Friday, November 20, 2015

In Defense of Market Timing

In my recent post on DRIP-ing, I defended the practice of market timing. One of my main issues with automatically re-investing dividends into more shares of the companies I own is my fear of buying shares at their high points. Based on the comments I received on the post and my impression from other dividend bloggers, buying at high points seems a common fear.

Yet, most of the investors we idolize condemn retail investors for trying to time the market. Below is a sample of this condemnation.

Peter Lynch"Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves."

John C. Bogle
"The idea that a bell rings to signal when investors should get into or out of the stock market is simply not credible. After nearly fifty years in this business, I do not know of anybody who has done it successfully and consistently."

Bernard Baruch
"Only liars manage to always be out during bad times and in during good times."

Warren Buffet
“Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.”

Out of the above quotes, I find the Warren Buffet one the most interesting. Buffet resists slamming the door closed on market timing. Another quote from the Oracle of Omaho furthers my perception that Mr. Buffet enjoys buying companies on sale as much as anyone:

Warren Buffett
“The best thing that happens to us is when a great company gets into temporary trouble… We want to buy them when they’re on the operating table.”

On a similar note, I enjoy buying companies near their 52-week lows, especially when their share price has been knocked down for no specific reason. Common causes of these situations are over-reactions to perceived negative news and when good companies get pulled down during sector sell-offs. A specific example of an over-reaction to perceived negative news is the 8% drop in Alaris's share price after their so-so Q3 earnings results release earlier this month. The fact that TransCanada is down about 15% year-to-date, despite continuing to post strong results is an example of a good company being pulled down in the pipeline sector sell-off.

A distinction can also be made between attempting to time the market and trying to time purchasing shares in individual companies. There are so many economic, political, geographical, and psychological factors that influence the movement of the market as a whole, I'd agree that no one could possibly forecast specific market movements with any sense of certainty. On the other hand, individual companies' share prices are much more a function of their operating results. Unless you're investing in complex multinationals that face a variety of risks, an argument can be made that projecting the course of a company is easier than foreseeing the course of the market as a whole.

Lastly, although I'll admit to trying to time my purchases at opportune instances, I know that I'll never buy an individual company at the bottom.  If I happen to perform this trick once, it will be dumb luck. I'm more interesting in stacking the odds of a purchase in my favor by buying a company with an adequate margin of safety. To me, that margin of safety is usually represented by an adequate dividend yield (at least 3%), a history of dividend and earnings growth, and a low P/E (or P/FFO in the case of REITs). 

Unlike some, I don't mind being called a market timer. I wear the title like a badge of honor. Afterall, the opposite of trying to time stock purchases would be indiscriminately buying shares when they near their all-time highs or when they look expensive. Not much of a plan if you ask me...

Do you consider yourself a market timer?


  1. There is nothing wrong with buying a company at good valuations especially if the fundamentals are good.

    1. Couldn't agree more D4S! The important part is that the fundamentals have to be intact.

      Congrats on your recent ADM purchase!

  2. I automatically reinvest all my dividends. Been doing that since I became a DGI'er. Sure I have heard that by automatically reinvesting I may be putting money to work in stocks that are overvalued but by always reinvesting I am able to compound my dividends faster. Thanks for sharing some great quotes.

    1. I appreciate you taking your time to share your perspective Keith. Obviously your method has worked wonderfully for you. Although I'm still hesitant to DRIP since it opens me up to buying at the top, I'll likely test it out with a few stocks in 2016.

      Thanks for stopping by!

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