In this newsletter we are going to talk about timing the market and how it is an awful idea. Every asset class whether it is stocks, bonds, real estate etc. moves up and down in cycles. Sometimes they trend up and sometimes they trend down. Some people believe erroneously that that can predict when those cycles switch direction. As a result, they lose a lot of money and/or miss out on profitable opportunities. We assert that asset classes in the short term (within a few years) have exceptionally random price movements.
Every time the stock market gets ugly, somebody wants to withdraw their money. We tell them that if they withdraw their money they will miss out on the eventual rebound. They tell us not to worry for they will know (via instinct) the best time to get back in. Unfortunately for their bank account they never get back in and they miss out on a lot of profit. The stock market collapse in 2009 was horrific, but since then it has nearly sextupled in value. Conversely, on many occasions people have bought into the stock market thinking that it will not go down any lower (the market then goes down lower in a fit of being nasty just because). By October of 2008, the stock market had lost 37% of its value from its peak. People who bought it then thinking it would not lose any more value got a rude awakening when the value dropped another 15%.
In addition, jumping in and out of stock market has the problem that there are transaction costs. Both explicitly (via brokerage charges) and implicitly (via bid/ask spreads). While these costs have been lowering over the years due to brokerage companies competing with each other, these costs still add up.
As scary as it sounds, you must ignore the price movements of assets. In our opinion (and the opinion of most academics) the past movements of an asset have no impact on the future price of that asset. There is no predictive value. Make a purchase or selling decision based on the underlying properties and value of the asset. If you are looking a stock, look at profitability, debt load, sales growth, etc. Don’t look at the chart movements. Our recommendation is to make your decision based on the fundamental data of the asset and then don’t do anything else until the fundamental data changes. Stick to your plan and stay calm.
If you have any questions about your investments, please call at any time. We sincerely hope you got value from this newsletter.
We appreciate your business and trust.
Thank-You
Dan and Eli
As we’re writing these to help our readers, we would be very appreciative of any input in regards to what we should write next. If you want us to write about a particular topic, please contact me. Please contact me if you would like to submit a post to our blog.
If anything that we mentioned above interests you, please consider downloading our free e-book. The book contains our thoughts on investment management and some information that we think everyone should know. You can also download it below.
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