Stock Market Timing - When to buy and sell

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Stock Market Timing: The Professional View

April 2009: Why is it that the general public finds it so hard to time their stock market investments?

I have recently been reading the excellent book, Hedgehogging, by legendary market strategist and now a hedge fund manager, Barton Biggs.

In his book, he remarks on some phenomenon that I have experienced in the investment world. It is an odd fascination of the general public to want to only own what is hot right now.

Since the public at large do not follow investment markets very closely, this approach makes very little sense. After all, sooner or later, the stock, sector or fund in question will not be hot. But unless they watch the markets every day, how will they know when that is and that they ought to be selling?

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Biggs describes the situation like this, “Jesse Livermore once was asked what his investment strategy was. “Buy low and sell high,” he replied. The public instead does just the opposite. It buys high and sells low, partly because the mutual fund industry has an overwhelming incentive to sell (and to hell with the consequences) what is easy to sell, and what is easy to sell is what has just been hot. The public never learns, and the mutual fund industry never can pass up a money-making opportunity, However, in fairness, the people who run the mutual fund industry and sell the funds are not evil; in the flush of the moment, with stocks soaring, they genuinely believe that maybe it truly is different this time. Of course, it never is!”

Of course, there are many experts on both sides of the argument as to how possible it is to trade in and out of the market profitably. What most people fail to mention is that the public is so monumentally bad at this!

To try and counter this, Biggs goes on to explain his suggested practice for amateur investors. “Of course, the dismal results for individual investors are partly their own fault as well. They are simply not equipped, either in terms of temperament, research resources, or time commitment, to compete with the professionals. Rational individuals wouldn’t dream of competing against professional athletes for money or against professional card players. Why would they in the financial markets? However, the individuals do need to make their own long-term asset allocations decisions. This can be done if they have at least a general concept of secular and cyclical cycles and some sense of contrarian investing. Index funds should be the means of implementation.”

Needless to say, Hedgehogging is an excellent book about many things related to wealth and investment. I highly recommend it to you.

But what of the average investor? What about YOU?

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As mentioned above, the investor needs some sort of idea as to how markets work and the broad implications of their cycles. After that, searching for a suitable mutual fund should be the logical next step. Of course, many will not do this. Either because they are sold something else, or because they simply wish to buy something else.

But the massive loss of capital by the general public in the tech bust of 2000/2001, and then the following boom and bust in residential investment property, shows that for now at least, we have not learned our lesson.

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