Market Timing

[Temperament]

[img] http://www.marketwatch.com/story/portfol...2013-10-16[/img]

Myth: Investors must decide to either be timers or practice buying and holding.

Reality: About half of my own equity investments are timed by mechanical trend-following systems; with the other half, I buy and hold. Sometimes one side of my portfolio does markedly better than the other. After navigating many bull markets and many bear markets, I have found that the long-term returns of each half of the portfolio are about the same.

I recommend this dual approach to long-term investors who understand timing enough to keep their expectations realistic. For me, it gives me comfort to know that when the market is going up, the majority of my equity investments are taking advantage of it — and when the market is going down, half of those investments have the ability to go to the sidelines to limit my losses.

If you want to learn more, one good place to start is with a 2011 book by Leslie Masonson called " All About Market Timing. "

[specuvestor]

I think this is a pretty good balanced article from 3rd avenue annual letter... there are actually 2 aspects:

Dear Fellow Shareholders:
Academics involved with finance restrict their studies to
analyzing markets and securities prices. As far as they are
concerned, the study of companies and the securities they
issue are someone else’s business. I am disappointed that a
Nobel Prize was awarded to Eugene Fama, who studies only
markets and prices; and whom, I daresay, does not focus on
Form 10-Ks or the footnotes to a corporation’s audited
financial statements. In fact there is no way of determining
whether any market is efficient or not in measuring
underlying values unless the analyst understands, and
analyzes, the specific securities that are the components of
that specific market.
Market participants make two types of decisions—market
decisions and investment decisions. Market decisions
involve predicting security prices and are, virtually, always
very short-run oriented. Investment decisions involve, inter
alia, determining underlying value, resource conversion
probabilities; terms of securities; credit analysis, and
probable access to capital markets particularly for providing
bailouts to public markets at high prices (versus cost) for
promoters, insiders and private investors.
Modern Capital Theory (“MCT”) concentrates on market
decisions and provides valuable lessons for specific markets
consisting of Outside Passive Minority Investors (“OPMIs”)
who deal in “sudden death” securities, i.e., options,
warrants, risk arbitrage, heavily margined portfolios, trading
strategies and performing loans with short-fuse maturities.
MCT is of little or no help to those involved primarily with
making investment decisions—value investors, control
investors, most distress investors, credit analysts, and first
and second stage venture capital investors.
The most basic problem for MCT, and all believers in
efficient markets, is that they take a very narrow special
case—OPMIs dealing in “sudden death” securities, and
claim, as the Nobel Prize winner does, that their theories
apply to all markets universally. What utter nonsense! Most
of the activity—and money—on Wall Street is in the hands
of people making investment decisions, not market
decisions. For the activist, and value investor, the market is
a place for a bail-out at high prices (versus cost), not a place
where underlying values are determined. MCT, in looking
at Wall Street, concentrates on mutual funds which trade
marketable securities. MCT seems oblivious to activists, not
studying what activists do, and why they do it.
MCT, not only misdefines markets, but also seems to be
sloppy science. The theory embodies the correct observation
that almost no one outperforms relevant market indexes
consistently. Consistently is a dirty word; it means all the
time. In justifying and promoting Index Funds, MCT
points to this failure of actively managed funds to
outperform consistently. MCT acolytes, however, forget
that many managed funds do tend to outperform relative
benchmarks, over the long term, on average, and most of
the time, notwithstanding their higher expense ratios. It’s
just plain stupid to state that the quality of money
management is tested by looking at consistency. Insofar as
MCT identifies what it describes as performance outliers,
e.g., Berkshire Hathaway, no attempt is made to study what
it is that outliers do that make them outliers, since this
would entail the detailed analysis of portfolio companies
and the securities they issue. How unscholarly!
MCT cannot possibly be helpful almost all the time to
those focusing primarily on investment decisions, i.e.,
understanding a company and the securities it issues. This
is because in MCT four factors are overemphasized to such
an extent that economic reality is blurred.
1. A belief in the primacy of the income account with
some emphasis on cash flow from operations rather
than earnings. (Earnings are defined as creating wealth
while consuming cash). If there is a primacy of anything
in understanding a business, at least subsequent to the
2008 financial meltdown, it is creditworthiness, not
periodic cash flows or periodic earnings.
2. An emphasis on short-termism. I think it is impossible
to be market conscious about publicly-traded
securities without emphasizing the immediate outlook
at the expense of a longer-term view.
3. Overemphasis on top-down macro-factors such as
forecasts for the economy, interest rates, the Dow Jones
Industrial Average, with a consequent de-emphasis of
bottom-up factors such as the financial strength of an
enterprise, the relationship of a security’s price to readily
ascertainable net asset value (“NAV”), or the covenants
in loan agreements. It is easy to appear wise and
profound, for example, by forecasting outlooks for the
general economy. Forecasting about the general
economy almost all the time tends to be a lot less
important for long-term buy-and-hold investors than are
nitty-gritty details about an issuer. Indeed, it seems as if
macro forecasts dominated in importance in the last 85
years only in 1929, 1974 and 2008-2009. Even in those
years of dramatic down-drafts in the U.S., macro factors
tended to be non-important (outside of immediate
market prices) for adequately secured creditors seeking
interest income or for well-financed companies with
opportunistic managements seeking acquisitions.
4. A belief in equilibrium pricing. An OPMI market price
is believed to value correctly and OPMI market prices
change as the market receives new information. Such a
view, though widely held, is ludicrous. The fact that the
common stocks of many well financed, growing,
companies sell at 25% to 75% discounts from readily
ascertainable NAV is mostly lost on finance academics
who believe in efficient markets. They do not believe
that such pricing can exist, though it does.

.... Continues here: http://www.thirdave.com/ta/documents/sl/...etters.pdf