Thursday, April 22, 2010

Timed the Market

A lot of Warren Buffett followers argue that timing to buy stock is less important as compared to buying under value stock. According to this group of investors, they are prepared to ride through the ups and downs of the market. If a stock is brilliant, they don't mind to practice buy and hold strategy. To them finding a good stock is more fruitful as compared to trying to time market entry.

I am a big fan of Warren Buffett. Did Warren Buffett timed the market? I had asked myself this question previously. My conclusion is Warren Buffett did timed the market. He always bought stocks during down turn and practice buy and hold for long term investment afterward. So people saying Warren Buffet did not timed the market is not right. The different is he only timed the market during crisis. He seldom time for a minor correction because short term up and down is unpredictable. However major correction is unavoidable, that is why he is prepared with huge cash pile for big buy during crisis. He bought Washington Post in year 1974, Coca-cola in 1988 and most recent GE and Goldman Sachs in 2008. If he did not time the market then why he always purchased stock at downtime?

I did write a post regarding a sizable correction every 3-5 years and a major correction every 10-12 years. So should we take advantage of it or ignore it totally??

I sold 70% of my stocks at mid year of 2008 and start buying back from end 2008 until early 2009. Just purely luck. Good timing did help a lot.

Don't forget that we, small investor, don't have constant big cash flow to invest as compared to Warren Buffett. Your monthly saving might be negligible compared to your portfolio, how you going to rely on that? To me, portfolio management and applying appropriate strategy are very important. Especially when your portfolio is already sizable.

Therefore, don't time the "kacang putih" drop, but time for significant correction. Normal day just hold on to your good quality stock, preferred growth stocks or growing stock (mid teen is acceptable) with good dividend.

Value investing did not mean that you cannot time the market.

I wrote this because a question posted to me.

19 comments:

  1. This comment has been removed by the author.

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  2. Hi 2nd brother, thanks for the write ups. What you said is true. WB indeed buy at the major corrections, and he seldom sell.

    I think investing fund is one of the constraint for retail investor like you and me ,however, the biggest obstacle for every investor is to how to buy at the correct timing and sell at the correct timing on the correct stocks/counter. For a good stocks, you buy when it is expensive, during bulls, you cant acheive max return. instead it will be a 'moderate' investing. For a good stocks, like you said , buy during bear , and sell during bulls definetly is good. But the question is, how we know is where is the bottom of major corrections and where is the top of the bulls. How you define , minor corrections and major corrections? How we analyze it?

    Add on smthing. To me, i see myself as a novice investor as I usually dont have the holding power to hold a stocks as well as dont have the the patience to buy at the lowest or among lowest hold untill it reach the highest. I think i need to practice somemore

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  3. 这也是很多人一直在猜测的
    什么时间是股底?会起到多少钱?
    我觉得这种事大概只有发生了之后我们才知道吧~

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  4. Ivan, nobody know exactly where the bottom is. What we can do is buy in stages. There are 2 ways to do that, 1st is to buy at certain price and add some more if the price drop more. Example, if a stock is dropped from 10.00 to 6.00, you can buy some at 6.00, if the price dropped some more to 5.00 you can add to your position, if price dropped to 4.00 you can also add. There is possibility that you might buy too early, practicing this way you can average down your purchase price. Personally, I like this method.

    The 2nd way is you buy at certain time frame. Example, at Dec 2008 you buy some, at Jan 2009 you add your position; and Feb 2009 you add more again. This method also will help you to average the purchase price.

    Similarly, nobody will know where the top is. So say you sell some at KLSE 1400 points, some at 1500 points and so on. Sometimes is not very difficult to sense the bubble, like volume is very huge, everyone is talking of share, most of investors are making good money.

    For those who still not able to find good quality stock, timing the market may not good for them. Unless them time the big big correction. Because the big correction may not occur frequently, at normal time you need to have good quality stocks in order to make money.

    A sizable correction can up to 20%, and major correction is 30% and above.

    The next trading day after 308 election, KLSE dropped more than 100 points in few hours. That was totally illogical, I bought some share. After 911 terrorist attack, I also bought more. These are purely example, not to show off.

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  5. dun be so humble. even u want to show off, i dun think they should argue with u. haha....

    Thanks again for your sharing in past and recent posts. Really wish you keep on sharing.Your articles and experience really enlighthen me a lots. I have to say thank you again.

    just a question here, most of your strategy, u practise in bear market or bull market? or timing shall not affect your strategy?

    Thanks for the sharing.

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  6. An useful one. I suddenly remember one investing quote. As a investor, when you got nothing to do ;the opp doesnt appear, then do nothing. I think the keywords here are waiting and patience.

