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If We Can’t Time the Market, What Can We Do?

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MBSearlymorning I remember asking this question of my wealth manager who was in charge of a few wealth advisors, “What do you think of dollar cost averaging?”

His confident answer is that “I don’t believe in that as I can time my entry and exit.”

From books and articles that I have read, I can safely say now that he is bluffing himself. And me.

My favourite investor, Warren Buffett, said that he does not care where the economy is headed and he does not know anyone who can predict the direction the economy is headed with 100% accuracy.

That is enough for me.

I had bought shares of Informatics from 2006 onwards and bought more in 2007 and held it for 3 to 4 years. Through the horrifying nosedive in 2007 and 2008 when my whole portfolio dipped by 60% or more. I bought more shares, but of different companies. My wife was concerned about my obsession with it and ask if we should unload it.

I guess in investing, it is good to have a second opinion and do things with consultation and arguments. It makes you question your principles, your belief and you have to test if it works and whether the reasons we bought the counters are sound.

In World War 2, Churchill and Roosevelt all had to make strategic decisions through a committee which delegates field decisions in the war to the commanders in the thick of action. Hitler decided everything in advance, with his infamous “No Withdrawal” issued to all the German generals who asked for permission to do so.

Warren Buffett has a strong second man in Charlie Munger who can tell him to go fly a kite.

So don’t believe everything you read or hear. Test it, retest it and find someone who has an opposing view and then check whether it still holds true.

Since we cannot time it, it is the length of time you are prepared to hold your positions that matter. Sometimes it takes 3 to 4 years, or as Buffett said, his holding period is forever.

I’d be away on a vacation from today till the 12th of August, so I may not be able to update the blog.

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7 comments:
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la papillion said...
August 5, 2010 at 1:00 AM  

Hi Lemi,

Hmm, just wondering why you think that the market cannot be timed. Did you question that belief too?

I believe WB did not hold his shares forever too.

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Ray said...
August 15, 2010 at 12:30 AM  

I think you are just being harsh on the wealth manager. Timing the market is possible only if you put in lots and lots of time into learning the techniques. The reason why books and articles say timing is not possible could be due to a few reasons: they didnt spend enough time to learn the RIGHT techniques OR they spent the time but fail and did not have the attitude to find out why OR because the media/banks want us to believe that. Imagine if everyone believes in timing, nobody will buy stocks during bear markets. This will be terrible for their business.

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Lemizeraq said...
August 16, 2010 at 10:56 PM  

Hi La Papillion,

Thanks for the visit. Sorry for the late reply.

Yeah, I did question whether markets cannot be timed. I find I am inclined towards time in the market.

Yes, WB didn't hold his shares forever too, even though he said that is his favourite holding period. But stocks like Washington Post and Coke, he has held it for like nearly 30 years.

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Lemizeraq said...
August 16, 2010 at 11:01 PM  

Hi Ray,

Thank you for the visit and your opinion. I was on vacation and couldn't reply your post earlier.

Think I still am of the belief that time in the market is more important than timing.

The industry will want you to believe in timing, because they more you trade in and out, the more they earn.

If you hold it for 30 years, they will hate you :)

And also, if everyone believes in timing and can do it with 100% accuracy, they will buy during bear markets and sell during bull market.

Which isn't what is happening. In fact it is the reverse. People panic during bear market and sell. And they buy the BS that media sells them and buy during bull market.

Regards,

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la papillion said...
August 17, 2010 at 9:47 AM  

Hi Lemi,

Timing doesn't mean 100% accuracy, so it's too harsh for market timers. For FA guys, have you seen one with 100% accuracy too?

I can also say that the industry wants people to believe that market cannot be timed so that people will invest in long term (in their funds) regardless of 'short-term' fluctuations (i.e. short term losses in their funds).

Haha, I'm neither for TA or FA.

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Lemizeraq said...
August 18, 2010 at 10:58 PM  

Hi La Papillion,

Yeah, it is hard to be 100%. But the thing with timing is that if you aren't 100%, you miss the days when the market goes up a lot or goes down a lot. So compared with FA, the error margin is less.

Yes, but the industry will want you to trade more than keep for long term, unless the market you refer to is the unit trust manager. That is cos they can eat the annual management fees. Else if you are in the stockbroking, a buy and hold customer is almost like you have no customer :)

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la papillion said...
August 18, 2010 at 11:08 PM  

Hi Lemi,

Miss the days? By missing the days with the best returns, you are also missing the days with the worst downturn. If bears hit fast and harder than bulls, then missing the worst days of the markets does not make out to be as bad as it sounds.

I disagree that margin error of TA is less. I can cite similar examples of a wannabe investor investing in a company with all the due diligence but losing all when it folds because he believes in holding it for long term and ignoring short term fluctuations.

I guess it boils down to skills in either case.

So, which industry are you talking about? the unit trust industry or the stock broking industry haha :) One wants you to hold long to suck your fees, the other wants you to trade more to suck your brokerage.

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