Tuesday, August 30, 2011

Opportunities Created In The Markets

When The Market Gets It Wrong
Let's talk about another common misconception regarding timing the market.  I am referring to the belief  that market timers always have to know what the market is going to do.  In reality, timing the market means taking advantage of the periods of time when the market misprices assets, times when others get it wrong.  I know, in the past, the academics have said this couldn't happen, but I am not alone in saying it happens all of the time.  The price of an ounce of gold dropped around one hundred dollars the other day.  Since gold is, well, gold, are they telling me the value of the U.S. dollar, which gold is priced in, changed so much that the price of gold should correct by that amount?  It doesn't take a rocket scientist to see the price of gold was relatively overbought, meaning, relative to what people have been willing to pay for gold in the past, the price was, temporarily, too high.

Playing The Odds
Note that I said temporarily.  I don't necessarily know what the price of gold should be all of the time, but when it reaches extreme overbought or oversold conditions, the odds are it is going to revert to a point where it is less so.  As it does, it will usually begin a new trend.  If the previous trend was up, then it normally begins a new downward trend.  If it was down, then the opposite is likely.

All In
With a "buy and hold" approach to investing, we have to commit to putting all of our money in the market all of the time.  Since people using such an approach don't believe there is any method for determining the extent to which assets are mispriced, their approach is to average into the market over time.  Consistency and regularity are the key.  Their belief is that there is no pattern to the markets.  So, how is it they perversely expect markets will consistently trend higher over time(?!).  Sorry, I digress. 

Market Extremes
In the so-called timing of the markets method,  I don't necessarily care about the direction of the markets.  If gold is extremely overbought, it can correct lower, no matter what the market is doing.  As far as the price of gold goes, I don't care what it is doing most of the time, I only care when it gets extremely overbought, or oversold.  The same goes for the markets.  I don't have to know what the market is doing every day, until it gets to one extreme, or the other.  Of course, the one exception would be when a reversal is followed shortly thereafter by another reversal.  If a return to the original direction of the trend creates a situation where I start to lose money, I exit the position.  I feel no compulsion to be fully invested all of the time, I simply wait for another opportunity.

Up, Down or Sideways
During long periods of time, the market can trend sideways, rather than making new highs or new lows.  There can be significant periods of time when the market is going nowhere, or going in the opposite direction of the longer trend.  I don't need to be fully invested while this is happening.

On The Lookout
Yes, others would say, but that means you have to be watching the market all of the time.  To, that I ask, your point is what?  Whenever I have money in the markets, I should be watching.  Why would I go away and ignore what is happening to my hard-earned savings?  To those who say they don't have time, I would argue it takes all of 10 minutes to check.  If I use what I call the Basic Timing Model which uses the 200-day moving average as a buy and sell signal, there is little I need to do for most of the year.  The prices of market indexes normally cross their 200-day moving averages only once or twice a year!   

Why Pay More?
To use a shopping metaphor, timing the market is like purchasing items only when they are really, really, on sale, or selling them when they are highly over-priced.  The rest of the time I can prepare my shopping list and check what constitutes a regular price.  The regular prices don't interest me, so until I spot a really great sale, I don't need to feel like I should be spending all of the money I have available.

How often do you check what the markets are doing?

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.