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Timing the market

By October 28, 2008February 29th, 2024Market Commentary, Uncategorized

One of the biggest issues we face as traders and investors is the issue of timing our entries into the market, or back into the market following a period of drawdown, as we have experienced of late. This is when the sustainability of our trading system will be fully put to the test, and when we as traders and investors need to have the strength of mind and conviction to trade within the rules of the system.

There is no doubt that the current bear market will eventually end and share markets will bottom out. Share markets may rise immediately or may then consolidate for an extended period of time before the next uptrend or bull market begins again at some as yet unknown point in the future. The question of how to time entries back into the share market will then be at the forefront of everyone’s mind as they try to decide whether or not to re-enter the market, and on what basis.

The problem is that just about everybody has experienced a drawdown in their portfolios during the downturn. Not participating in the inevitable rise will guarantee that portfolios remain in drawdown.

In a recent article in the New York Times, Warren Buffet had the following to say about timing the market. It makes wonderful reading and all traders and investors need to give some thought to what Buffet is saying in this article, and to their personal interpretation of his words.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that the government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

The full article can be found by clicking on this link “Buy American, I am”.

Whilst it is obvious that we can’t and don’t all invest as Buffet does, the important points in this article are the ability to have a set of guidelines to follow for trading and investing in shares, rules for timing your decisions to re-enter the market, and the fact that some exposure to the market in times of absolute fear is not a bad thing.

The SPA3 system covers all these aspects within its overall trading plan. We have a definite and precise set of rules for entering and exiting every trade, our overall timing decisions are based on market risk parameters – buying during periods of low market risk and reducing overall exposure during periods of high market risk. And, depending on the risk profile under which you are trading, perhaps maintaining a reduced exposure to the market even during a bear market in order to be in some stocks when the bear market ends and the market turns up again and thus effectively being ‘first cab off the rank’.

It is important to maintain cool, calm, and collected, or put another way, consistent and objective, during these turbulent times in order to be prepared to participate in the ‘good times’ in the share market when they inevitably return. The key is to have a rigorous process that keeps you engaged, even if your exposure is very little or nothing, such that you get a call to action from your system when the market does turn.


  • peter cropley says:

    It’s like planting seeds if you don’t plant you can’t reap. The need to water, fertilize and maintain is constant as is watching the weather.

    You do have to understand the need to identify and plant the right crop
    Ps I am not a farmer
    Regards – thanks for your forum

  • Marcadrian says:

    Gary.. it sounds like Warren is talking about a long term buy and hold strategy here.

    What does the SPA system do once you pick a winner and it continues to rise and rise over time? As it is a medium term system, does it force you to sell and take profits within 8-12 weeks?

    I’m just wondering whether the pay off from using SPA is greater than holding on to a good quality stock for the long term.

  • Gary Stone says:

    Reply to Comment by Marcadrian:

    The pay-off from managing a SPA3 portfolio should be far greater than a buy and hold strategy of ‘quality stock(s) for the long term’. Because I don’t believe in probabilities of 1 (meaning samples of 100%), there might well be a tiny number of buy and hold portfolios that outperform SPA3 portfolios, even though the probability of this occurring is very very low.

    Notice I have answered your question at the portfolio level of investing. On an individual stock basis, over a 10 year period there are many stocks that, if held for 10 years, would provide a better return than having traded the individual stock using SPA3, or any other active strategy for that matter.

    However, there are two problems with this. One, you have to find the performing stock IN ADVANCE to hold onto for 10 years. And secondly, you have to find more than ONE performing stock in advance for your portfolio.

    With any portfolio you obviously need to hold more than one stock in the portfolio. Say 10. The task for the buy and holder therefore is to find 10 stocks that will outperform over the long term. No selling, just holding.

    Let’s talk examples here. Up to yesterday, the SPA3 Portfolio 1 had risen 250% over 7.8 years whereas the ASX50 Accumulation Index (assuming that your portfolio of 10 stocks had come from the ASX50) had risen 56.5% (includes dividends re-invested). To find 10 stocks, in advance, on the ASX that each rose, on average, 250% over 7.8 years is a near impossible task.

    The are a number of reasons that SPA3 works so well: firstly, it achieves compounding from re-investing profits from closed trades into new trades, on average, every 8 or so weeks; secondly, it has a well defined exit strategy which ELIMINATES LARGE LOSS TRADES; thirdly, it maximises portfolio exposure during rising markets and it reduces overall portfolio exposure during bear markets thereby reducing drawdown – to this will be added (in the next couple of weeks) the SPA3 hEdge risk management rules which will reduce drawdown even more.

    Warren Buffet can’t invest like this because there simply is not sufficient liquidity in the market for his portfolio size so he needs to take much longer term positions in fewer stocks. He HAS to get his stock selection right – we don’t! For him, a 45% pull back in the overall market is perfect for his startegy to enter the market. Of course, there may be some more downside, but then again, there may not be. His other point is that spectators don’t get to kick goals (sure they can’t get tackled either), they can ony watch others kick goals.

    Regards, Gary.

  • Annabella says:

    Gary I’ve been wondering about portfolio diversification – if one would expect to outperform buy & hold strategies by using SPA – then would one want or need to have a buy & hold/ or long term strategy if one was also using SPA? I know Sharefinder also has a long term strategy – (Intelledgence I think) – in what circumstances would you recomend a person to use both methodolies – or would always recomend use of both? Annabella

  • Sean Baker says:

    Reply to Comment by Annabella:

    The investor choosing a long term buy and hold strategy will have a different objective than say a SPA3 user. This could be due to the size of capital, either too small or too large or the activity of the strategy it’s self.

    Investors with a small amount of capital should really use a buy and hold method as the brokerage becomes relatively large in comparison to position sizing. So a buy and holder with a small amount of capital needs to stay away from the necessary activity.

    The investor with a large amount of capital has an issue with liquidity. Large position sizes are best suited to large market cap stocks where there is plenty of liquidity. These stocks can be held for longer periods according to the investors trading plan.

    The final point is that the activity of SPA3 which is only 10-15 minutes a day is still too active for some investors. A buy and hold strategy like IntellEdgence can take as little as an hour a month to manage.

    Which is best? Depends what the individual classifies as best. As Gary has said if you are looking at pure performance then SPA3 is a great fit for effort verses results.

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