Author Topic: Differentiating value investing from market timing  (Read 9142 times)

mrbrighton

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Differentiating value investing from market timing
« on: December 28, 2013, 08:29:17 AM »
This is my first post and I was hoping to hear some thoughts on how some of you separate investing at attractive valuations from market timing.  As P/E ratios (and other popular metrics) stretch it is becoming more difficult for me to put money into parts of the market that seem the most richly valued. As an example, my target allocation calls for a significant investment in US small caps. However, Vanguard small cap is near 28 times earnings. We all are aware (or should be) that timing the market is a suckers game, however, putting money into funds at such lofty levels seems unwise to me. How do you all view such scenarios? Doesn't it make sense to deviate from targets in order to invest in sectors offering better perceived value? No one can predict the future, but I would say it's reasonable to expect better long term returns from Vanguard Value Index (US large cap) at 16 times earnings than the small caps at 28.
« Last Edit: December 28, 2013, 09:40:42 AM by mrbrighton »

kyleaaa

  • Bristles
  • ***
  • Posts: 327
    • Kyle Bumpus
Re: Differentiating value investing from market timing
« Reply #1 on: December 28, 2013, 09:17:45 AM »
That's market timing. Besides, I do not believe it is reasonable to say a fund at 20 times earnings is likely to under perform a fund at 16 times earnings. We don't have enough information in that case to reach a reasonable conclusion.

Nothlit

  • Bristles
  • ***
  • Posts: 402
Re: Differentiating value investing from market timing
« Reply #2 on: December 28, 2013, 09:18:04 AM »
Maybe I'm naive, but I just don't pay attention to those kinds of metrics, nor do I slice up my investments by large cap, small cap etc. My asset allocation is much broader and simpler: 80% stocks/20% bonds; stocks 70% domestic/30% international. I use total-market index funds to achieve this (e.g., Vanguard Total Stock Market Index Fund, Vanguard Total International Stock Index Fund, etc.).

I have no idea if my method outperforms someone who slices and dices, but my preference is for simplicity, ease of implementation, and not having to worry about anything other than just putting money in at regular intervals.

I got most of my investing advice from the Bogleheads forum and wiki, so that may explain why I've made these particular choices.

moneetalks

  • 5 O'Clock Shadow
  • *
  • Posts: 19
Re: Differentiating value investing from market timing
« Reply #3 on: December 28, 2013, 09:29:43 AM »
Remember why you invested in funds like these in the first place - to get diversification and a safe chance at solid returns without a lot of fees.  These are both very solid funds and investing in both is about the safest way I know to benefit from small cap exposure. 

mrbrighton

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Re: Differentiating value investing from market timing
« Reply #4 on: December 28, 2013, 09:33:41 AM »
It is related to market timing, which is why I wanted to ask about it. But history shows that investing in stocks when valuations are lower (eg early 80s) offers better long term returns than when valuations were higher (eg late 90s).

Also, there are credible examples of people warning of high valuations, such as Robert Shiller and Warren Buffett around 2000. Neither of those would recommend timing the market but I bet neither would have recommended investing in US large caps at 30 X earnings either.

the fixer

  • Handlebar Stache
  • *****
  • Posts: 1035
  • Location: Seattle, WA
Re: Differentiating value investing from market timing
« Reply #5 on: December 28, 2013, 09:39:16 AM »
http://www.cbsnews.com/news/the-case-for-rebalancing/

Quote
Wise investors know that while reversion to the mean is a powerful force, trying to trade on that information is a loser’s game. One reason is that streaks of abnormally low or abnormally high returns can continue for a long time. The following insightful quote has often been attributed to John Maynard Keynes, perhaps the most famous economist of modern times: "The market can stay irrational longer than you can stay solvent."

the fixer

  • Handlebar Stache
  • *****
  • Posts: 1035
  • Location: Seattle, WA
Re: Differentiating value investing from market timing
« Reply #6 on: December 28, 2013, 09:44:13 AM »
By the way I just finished reading an old edition of A Random Walk Down Wall Street. It was published in 1998.

