Time In The Market, or Timing The Market

The topic above has probably been debated to death, and there are many studies and so-called research and material dug out from the historical annals of the stock market which can either support one theory or the other. In case readers may not understand the meaning of the title above, let me give a little background. Time in the market simply means “Buy and Hold” as it implies you are spending time staying vested in the stock market (i.e. the companies whose shares you purchased). Timing the market, on the other hand, is the practise of trying to enter and exit periodically and maximizing one’s gains through this method.

This post is more to compare and contrast the two methods rather than to pass judgement on which method is “right” or “wrong”. Of course, this is a value investment blog and I am a practitioner and advocate of value investment, which belongs to the “buy and hold” camp. Still, keeping an open mind is important and I recognize that this style may not be suitable for everyone as one’s investment style is intensely personal. Basically, as long as a particular style suits you, then whether it is time in the market or timing the markets, one should be able to profit consistently from it over the long-term.

Proponents of timing the market are of the opinion that as long as a long-term trend can be established, it is relatively safe and low-risk to enter the market and either ride it up or down. Others may also rely on charts, graphs and trendlines to determine support and resistance areas, and use these as price points for determining their entry and exit. I would assume that obviously if one thinks that they can time the market successfully, that they would be able to do so consistently and profitably. What one must always remember by using this method is that frequent trading will erode profits and magnify losses as frictional costs such as brokerage come in. Even if one were to trade, the trade should be infrequent and one should maximize the gains while cutting the losses short. This strategy requires, of course, much discipline and fortitude and is much easier said than done. The reasons why 95% of traders lose money is not due to the lack of a system of cutting loss or taking profit; in fact it is actually due to the inability to properly control their emotions of fear and greed. A trader who does not adhere strictly to this system will likely not be able to enjoy long-term success, so do not be fooled by the myriad advertisements in the newspaper claiming easy profits through trading “systems”. Trading is as intensely personal as investing, and each person should have their own style and risk tolerance level, as well as way of observing the stock market and reading charts. There is no one size fits all, and I will explain how this applies to investing as well.

Investing is more of an art than a science, which is what I concluded after being invested in the Singapore Stock Market for the last 5 years. Why do I say so ? This is because aside from the numbers, financials, tangible products and one’s concrete understanding of a business, there are still a lot of “grey” areas which make up a business and determine its attractiveness. Aspects such as corporate governance, quality and integrity of Management, goodwill, brand equity are impossible to quantify and measure; and risk factors such as those associated with S-Shares in the past few months are but some of the factors to consider when making an investment decision. I can almost consider myself lucky that none of the companies I own have seen anything dishonest associated with them (touch wood !), but continuing to remain vigilant is important and one must also ensure one does not harbour blind faith in the Company and ignore any warning signs.

Having said that, time in the market means one should control their emotions of greed and fear as well, similar to what traders have to go through. The problem with being vested throughout is that one must mentally tune out the noise and rubbish which filters through the news every day, in order to make sense of what’s important. The news is responsible for propagating half-truths, as the media tends to expound on certain news which is more prominent, while neglecting other aspects. This gives one a very skewed perspective of the “truth” and may make one either panic or get too greedy (depending on the nature of the news). Investing is not just emotional control, but consists of intense objective analysis of companies too, which is why it is not easy to get consistent returns.

I guess I may have veered a little off-topic, so let’s get back to the issue of time, versus timing. Timing is a fine strategy as long as one is emotionally disciplined, and has a very strict and rigid set of rules for cutting losses/taking profits. This also requires one to be in tune with the markets, economic news and the psychology of the market. Though I have yet to see someone I know personally consistently make money through timing, I have no doubt that there are such people out there (they simply choose to keep quiet about it). As for time in the market, this is a strategy which is more suited to my temperament and character; as well as utilizes my analytical abilities.

So dear reader, please use whichever method is more comfortable for you; but for this blog, I can only give advice on “time in the markets”, and not “timing the markets”.