Posted in Investing | April 7th, 2008 | by Jordan
The sentiment that the market always goes up has long been in play and is still the fact used by most professional money managers to assume positions in beaten down companies. The average is about 10.5% a year for large cap stocks over the long run, some 100+ years.
Market timing is something that is critical for a short term trader and not so necessary to the retirement fund manager. The short term trader needs to show huge daily profits from relatively small movements in price. A move from $25 a share to $26 would be a gift from the heavens for most full time traders. For the long term investor, that’s just a 4% return, very unlikely to make a considerable difference in the long run.
When the markets get beaten down, look at the last few months, the new favorite term is “timing the market.” Many investors tried to time the real estate market only to get trounced, many ran out the commodity boom and the USDJPY carry trade watched their profits unravel as it broke down. Market timing can be a difficult thing to learn but can bring huge gains for correct timing. The losses can be huge as the gains, many investors lose big by chasing returns.
Short term traders do not profit from the difference in value in a company, they profit by merely buying X stock and selling it for more than they paid. Traders, unlike investors, just want to flip their shares for a profit rather than hold on for the long term. For this reason, data such as corporate earnings and economic outlooks play a very minor role in the short term trader. Long term analysis is unlikely to affect a trader’s short term perspective.
For the rest of us, market timing really isn’t that critical. As much as we’d like to follow the world’s best investments and be invested in each of them, its entirely impossible. Most of us have our retirement portfolios invested into a series of profitable companies rather than the hot biotech down the street.
There is some role for market timing in a bear market, especially for the long term investor. A bear market is likely to bring down the values of all stocks, even those with strong fundamentals. A boring market in the US looks like a great opportunity for foreign countries. Fundamentals remain strong even amongst this very technical-driven investment cycle.
As things weaken on the American front, there are still many great investments that have become oversold due to market sentiment rather than an actual difference in company quality. Take for instance the deep-discounters, the fall in prices was due mostly to a market event than an internal event. If anything, the balance sheets of deep-discounting corporations have never looked better.
And as much as the market hates the financial sector as a whole, there are still many great investments. Firms with limited exposure to subprime mortgages have been hit just as hard as those with maximum exposure. The rebound for these companies who managed their investments wisely will be huge, driven by profits rather than the rumor-mill. Just by being in the financial industry it is likely to see a stock price tank by 20-30% without any hard evidence that the company will be doing worse. This kind of sentiment is easy to beat with high quality, profitable stocks which are still lingering in the mess of illiquid lenders.
