Market Timing: What All Great Investors Have in Common
by Floyd G. Brown, Advisory Panelist, Investment U
Wednesday, July 9, 2008: Issue #817
Where will oil be six months from now? And stocks? What about real estate?
Fact is, investors who try to concentrate on market timing are fooling themselves. Jumping in and out of the market isn’t a reliable strategy for wealth creation, and it isn’t successful – period.
Several years ago, New York University completed an exhaustive study of market timing. Here’s their conclusion:
“Its appeal to investors, notwithstanding, market timing remains an elusive dream for most. Looking back at market history, there have been far fewer successful market timers than successful stock selectors, and it is not clear whether even the few successes that can be attributed to market timing are more attributable to luck.”
The Financial Press – No Help With Market Timing
The financial press is no help with market timing…
Flip on any news channel and all day long, you will get up-to-the-minute, market timed reports on the Dow, S&P and a host of individual stocks and investment opportunities. The media, especially the financial media, are obsessed with each day’s market results. Flip on CNBC and the hosts jump with euphoria as the market rises and they swoon and sink with depression as the market falls.
They exaggerate the emotions associated with having risk in the market. Unless you are a steely-eyed independent investor, you will find yourself riding this emotional rollercoaster.
Remember, these shows don’t make profits if your portfolio shines; they make profits if you watch them. They are entertaining you, titillating you and grabbing you with emotion. Most of the talking heads are personalities, not successful investors that share dispassionate advice.
So how does an investor, rookie or expert get the tools and learn the skills that translate into success?
Don’t Just Time The Market, Control Your Emotional Responses
Success in many of areas of life, such as marriage, child rearing, sports and career, often depends on controlling your emotional response.
In his book, “Enhancing Trader Performance,” Brett Steenbarger, Ph.D., found that preparation is an important tool in controlling emotions. He believes that a successful trader, like a successful Olympic athlete or musician, spends many more hours preparing to trade than actually trading.
To control emotions, investors should analyze results quantitatively. “This includes time spent examining one’s trading performance,” Steenbarger says, “identifying weaknesses, and working systematically to improve weak areas and build upon strong ones.”
He believes it is important to identify factors in yourself that may hinder the processing of information, such as “trading biases, distractions and lapses of discipline.”
Steenbarger says that one of the biggest mistakes an investor can make is when he believes “he makes his best trades from his gut.”
Investor Overconfidence Is A Major Risk
Investor overconfidence is an observable risk, and it is difficult to defeat during a bull market. When the bull rages, we believe that our success is due to our own brilliance, not the overall market. The reverse problem comes into play when we are in a bear market.
Mistakenly, many investors let emotions influence decisions what should be based on fact. While you cannot control the market and its movements, you can control your preparation for investing.
My contrarian strategy in this bear market is to stay invested in out-of-favor stocks with:
- Low price-to-earnings ratios,
- Price-to-cash flow,
- Or price-to-book ratios.
See today’s Investment U Crib Sheet for a few ideas. These are the stocks set to move forward again when the market reverses, but also have downside protection.
Good investing,
Floyd
Today’s Investment U Crib Sheet – The Top 10 Cheapest Stocks On The Dow
Based on the price-to-earnings ratios, here are the top 10 cheapest stocks in the Dow. It should be noted that only three stocks are in positive territory year-to-date.
If you’d like to forget about investing fundamentals for a while and steer clear of the current market, read Investment U Issue #797, Target Retirement Funds: How to Put Your Investment Portfolio on Autopilot.
Related Investment U Articles:
- Timing the Market: If Only You Knew What Mark Hulbert Knows…
- Cold-Blooded Investing: How to Overcome Emotional Stock Attachments
- Are These Five Mistakes Killing Your Investment Returns?
- Why the Best Investing Strategy Is Not Always the Best Trading Technique
- Do Trailing Stops Really Work?
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