I believe the objectives of “timing the market” are to identify:
- The bottom price of a stock that is falling.
- The peak price of a stock that is rising.
This is so that an investor would be assured that he would buy a stock at a price that is the lowest and sell a stock at a price that is the highest. Buying when it is the lowest and selling when it is the highest would result in maximum “gain” on this stock.
Many choose to use technical analysis (TA) to achieve this feat. That is why they would draw trend lines, use moving averages and check volumes to identify the stock price patterns in order to execute trades.
So to that, I would say that I’m not into the above. This is because:
1. I don’t know how to time the market with TA.
2. Despite not knowing TA, I do know that TA practitioners aren’t certain of how accurate they are in finding such trends. For example, if a stock has fallen in the market to $10 per share, who could (with 100% certainty) guarantee that $10 is indeed the bottom price of that stock? On the flip side, if a stock had jumped to $20 a share, who can guarantee that $20 is indeed its peak price?
Hence, I believe that trying to “time the market” is rather a futile effort.
Instead, here is what I do:
Let’s assume that there is a stock which is fundamentally solid. It had generated $5 in its latest 12M EPS. The company’s long-term P/E Ratio averages around 25 in the past 10 years. Now, supposedly the stock price ranges between $80-$120 a share (averaging around $100) in the recent 12 months:
And, over the next 5 years, this stock continues to increase its earnings and as a result, recording $10 in its EPS. Its long-term P/E Ratio average remains at 25. In that moment in time, its stock price ranges around $250 a share, between $220 to $280 a share.
So, in this case, does it really matter if I invested in this stock at $80, $90, … and even $120 a share?
I guess not. In the example, we can see that I could still attain capital gains from this stock despite me investing in it at +20% above its average price of $100 per share. So, I don’t see the necessity to be absolutely accurate in terms of buying, hitting and investing in a stock at its bottom price.
Rather, I believe the key drivers that will move the needle (contributing to stock price increases) would be:
- Improved business + financial performances.
- Stable and rising P/E Ratio.
As long as the businesses that I invested continue to improve its earnings, these businesses would attract more investment capital from:
- Pension funds.
- Mutual funds (unit trust) and equivalent (robo-advisors, ETFs … etc)
- Insurance companies
- Long-term investors
Such could contribute to higher P/E Ratio over time due to the investors’ profile of these companies’ shareholders. Hence, as an investor, I would just keep track of the business fundamentals as they generate earnings (wealth) to investors or shareholders in the long-term.
In short, I don’t time the market.
But rather, I would prefer to have “time in the market”. This means my personal aim is to invest in sound businesses that would grow its earnings over time. The more these businesses earn, the more dividends they pay, and the greater their valuation over time. “Time in the market” is greater than “timing the market”.
Presently, we are launching Growth Vault, an online course, which is catered for growth-oriented investors who intend to build and manage U.S. stock portfolios independently. The opening would end on 30 September 2023. To check us out, please click the link and obtain a 31% discount for its yearly subscription:
Link: Growth Vault
