 50% of my stock portfolio when I predict the next possible crisis. If there is no crisis, I realize my gain and keep the money for other opportunities. If there is a crisis, and prices come down 25-50%, I can buy back those shares with good fundamentals. I will try this approach during the next downturn...

[shuoyanz]

There is nothing wrong with this observation though. Nonetheless, to calculate correct base rates, you might need a bigger sample size than what you have observed, ie. you will need to observe all 10% drop events, rather than simply focusing on the recession events only.

weijian, you make a good point here. Let me examine the 10% drops that have happened.

In the last few years, several have happened. Latest was in May-June 2013. My notes on that period say it was due to tapering and REITs correction.

Second latest was in April-June 2012. My notes say it was a time of Greece bailout was in doubts.

Third latest was in July-Aug 2011. My notes say that the US credit rating had just been downgraded.

At that time, I did not think any of those three events were going to lead to recessions, as I kept buying

I am curious, during GFC, what point in time did you know it was confirm going to be a recession? I use the term recession loosely to refer to a large fall in stock value, typically around 40%. Also, what allows you to make that confirmation, like news reports etc?

Thanks!