Stock Market Timing vs Buy and Hold II

There has been a lot of press lately about the buy and hold philosophy. Based on the name of my site I think you know where I stand. It is also more than a bit ironic that I would quote Ben Graham, but some quotes are timeless. I do believe in the underlying principles outlined in his classic Security Analysis. Somewhere along the line value investing got confused with buy and hold. The confusion probably started when Wall Street still needed to sell stocks when they were not a bargain by any stretch of the imagination. That is probably when people started referring to Warren Buffet as a buy and hold investor. Wrong, he is a value investor that is well aware of the tax ramifications of an actively managed taxable account. Value investing is best suited for your taxable brokerage accounts. Most investors probably lack the time and or dedication that are required to research enough stocks so you can have a well-diversified portfolio. The vast majority of individuals have the bulk of their investments in some type of tax deferred retirement account. That is why my focus here is on market timing in your tax deferred accounts.

All that being said, I have been getting a kick out of the arguments made by long-term buy and holders.

Some of the major defenses of buy and hold have a hint of market timing to them. If you are buying cheap and selling dear is that not a form of market timing. Your indicator du jour might be a P/E ratio instead of a moving average but you are still making a prediction about the future price of an individual stock. The funny thing is you would be hard pressed to find a long term buy and holder that thinks he or she is timing the market. I would venture to guess that they would loathe the thought of trying to time the market.

I also see a lot of people saying that because there is so much talk about buy and hold being dead that is the exact reason it is probably not dead. There may be some truth to this in that it is best to probably zig if everyone else is zagging. However that in it self a form of market timing based on sentiment. I wouldn’t buy something just because it is out of favor. For me I need to see positive fundamentals and good price behavior. I am sure at some point in time, on its way to zero, the sentiment for Enron may have made it look like a good contrary investment.

Professional fund managers can’t seem to beat the market. Well this is true but in their defense how many mutual funds are allowed to be 100% in cash. I would venture to guess not too many. It is not their job to time the market their job is to pick the stocks that will perform best relative to the market. However if the market goes down it will tend to take most stocks with it. Lets not forget the fees associated with investing in mutual funds. From the starting gate mutual funds start out in the whole relative to the overall stock market.

Market Timing is voodoo. I get a kick out of the fact that just because someone wins a noble prize in economics, their theories become widely accepted. Then everyone using that noble prize theory somehow thinks they are smarter than the market. Maybe people feel better if they lose money investing along side a bunch of PhD’s. I for one do not think I am smarter than the market but I will let the market show me the path of least resistance. If and when market timing becomes widely accepted the market will probably be a very different animal.

I am sure there might be something I missed here but I hope you get my point. There are times when the risks associated with being in the market are out weighed by any short-term benefits of being in the market. I think this is one of those times. State budgets across the country are bleeding red. They will have to raise taxes or layoff state workers, neither of which will stimulate the economy. I could see the writing on the wall when the housing market collapsed where I live. I can’t for the life of me understand how so many economist and market analyst couldn’t see this coming. Then they were in a state of denial for the first six months of the downturn. Please don’t expect them to know when this will end either. I don’t claim to know when it will end, but I will say I don’t think it is over yet.