It's really interesting to see Malkiel's commentary on the stock market at the time. He essentially is unable to tell the market is still high despite putting it in context to all the bubbles of the past. At any point in time, at both peaks and troughs, there will be people on one side saying the market is overvalued while there are others saying it's undervalued, and both sides can make convincing arguments to support their position. If you want guaranteed results, don't pick a side. Only do so if you feel like gambling.

prestojx

  • 5 O'Clock Shadow
  • *
  • Posts: 67
  • Location: Boulder, CO
Re: Differentiating value investing from market timing
« Reply #7 on: December 28, 2013, 12:15:06 PM »
I will also echo what others are saying. These metrics have meaning but really can't be used to determine where or when to invest.

I heard these same things said constantly throughout the late 90s and clearly the market was overvalued based on P/E ratios and other metrics. Many "experts" advised getting out of the market and as a relatively inexperienced investor, I was unsure what to do. However, I followed the advice of Swedroe, Bogle, et al. and just stayed the course. So while people I knew got out of the market, I made a ton of money.

Granted 2000 (and 2008!) sucked but of course no one rang the bell at these tops (unless you count the people who are like a broken clock - correct 2 times a day)
I now have the perspective to see these bear markets as necessary and wholly unpredictable.

I know a smart guy that spends a lot of energy trying to value the market and always concludes it is overvalued. He has been out of the market for a decade now. I asked him in  2007 what it would take for him to invest in equities. He said he would invest if the market dropped more than 30%. And when that happened in 2008/2009, he was way too terrified (along with everyone else) to do it. He missed the turn and is now back to calling the market overvalued. Meanwhile, I have made another tidy sum.

It's only in hind site that a market downturn (lower P/E ratios, etc.) looks like a good time to invest. During the actual downturn, fear is high and there is no way to know if the market will drop another 30 or 40 percent more. So, in theory these types of analyses may make some since - however in practice......

Just make a plan and stick to it through thick and thin and you will likely come out way ahead.
« Last Edit: December 28, 2013, 12:20:47 PM by prestojx »

Jamesqf

  • Magnum Stache
  • ******
  • Posts: 4047
Re: Differentiating value investing from market timing
« Reply #8 on: December 28, 2013, 03:12:37 PM »
It's only in hind site that a market downturn (lower P/E ratios, etc.) looks like a good time to invest. During the actual downturn, fear is high and there is no way to know if the market will drop another 30 or 40 percent more. So, in theory these types of analyses may make some since - however in practice....

Worked for me :-)  Maybe it takes a special kind of contrary mind to do it, one that - unlike your friend - doesn't get terrified when buying opportunities appear. 

Personally, I'd put all the "can't possibly time" naysayers in the same bucket as those who claim that ordinary non-lottery-winning people can't possibly accumulate enough of a stash to become financially independent.

Ziggurat

  • Stubble
  • **
  • Posts: 125
  • Age: 55
  • Location: Toronto area
Re: Differentiating value investing from market timing
« Reply #9 on: December 28, 2013, 03:34:37 PM »
I know a smart guy that spends a lot of energy trying to value the market and always concludes it is overvalued. He has been out of the market for a decade now. I asked him in  2007 what it would take for him to invest in equities. He said he would invest if the market dropped more than 30%. And when that happened in 2008/2009, he was way too terrified (along with everyone else) to do it. He missed the turn and is now back to calling the market overvalued. Meanwhile, I have made another tidy sum.

I was pretty similar to that guy, but I did have some courage to buy near the bottom in early 2009. Those stocks (before I knew much about index investing) are all up almost double and have great dividends relative to my original investment; I chose well.  BUT ... it doesn't matter. It was only part of my money and not enough that the doubling changed my life.  Before that the money sat unused (well, about half of it in low interest rate vehicles). I haven't actually done the math, but I'm pretty sure I would have been much better off to at least buy and hold and get the ~2% dividends through the years before and after the crash. Now I am a believer in the index and buy/hold principles, so I've continued to buy since 2009, even through the big run-up the last couple of years, which would have scared me off before.

However, I don't think there is anything wrong with leaning your choices one way or the other.  Everyone sets up a diversification allocation based on their risk comfort level. It makes sense that your comfort level changes depending on whether the market is very high or very low. Changing the allocations a little (but not a lot, for all the reasons others have outlined) to me makes sense. It may help your portfolio a little, with a relatively small risk of losing some gains compared to a pure "no-timing" strategy.


prestojx

  • 5 O'Clock Shadow
  • *
  • Posts: 67
  • Location: Boulder, CO
Re: Differentiating value investing from market timing
« Reply #10 on: December 28, 2013, 03:39:27 PM »
Personally, I'd put all the "can't possibly time" naysayers in the same bucket as those who claim that ordinary non-lottery-winning people can't possibly accumulate enough of a stash to become financially independent.

