timing market is futile

Someone said it long before that markets will fluctuate. And they do, always. It is difficult to predict what will happen to them in the short term. However, it should be possible for any of us to say that markets will be marching ahead in the long future. And they have been, always. Of course there are aberrations: 

Dow Jones did not move from end of 1964 to 1981; S&P-500 did move, but only a little. Without dividends, you got nothing from the Dow, and less than 2.50% from the S&P-500. The long term treasuries gave you over 13% by the end of 1981. In May 2007, S&P-500 was at 1511.14, and by February 2013, it was still at 1512.31. During the period, the financial crisis took a toll on the markets and investor returns. 

Yet, when you play a long game, you are usually better off. Playing the timing game is futile since we do not possess crystal balls. If you stick to index investing, you are more likely to come out a winner. Your costs will be averaged out, and returns you get will be market returns. 

If you are willing to spend time, you can play the long game, but with stocks rather than the index. Here, you are faced with three challenges: Information, Analytical ability, and Behavior. You need to have the behavioral edge, coupled with at least one of the other. The information edge is more difficult these days because most of the information required is already there in the public domain, and that too in real time. The only edge here is the ability to separate wheat from chaff. Knowing what counts is an important tool in your kit. There is no point in spending time on what does not count. 

It is much better to possess the analytical edge, though. If you are able to check the numbers with the story told by the market, you are on to something, especially when combined with the right behavior. There are times when stories and numbers do not match, and that is where opportunities lie for the investors. Such opportunities are available for a curious investor most of the time. As long as the expected returns are a few points higher than the alternative opportunities, you could pick that story for investment. 

Here's an old story that did not go well with the underlying numbers, and a sensible investor could have profited. Ford Motor Company had a tough time in dealing with its Edsel experiments.

From a low price of $40 per share in 1958, the stock moved to a high of $90 by 1959. The time lag was just a couple of years, but dividends were rich enough for the investor who believed in both the business and the ability of the management. 

The story is an old one; but history often rhymes and repeats. For a stock picker with the analytical and behavioral edge, opportunities are enormous, and the long game need not be always a very long one. I reckon there can be 3 strategies based upon just one philosophy, i.e. gap between price and value.

The first is a very long one: Pick businesses with the long term competitive advantages, and stay with them for a long, long time.

The second is a long one: Find businesses with decent quality that are undergoing genuine, but temporary, hiccups and consequently priced much lower than their underlying intrinsic value. Then wait for the gap to fill. This could take any time from several months to a few years.

The third one is not that long, but long enough: For the most market participants, long term is less than a quarter. Because of this, markets tend be inefficient. This means for a sensible investor, there will be stocks available where stories and numbers invite scrutiny. The stocks need not necessarily be of very high quality. But it is wise to reject all poor quality businesses; the idea is to reduce risk in investments, not increase it. The opportunities could last from a few months to a couple of years. 

So stop timing the markets. Go pick your game, and play it well.