    Do write ups more. Thank you

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  7. tan81, my strategy is to construct a portfolio will beat KLCI and the same time I can sleep well. That is why I always emphasized that my portfolio consist of traditional value stocks plus certain percentage of growth stock in order to beat the market. However, i also always revisit my strategy to make some adjustment. Whether to increase my cash position or increase my stock position. Besides, i also always try to re-balance the percentage of value stock and growth stock. All these are depend on what my view of the market.

    Bull and bear market are unavoidable, that is rule of the game. As a small player I cannot change that. So i will follow the rule of the game. Some people ignore that, they stay 100% committed; some said they are prepared to ride through that; some don't know about that; and some like me will try to capitalize that.

    Strategy is not cast in stone, we need to review it from time to time. All depend on what happen in the market.

    Like few months ago, look like the economy is recovering, some still stick to their so called "value stock" like BAT, BTOTO......., these kind of stock only out perform growth stock or cyclical stock in down turn in relative term. They did not realize these group of stocks well rise much more lesser that growth and cyclical stocks. They did not re-balance their portfolio, i doubt they are making good money. Although they are still making money. Reader of my blog should noticed that i started balancing my portfolio at end 2009 to position myself.

    Please remember the objective of buying stock, is to make money.

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  8. Thanks for ur reply. I read this few days ago,and still reading it a few more times.coz ur sharing makes me understand more.

    u r damn right.

    it is really lucky for me to listen to u last year.thanks to ants,too.

    As u know,i am holding a pile of nestle.wat u may not know is, i was collecting an electronic share,too. And recently, electronics are in growth industry, as u said. So, the earnings enable me to beat the market, which nestle can't do.

    ur sharing is real experience.but i am dumb and takes quite some time to see it. hope one day,i can reach ur height to see this.

    When u want to rebalance ur porfolio again? i guess it should wait till the industry cycle ends in its growth?

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  9. I guess Mr Buffett never actually try to predict the market. He buys aggresively during a market downturn, and buy cautiously when the market is deemed overvalued by him (that could be seen with the high cash ratio during the mid 2000s).

    Mr Buffett did buy Goldman Sachs and GE when the tide seems going all the way down. But, he regretted the decision later as he said he should have waited for a little longer before investing in both companies.

    In this decade, I thought Mr Buffett has learned the importance of market timing. His purchase of PetroChina in 2002 was the perfect buy. The China market was cheap back then and so did the oil price. However, he made a serious mistake when he bought ConocoPhillips at the exact peak of the oil price and when the market is overvalued. In fact, ConocoPhillips is a good company with decent earning power but the wrong timing of the purchase has cost Mr Buffett a lot of money.

    Thus, in a volatile market like this, market timing becomes more important. Mr Buffett never had to time the market because he is someone who had experienced the two greatest bull market in American History which a buy and hold strategy fits perfectly. Besides, Mr Buffett primarily invests for cash flow, not capital gain. As a small player, I doubt that one could mimic the strategy of Warren Buffett when it comes to investing.

    I am a big fan of Warren Buffett too. Sometimes, I would ask myself questions like "Should I lock in profit and get out of the market temporarily in anticipation for a correction or a bear market?". The stocks which I bought are good companies with good management, why should I sell them?

    It is extremely profitable to time the market but it is easier said than done. There arent many good market timers around. George Soros could be the best but he made some mistakes too, eg. Japan in the 90s. Stanley Druckenmiller is another elite market timer but he was dead wrong during the technology bubble. The conclusion is you cant be 100% correct everytime when timing the market. You ought to make some good calls and some bad calls.

    Market timing requires an active strategy of managing your investments. You are required to trade in and trade out the market a lot. Not many people have the time and dedication to time the market. So, one should be wise when it comes to market timing. If you see a bear market coming, just sell, sell, sell. If you saw that coming and didnt make any changes to your portfolio, I would call you an idiot!

    I am a big fan of Warren Buffett. I guess it is best to hold some good companies which pay you dividends and that would give you that extra cushion during a bear market. Just simply buy more when the valuation is cheap and sell when the valuation is expensive. Some stocks are suitable to hold for the long term but some stocks are not, eg. cyclical stocks. To be profitable in investing in a cyclical stock, a macro style timing is inevitable.

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  10. “Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.” (Berkshire Hathaway 2004 Chairman’s Letter)

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  11. JP, thanks for your reply and opinion. You are right that Warren Buffett did not actually predict the up and down of the market. However, he is prepared to take advantage of the foolish of the market. People who is saying WB only invest the stock market for cash flow is only correct at surface. If he only invest for cash flow, then at no ground he had disposed his Petro China. He shall keep it and enjoy the cash flow (dividend) year after year. His cash flow are mainly derived from the float from his insurance company, privately held business, and preference share.