Good for you. You may be that one rare person that can pull it off consistently. If so, you certainly won't have to worry about Financial Independence.

Respectfully however, I would put most people who think they can time the market in the same bucket with those who confuse luck with skill.

prestojx

  • 5 O'Clock Shadow
  • *
  • Posts: 67
  • Location: Boulder, CO
Re: Differentiating value investing from market timing
« Reply #11 on: December 28, 2013, 04:24:29 PM »
However, I don't think there is anything wrong with leaning your choices one way or the other.  Everyone sets up a diversification allocation based on their risk comfort level. It makes sense that your comfort level changes depending on whether the market is very high or very low. Changing the allocations a little (but not a lot, for all the reasons others have outlined) to me makes sense. It may help your portfolio a little, with a relatively small risk of losing some gains compared to a pure "no-timing" strategy.

That sounds very good but the problem is knowing when "the market is very high or very low." It seems like it is possible but it is only with some perspective that the idea of high or low makes sense.
Is it high or low right now? We may know in 5 years or so.

Since the late 80's the Nikkei has been basically flat but has had some large moves up and down. Do you really think if you lived in Japan and primarily invested in the Nikkei, you would have been able to predict which move was a breakout up or down - or was nothing more than noise in a long sideways move? The reason many people believe they can do it in the US is that the long term trend of the market always bails them out. No one knew in 2000 or 2008 how low the market would go or how long it would stay down.

On the other hand, my Dad said that when the Dow crossed 1,000 for the first time, everyone thought it was insanely overvalued and maybe it was but I would ask if it would have been a good idea to shade your allocation down? I would ask the same question at a Dow of 5,000, 10,000, and 15,000.

That being said, I opened a 529 plan in 2009 with the maximum contribution. It has more than doubled but I don't kid myself I had correctly valued the market. It was pure luck. I also try to add to my equity holdings when the market backs off significantly but I never know if it will work out. One of these days we may head into a Japanese style sideways market that lasts for decades. If that happens, I bet there will be a distinct lack of people claiming they can tell when the market is under or over valued.

Jamesqf

  • Magnum Stache
  • ******
  • Posts: 4047
Re: Differentiating value investing from market timing
« Reply #12 on: December 30, 2013, 01:05:57 PM »
Good for you. You may be that one rare person that can pull it off consistently. If so, you certainly won't have to worry about Financial Independence.

Respectfully however, I would put most people who think they can time the market in the same bucket with those who confuse luck with skill.

There's certainly some of that, but I think the real problems with what I'll call 'macro-timing', or taking advantage of bubbles and busts, is having the capital available to take advantage of them.  If it's just sitting around waiting for the bubble to pop (and I certainly agree that it's not possible to perdict exactly when that's going to happen), it' not earning anything much.

So the best you can do, I think, is ) not panic sell in the crashes; and b) decide what the best value investment is at any given time.  As for instance, in the couple of years before the '08 crash, I thought stocks were getting into bubble territory, so much of my disposable income went to home improvements (that have paid off in energy efficiency) paying down the mortgage, and recreational spending.  After the crash, that spending got cut to the bone so I could buy more stock.

This isn't a strategy that's going to make anyone a fortune, but I think it does offer modest advantages.

prestojx

  • 5 O'Clock Shadow
  • *
  • Posts: 67
  • Location: Boulder, CO
Re: Differentiating value investing from market timing
« Reply #13 on: December 30, 2013, 05:04:05 PM »
So the best you can do, I think, is ) not panic sell in the crashes; and b) decide what the best value investment is at any given time.  As for instance, in the couple of years before the '08 crash, I thought stocks were getting into bubble territory, so much of my disposable income went to home improvements (that have paid off in energy efficiency) paying down the mortgage, and recreational spending.  After the crash, that spending got cut to the bone so I could buy more stock.

This isn't a strategy that's going to make anyone a fortune, but I think it does offer modest advantages.

