Sunday, January 31, 2010

Market Timing

Market timing cannot be done consistently and should be avoided. The 2008 credit crisis in fact started showing up on the radar screen much earlier. There were clear rumblings in August 2007 and U.S. stock markets declined somewhat since that time until Sept 2008. On the other hand, the TSX went full steam steam ahead because of ever rising commodity prices and we were talking about decoupling the U.S. and Canadian economies. There were some rumblings in Europe's real estate market as well. But most of us, except perennial bears, thought it would fly over and then the market would rocket ahead on the coattails of the BRIC countries.

So, even major downturns are not easily predicted. There is a saying that 'the stock market predicted nine of the last five recessions'. You buy when the price of the market is right and sometimes you take profits when prices go way too high. But most of the time we don't know when it will crash. Not even Warren B. saw 2008 coming as dramatically as it did. He did foresee the end of the High Tech Bubble and recognized it as the bubble it was. He stayed away from it, derided by every self-proclaimed stock market guru on Wall Street. But Warren B. had no clue as to when the actual crash would occur.

'Buy and hold' is what works. That doesn't mean you should not be prepared for bad times and you can remain high in cash when you see that people overpay and there are multiple offers on real estate properties. Those are flags, but guess what, if you only buy what makes the REIN criteria and you don't go with a Loan To Value ratio (LTV) higher than 80% (in fact I don't go beyond a LTV>70%) then you should handle most downturns without much sweat. By the way, when I say LTV>80% then I don't mean that you borrow the down payment using someone's HELOC (Home Equity Line Of Credit). In that case your LTV is way higher and you delude yourself.

The real downturns are not what you should be afraid for - they are buying opportunities unless you believe in the 'end of the world' scenarios. After the downturn there is always a recovery. You cannot time the bottom of the down turn but you can buy when you think prices are attractive. Since prices were probably way too high during the preceding peak you should have built a nice stash of cash by the time the downturn arrives.

There is one more thing, if you look at most price charts for stock indexes or real estate average housing prices, you see that there are indeed ups and downs, but the overall long term market trend is up. So you may buy an investment at a lower price than the previous peak, but hardly ever can you buy as cheap as prices were in the down turn before the current cycle. 2008 was kind of an exception in the stock market; prices were as low as around the lows of 2003, but not the housing market (at least not in Canada). So, you cannot time and the only thing that counts is buying at the right price and as Don Campbell says "in the right town and in the right neighbourhood" [I paraphrased that].

That is how I see it, but then I am not a day-trader.

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