    Again, people who are saying WB is practicing focus investment is also correct at the surface only. We cannot denied that WB stock portfolio is quite concentrate, however this is not the overall picture of his investment. He own plenty of private businesses from big variety different nature. Stock is not his only investment class. He is diversify enough.

    WB, during his early day of investing, he invested into undervalue stock and sold it when the market appreciate that stock. He roll and accumulate capital. He only changed after his capital is sizable and accepted the investing philosophy of Philip Fisher. Today he is not totally in this kind of game, but he still practicing that.

    Benjamin Graham, did proposed that investor shall always balance the portion of stock and bond. When the market is bull, increase the bond portion. When the market is bear, increase the bond portion. I dont have bond, what i do is always reviewing the stock and cash portion. I am aware that i cannot mimic WB, so i do it my own way. The point i want articulate is not only timing issue but the preparedness of an individual investor. If your cash level cause you cannot sleep well, the only logic is increase your cash level.

    What i try to do is integrate the philosophy of Ben Graham, Warren Buffett and Philip Fisher to suit my own needs.

    When come to stock selection my strategy is constructed based the concept of Philip Fisher and Benjamin Graham. I owned some value stocks and growth stocks, and i try to balance the two to beat the market.

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  12. It's a pleasure to read your blog, 2nd brother!

    Yeap, Buffett trades "value" instead of buy and hold in his early days of investing and achieving a string of 60%++ returns for his partnerships. I think Buffett picks up the philosophy of buying wonderful companies at a reasonable price in the early 1970s. The American economy during that period wasnt very impressive. Stocks were very cheap back then and he bought a lot.

    In my opinion, I think Buffett never wanted to sell PetroChina. I was scratching my head when he sold PetroChina in 2007. That's just not his style you know. I think the Darfur genocide influenced his decision to hold the company for a long long time.

    2nd brother, you talk about the float from the insurance company. I read somewhere that Lou Simpson, the CIO of Geico is currently managing a portfolio of $4B. Do you know the approximate value of float that Buffett gets from his insurance businesses?

    I share the philosophy of buying wonderful companies with a margin of safety. But, what I am trying to do is adding the "timing" thing into my investments based on macroeconomic factors. The timing thing is still out of my circle of competence, I admit and I might even be too dumb to learn it. Nevertheless, timing is quite important when it comes to assets like commodities, currencies and bonds where the fair value of the assets are hard or impossible to predict.

    Your strategy of owning both value stocks and growth stocks is a strategy worth referring. I think it is a good strategy to implement as value stocks win in a bear market while growth stocks win in a bull market! When a bear market comes, the value stocks could serve as a hedge against the temporary panic sell off by providing cash flow with dividends. When a bull market comes, the growth stocks could help you to beat the market while waiting Mr. Market to realize the fair value of the value stocks.

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  13. Hi, 2nd Brother,

    It's a great pleasure in reading your posting. Just one question on your write-up: is there any difference between "growth stock" and "growing stock"? mid-teen is referred to the PE of the stock?

    thanks
    --------------------------------------------
    Therefore, don't time the "kacang putih" drop, but time for significant correction. Normal day just hold on to your good quality stock, preferred growth stocks or growing stock (mid teen is acceptable) with good dividend.

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  14. JP & the Rock, not free lately. Will reply ASAP.

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  15. JP, regarding the float WB obtained from his insurance units, you can always refer to Berkshire annual report.

    The Rock, my strategy is to hold both value stocks and growth stocks. But the "value stock" that i refer to is not the traditional value stock which end up holding Nestle, BAT, BTOTO and the like. I am refer to stocks that still growing at mid teen (10-20%) and pay good dividend, like Public Bank, CIMB, LPI, Tanjong....These kind of stock did not grow at rate can consider as growth stock but they still growing consistently year after year. Because they are paying good dividend, thus their dividend will support their share price at certain extend. Over long term, 10% grow + 5% dividend would provide 15% return. Although it is not extremely high but these companies are good at corporate governance, transparency, good management would make me sleep well.

    Since this category is lack of definition i called it as growing stock with good dividend.

    Investing is long term business, so you cannot rely on a single selected stock. People who is relying on single stock is not in this market long enough or their capital is not reach a level where applying strategy is required.

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  16. Yee Loh!

    How are you? Good write.

    IINM Unker Bufffy said he priced his stock entries, ie.. buying when he thinks the stocks are cheap.

    And ironically... this happens in a market downtrend.

    Which means.. you can either call it as 'market timing' the stock purchases or you can call it buying only when the stocks are really cheap.

    :D

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  17. Excellent post! Timing the market can really enhance yout profitability if done right. i went in end 2008 and again september 2010. now we are in a strong bull market. I dont really believe in forecasting the market but trend following is an excellent strategy. we don't have to buy at the bottom, just close enough is good. And similarly once the market started to slide off from the top.

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