I like your idea of trying to decide where value is best. I have just realized that I can't do it when it comes to the stock or bond market (and apparently neither can most of the pros). There are just too many variables. I do try to add a bit to my equity holdings on the big drops but I never know if it will work out. So far the long-term trend has been on my side. And of course when I rebalance my portfolio, I accomplish the same thing but it is purely mechanical and I am not trying to predict anything.

I did try to take advantage of the situation in 2008 by putting an LP together to buy commercial real estate and bank notes in default. There were people who were desperate for cash and credit had completely dried up. We could close very quickly and because of that, I think we bought some properties at rock bottom prices. This is an area where there are fewer unknowns and I feel much more confident I can accurately assess the value.

But as they say in Colombia "Todos estamos en la lucha!"
Buena suerte!

« Last Edit: December 30, 2013, 05:10:38 PM by prestojx »

wtjbatman

  • Handlebar Stache
  • *****
  • Posts: 1310
  • Age: 36
  • Location: Missouri
Re: Differentiating value investing from market timing
« Reply #14 on: December 30, 2013, 09:52:52 PM »
That's market timing.

So? This anti "market timing" idea is just Boglehead cult speak. The idea behind it is that the average investor can't beat the market. Well guess what, people who spend a significant amount of time researching and investigating the markets aren't average investors. What Bogle and index hounds like him are saying is that the average person who only thinks "Well I've heard of Apple, time to dump my life savings into AAPL." is most likely not going to come out ahead. Especially since that person will probably shift their position into and out of AAPL way too often.

Value investing is not impossible, crazy, or even particularly difficult. Buffet made a few bucks doing it. And even investors with much more modest means than Buffet can evaluate stocks and determine whether you should invest your money in them. Just keep in mind that to be an effective value investor you still need to practice patience and follow a buy and hold strategy. Value investing just helps you determine where you should put your money that will give you the greatest chance at being successful. It's the short term investors who have trouble timing the market.

Price to earnings ratio is just one of many tools that a value investor uses.

Khan

  • Pencil Stache
  • ****
  • Posts: 616
Re: Differentiating value investing from market timing
« Reply #15 on: December 31, 2013, 04:38:28 AM »
I agree that value investing isn't market timing. That said, if you're investing in a market fund, then you shouldn't be looking at P/E, you should be looking at asset allocation. Looking at P/E and saying it's too high for the entire market is a form of market timing.

Looking at a specific stock, P/E, yield, headwinds, market currents and saying that it itself is in value territory is something else entirely. It's A: work, and B: research.

If you want to choose to value invest, or invest for DGR, then do so.
https://personal.vanguard.com/us/funds/etf/all?assetclass=stk&assetclass=stk&assetclass=stk&assetclass=stk
large cap:
VIG(Dividend Growth)
VTV(Value)

Small cap:
VBR(small cap value), which has a P/E of 22.3

However, if you're looking at total market funds, then I think you should simply choose asset allocation amounts to each market, rebalance, etc.


ender

  • Walrus Stache
  • *******
  • Posts: 5423
Re: Differentiating value investing from market timing
« Reply #16 on: December 31, 2013, 07:52:01 AM »
So? This anti "market timing" idea is just Boglehead cult speak. The idea behind it is that the average investor can't beat the market. Well guess what, people who spend a significant amount of time researching and investigating the markets aren't average investors. What Bogle and index hounds like him are saying is that the average person who only thinks "Well I've heard of Apple, time to dump my life savings into AAPL." is most likely not going to come out ahead. Especially since that person will probably shift their position into and out of AAPL way too often.

From my perspective, considering the number of funds which are managed by people whose full time job is to not be an average investor yet they can't consistently (or practically even frequently) beat the market, well, I don't hold a lot of promise for my own abilities to do so.

prestojx

  • 5 O'Clock Shadow
  • *
  • Posts: 67
  • Location: Boulder, CO
Re: Differentiating value investing from market timing
« Reply #17 on: December 31, 2013, 11:28:35 AM »
Really?? Anti-market timing is just cult speak?? Have you considered the vast amount of evidence and the many studies that show, over time, only 10% of actively managed funds outperform their passive asset class equivalents.

Also FYI, market timing and Value investing are vastly different things.

Are you also saying that it is not particularly difficult to build a portfolio of value stocks that outperform a passive asset class equity portfolio after expenses and taxes?

