1. #1

    Join Date
    Aug 2011
    Lahore, Pakistan
    Blog Entries

    Double speak on market timing in stocks

    Timing of market has been a topic of discussion among experts for a long time now. There are different views on market timing but broadly they get converged into two schools of thought

    1) One which supports market timing, typically traders and short term investors and
    2) Long term investors who believe in staying put as investors. While views may be different theoretically, practically everybody is involved in market timing.

    The problem is that some investors pretend to be against market timing but leave no opportunity of timing the market as and when they get it.

    Let us look at a simple example to understand it. There are investors who search for value in stocks.

    What is this search?

    The idea is to find whether a stock has the potential to generate good returns in the future or not. The process of value investment in stocks is dependent on the fact that whether a stock is trading below its intrinsic value or not. In other words, value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with the company's long-term fundamentals.

    The result is an opportunity for value investors to profit by buying when the price is deflated.

    By searching the value, aren’t investors trying to time the market. The answer is yes. Basically, investors are spotting the opportunity and trying to enter the market at the right time. It is pertinent to note that it is very difficult to find out intrinsic value of a stock and valuation process suffers from severe limitations. Still investors do it. The decision to find value may go wrong as well but then nobody wants to leave that extra opportunity to make money which is offered by this process of value identification in stocks in a disguised form of market timing.

    The same group of investors exit some stocks who they feel have run out of value. Again this is perception driven and may not be true but they still try to time the market in exit as well. While investors like Warren Buffet say that they can wait indefinitely in the market. The fact remains that every investor, including Warren Buffet looks at right opportunity to exit and enter. That is where market timing concept props in.

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