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Should You & Can You Time the Markets ?

The severity of the global stock market downturn from late 2007 to early 2009 has rounded off a dismal decade for stock market investors where returns since early 2000 remain hugely negative in the major markets of the US, UK, Europe and Japan among many others.

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Many Markets Were Significantly Over-valued in Early 2000
Looking back, there is little doubt that the major markets were dangerously over-valued in early 2000 whether one judged that on the basis of valuation or a peak in earnings (i.e. a peak in the business cycle) or a combination of both. The result of the over-valuation has been a lost decade from a return viewpoint as, at the time of writing (5th Oct 2009), many markets remain approximately 30% below the peaks recorded nearly ten years ago.

The Buy & Hold' Concept' is Under Threat of Extinction
The effects of two major bear markets within eight years have been phycologically destructive and many investors are rightly asking whether the 'Buy & Hold' concept is dead and whether they should in fact be timing their entry into and exit from markets on a more frequent basis. These are fair questions.

Regular Investing is One Answer but is Not Practical for Many
As always, for the person who invests on a regular basis by adding monies to his/her investment plan each month or quarter (or even on an ad-hoc basis) then the 'Buy & Hold' approach is still applicable. See our related article 'Regular Investing Irons out Volatility' for a real time example of how the regular investor fared from 2000 to 2009. Far too few people commit to a proper plan of regular investing, in my view. I believe training, like our own 1-day training course, can help in this and other areas of investing.

In practice, then, the question about whether we should or can time the market relates primarily to the lump-sum investor i.e. the investor who must protect the capital he/she already has on the basis that he/she is close to retirement or is not in a position to take advantage of the lower prices that come with declines in markets.

Direct Invest

Two Ways to Time Markets - Fundamental Values & Technical Indicators
There are two ways to try and better time the markets and probably a combination of both makes sense. The first is to rely on fundamental values like the price-to-earnings ratio, price-to sales ratio and other such measures to signal when the markets are over valued relative to history. The difficulty with fundamental values is that they are very inexact and are only useful at extremes, which are seldom.

The second way that investors can try to time the market is to use charting or technical indicators as a guide to when the medium term direction of markets appears to have changed. Relying on short term signals (over say 20 or even 50 days) will turn you into a trader and most will fail at that - see our related article on 'The Investor versus The Speculator' for a fuller version of our views in this area. We post three separate technical indicators in the member's section of the web site. These include;

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The Coppock Indicator
The 30-Week Moving Average Indicator
The 30 & 50-Week Moving Average Indicator

They are medium term sentiment indicators and for members of the web site we also provide the success history of each indicator in calling turns in markets in the past. If the indicator in question has not had a good record of calling market turns in the past then why would you follow it? We provide the critical analysis that allows you to make that judgement i.e. we supply you with the facts, not hype!! See our features articles section for key technical signals that we higlighted for members in real time on the 'Coppock Indicator' in early May 2009 and on the 30 & 50-week moving average indicator in early september.

A Series of Aricles on Market Timing For Members
Over the coming months, we will be examining this theme in greater detail in a series of articles through the weekly investment bulletin and first published to members of the web site.

Words of Wisdom From the Infamous Value Investor - 'Benjamin Graham'
A quote from Benjamin Graham, author of the all-time investment classic 'The Intelligent Investor' , first published in 1949, adds significant light in this area. Graham said at the time that;

"There are two possible ways to take advantage of the recurring wide fluctuations in stock prices, by way of timing or by way of pricing"

Apart from the very graceful use of English, the line is a powerful one and full of understanding. What Graham meant was that an investor can chose to time his/her entry into or exit from markets or to stay in the market but ensure that you are in the best possible value. The extra value was your 'margin of safety'. He believed market timing was akin to gambling unless it was practisd using fundamental values. His own approach in practice was to try and buy a diversified list of stocks at good business values, which he was sure would lead to higher returns than the market over time. He succeeded handsomely and many of the recognised value investors over the years pay tribute to Graham's teachings.

GillenMarkets Offers Access to Value Approaches
To the extent that members wish to invest directly in a portfolio of shares (as opposed to indirectly via funds like exchange traded funds), GillenMarkets follows value-based approaches in the US, UK and Irish markets. For example, one UK value-based approach buys and holds a portfolio of 15 high dividend yielding stocks from the FT 100 Index. The portfolio is held for one year and then re-jigged - stocks no longer fitting the approach are weeded out and sold and the new stocks matching the criteria for selection are bought. The point is that the investor holds a portfolio of 15 high yielding stocks at all times, good and bad. This is what Graham meant by taking advantage of market swings 'by way of pricing'. The approach UK FT 100 - HY 10,000

we follow in this instance ensures that the investor recycles his money into the stocks offering the best value each year, in this case as defined by the dividend yield.

The approach declined with the market in the severe 2007-09 downturn but as the accompanying graph highlights it recovered with the market in 2009 and has more than held its own over the 15 years that we have tracked its prformance (1995-2009).

We teach this approach at our 1-day investment seminar and we provide all the information (updated weekly) to members of the web site who wish to follow the approach in practice.

Rory Gillen
5th October 2009