If so, and if you have done this for 10+ years with the same level of risk (volatility) as a passive portfolio, why haven't you opened a fund? It sounds like you could even keep your day job.

If not, you may want to read Fooled by Randomness by Nassim Nicholas Taleb.

A couple of other things you may want to consider.

Value stocks are typically low P/E for damn good reasons. They are out of favor because they are perceived to have a serious problem and some do eventually go out of business. This is why Value stocks have earned higher risk premiums over the years - they are riskier!

How many Value stocks do you think you need to own to offset single issue risk? 30? 50? How easy is it to pick 30+ stocks that will outperform in aggregate over a 10 to 15 year market cycle?

Also, when someone uses Warren Buffet as an example of what an investor can do, I wonder if they really understand how exceptional he is. Read The Snowball and tell me if you actually believe his skill set, psychology, and work ethic are readily reproducible.

There is a reason why he is probably the single greatest investor of all time and why he recommends a passive investment strategy for most people.

There is also a reason why after a few years of a bull market, naive investors start to talk about how easy it is to pick stocks or talk about having 100% equity allocations!!

Eric

  • Magnum Stache
  • ******
  • Posts: 4061
  • Location: On my bike
Re: Differentiating value investing from market timing
« Reply #18 on: December 31, 2013, 12:13:28 PM »
I was right there with you until the end.

There is also a reason why after a few years of a bull market, naive investors start to talk about how easy it is to pick stocks or talk about having 100% equity allocations!!

What's wrong with a 100% equity allocation while you're in your accumulation phase?  It's not like you're looking to sell anytime soon.

prestojx

  • 5 O'Clock Shadow
  • *
  • Posts: 67
  • Location: Boulder, CO
Re: Differentiating value investing from market timing
« Reply #19 on: December 31, 2013, 01:10:44 PM »
I was right there with you until the end.

What's wrong with a 100% equity allocation while you're in your accumulation phase?  It's not like you're looking to sell anytime soon.

IMO, it is making the mistake of thinking that current market conditions will prevail forever and believing that, because we have had a bull market for several years, equity risk isn't real. Controlling risk is every bit as important as trying to achieve superior returns. How would you feel about losing 30 to 50% of your portfolio value for several years in a row? - because that is the kind of risk you are taking with a 100% equity portfolio. If that were to happen, it could deal a death blow to your plans for FI.

Bonds can add stability to a portfolio and reduce risk significantly. Also bonds have, at times, outperformed stocks for over a decade. You never know which asset class will outperform or for how long.

The goal is to build a portfolio that will grow safely and steadily for decades, not one that works for a few years and then blows up.

Buena suerte.


Eric

  • Magnum Stache
  • ******
  • Posts: 4061
  • Location: On my bike
Re: Differentiating value investing from market timing
« Reply #20 on: December 31, 2013, 02:10:47 PM »
I was right there with you until the end.

What's wrong with a 100% equity allocation while you're in your accumulation phase?  It's not like you're looking to sell anytime soon.

IMO, it is making the mistake of thinking that current market conditions will prevail forever and believing that, because we have had a bull market for several years, equity risk isn't real. Controlling risk is every bit as important as trying to achieve superior returns. How would you feel about losing 30 to 50% of your portfolio value for several years in a row? - because that is the kind of risk you are taking with a 100% equity portfolio. If that were to happen, it could deal a death blow to your plans for FI.


You mean I shouldn't expect the S&P to return 29% every year?  :)  Too bad.  This was a fun year!

How would I feel after a large drop or three?  A little disappointed when looking at my overall net worth, but excited to be able to buy shares so cheaply.  You've only lost money if you sell, right?  But the market will recover.  It always does.  I mean, if the market drops 50% per year for 3 years and never recovers, then we're all screwed anyway.  At least as far as FIRE goes, and probably worse than that.

Happy New Year!

wtjbatman

  • Handlebar Stache
  • *****
  • Posts: 1310
  • Age: 36
  • Location: Missouri
Re: Differentiating value investing from market timing
« Reply #21 on: December 31, 2013, 02:33:12 PM »
I was right there with you until the end.

There is also a reason why after a few years of a bull market, naive investors start to talk about how easy it is to pick stocks or talk about having 100% equity allocations!!

What's wrong with a 100% equity allocation while you're in your accumulation phase?  It's not like you're looking to sell anytime soon.

Bogleheads will tell you that it's dangerous because of the fear factor. I've read this on multiple threads. Someone will post about how they are 100% into equities. Bogleheads will ask, what is your risk tolerance? The person will say it is high, and that they will stick with equitities even during a market downturn. You then get half a dozen bogleheads jumping down the person's throat telling them they can't possibly know their risk tolerance in that situation, and really, they need to diversify.

I really shouldn't lump all bogleheads together. I actually love reading their forums, there are a lot of knowledgeable people on there. But there is also the persuasive idea that there is only one way to invest to get the best returns, and that is a three index fund portfolio. And it's usually a 70/30 allocation with 25% in international. 60/40 for many of the more conservative bogleheads.

wtjbatman

  • Handlebar Stache
  • *****
  • Posts: 1310
  • Age: 36
  • Location: Missouri
Re: Differentiating value investing from market timing
« Reply #22 on: December 31, 2013, 02:41:19 PM »
Also FYI, market timing and Value investing are vastly different things.

Indeed they are. Notice my original reply was to kyleaaa, who called the original poster's ideas market timing. When in reality the OP was just talking about value investing.

Funny how you're speaking for Buffet. Let's hear it from the man himself. "If you like spending 6-8 hours per week working on investments, do it. If you don't, then dollar-cost average into index funds." (Source). Even Buffet thinks if you're the average investor, you should just invest in an index fund. No argument there. But as I've repeated, and just like Buffet said, if you can and do devote several hours a week to researching stocks... then go for it. Is it "riskier" than shoveling money into index funds? Yep. It also has the potential for greater gains. Plus it's just plain fun.

prestojx

  • 5 O'Clock Shadow
  • *
  • Posts: 67
  • Location: Boulder, CO
Re: Differentiating value investing from market timing
« Reply #23 on: December 31, 2013, 03:01:46 PM »
You mean I shouldn't expect the S&P to return 29% every year?  :)  Too bad.  This was a fun year!

How would I feel after a large drop or three?  A little disappointed when looking at my overall net worth, but excited to be able to buy shares so cheaply.  You've only lost money if you sell, right?  But the market will recover.  It always does.  I mean, if the market drops 50% per year for 3 years and never recovers, then we're all screwed anyway.  At least as far as FIRE goes, and probably worse than that.

Happy New Year!

Haha - for sure! I would love to see that return for say...... a decade more!

Take a look at this chart of the Nikkei. Don't think it couldn't happen here. In the 80s everyone thought we would all be speaking Japanese!
It hasn't been the end of the world in Japan but I still wouldn't want to be "all in" in the Nikkei.

http://finance.yahoo.com/echarts?s=%5En225+interactive#symbol=%5En225;range=my;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

Feliz Año Nuevo a ti, amigo!

Jamesqf

  • Magnum Stache
  • ******
  • Posts: 4047
Re: Differentiating value investing from market timing
« Reply #24 on: December 31, 2013, 03:37:47 PM »
You then get half a dozen bogleheads jumping down the person's throat telling them they can't possibly know their risk tolerance in that situation, and really, they need to diversify.

But I can and do know my risk tolerance in such situations, precisely because I've been there before.

Even Buffet thinks if you're the average investor, you should just invest in an index fund. No argument there.

Sure, though I add a value-investing fund or two to the mix.  But as I implied in my earlier post, for me the market timing aspect isn't about what stocks  or funds to buy, but about when & how much: cutting other spending to the bone to invest in downturns, spending on other stuff like home improvements when stocks seem to be in bubble territory.

Cyrano

  • Stubble
  • **
  • Posts: 123
Re: Differentiating value investing from market timing
« Reply #25 on: December 31, 2013, 04:15:53 PM »
Most of the studies that conclude the pros can't beat their index, compare an actively managed fund bound by its prospectus to invest in a particular asset class, to a broad index of that asset class. But that doesn't address what the OP is thinking about doing.

The OP is concerned that one asset class has gotten bubbly, and is considering underweighting it. 

What do studies say about money managers' track record with asset class rotation? (It's a harder question to study: what's the benchmark for the entire investable universe?)

prestojx

  • 5 O'Clock Shadow
  • *
  • Posts: 67
  • Location: Boulder, CO
Re: Differentiating value investing from market timing
« Reply #26 on: December 31, 2013, 04:56:50 PM »
Funny how you're speaking for Buffet. Let's hear it from the man himself. "If you like spending 6-8 hours per week working on investments, do it. If you don't, then dollar-cost average into index funds." (Source). Even Buffet thinks if you're the average investor, you should just invest in an index fund. No argument there. But as I've repeated, and just like Buffet said, if you can and do devote several hours a week to researching stocks... then go for it. Is it "riskier" than shoveling money into index funds? Yep. It also has the potential for greater gains. Plus it's just plain fun.

Good luck with all that!

the fixer

  • Handlebar Stache
  • *****
  • Posts: 1035
  • Location: Seattle, WA
Re: Differentiating value investing from market timing
« Reply #27 on: December 31, 2013, 05:19:42 PM »
FWIW there have also been studies that other types of institutional investors, like pension funds, underperform the market on average. It's not just the managers of actively managed mutual funds.

wtjbatman

  • Handlebar Stache
  • *****
  • Posts: 1310
  • Age: 36
  • Location: Missouri
Re: Differentiating value investing from market timing
« Reply #28 on: December 31, 2013, 06:46:08 PM »
Ironically, in some ways an actively managed fund is more handcuffed than an individual investor. An actively managed fund is usually limited to specific asset classes (like Cyrano pointed out), and the sheer size of the fund precludes certain types of investments (think small-caps). The larger the fund, the more likely it will only focus on companies with a large market capitalization. Funds can also be limited by law on how much they can invest in a single company. This doesn't matter when you're talking about WMT, XOM, or MO, but it does matter when you're talking about small or mid caps. At that point you can see why it may not be worth it for the fund to even invest in certain stocks. Stocks that, to an individual investor, may be fantastic growth or value buys.

Snowboard junkie

  • 5 O'Clock Shadow
  • *
  • Posts: 50
Re: Differentiating value investing from market timing
« Reply #29 on: January 07, 2014, 10:25:15 PM »
To answer the original post:

Value investing can be entered into gradually (e.g. dollar cost averaging share purchases) and gradually picking up stocks that based upon research have low p/e ratios and you feel have a large potential upside.  One can value invest in a stock (or several) over the course of years waiting for the hoped for revelation that causes your chosen stock(s) to go up 1000% hopefully all the while capturing a high dividend rate.  A value investor will periodically switch the stocks they are purchasing based on perceived "value" but the same basic logic remains. 

Market timing is by definition a single (or several closely spaced) purchases trying to take advantage of a temporary downturn in a stock or market.  One cannot be consistently purchasing if one is a market timer.  The difficult part of being a market timer is having available capital to invest at the right time.  (where do you get it? more on this later)

To address the comments:
1. It is theoretically possible that some people (i.e. warren buffet) have the ability and discipline to be able to consistently outperform the overall equity market.  If you feel that you personally have such skills, congratulations.  Now, ask yourself:
a. Do I feel confident that I will not make an error or commit an oversight that will cost me significantly?
b. Do I really want to spend the time and energy that really mastering this subject requires?  (or would I rather actually enjoy early retirement?)  (I'm actually not being sarcastic - it's a valid and very important question)

2.  100% equity allocation has higher potential benefits but also significant risks in the event of buying high.  It only makes sense if and when:
a. you have good risk tolerance and will not panic when (not if) the market drops
b. you don't need that money for a house, car, or bills in the short term.  (i.e. if the market crashes and you lose your job, sucks to be you if all your hard earned savings are in that market)
c. what do you think market timers use as a source of cash to BUY when the market crashes?  You guessed it, that 30% of your portfolio that is in bonds gets liquidated and used to snap up bargains (if you really have good risk tolerance)

Jamesqf

  • Magnum Stache
  • ******
  • Posts: 4047
Re: Differentiating value investing from market timing
« Reply #30 on: January 08, 2014, 12:52:15 PM »
c. what do you think market timers use as a source of cash to BUY when the market crashes? 

I think I answered that before: for me it's a matter of cutting ALL other spending to the bone.

That lack of capital problem is, of course, the real reason why the macro version of market timing has such limited applicability.  I've seen maybe four good opportunities in my life, but was only able to really take advantage of two - '87 and '08.  If I'd just left money sitting around waiting, I'd have lost a lot of gradual growth & dividend income.