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market timing is a trap


finetrader
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I am learning to be highly suspicious of academics... Efficient Market Theory comes to mind. Personally, if I had simply bought and held FFH in 2002 when I first learned about the company I would have done OK but not nearly as well as I have done since then by buying and selling once or twice during the year. ORH is another great example (buy at 0.8xBV in April/May and sell at 1.15xBV in Sept).

 

Hamblin Watsa are also macro market timers. Their time horizon looks to be 3 to 5 years. Look at the short term concentrated bets they have made over the years (long US Treasuries, CDS, muni bonds and now equities). That is not buy and hold investing.

 

Personally, I have no appetite to follow Buffett's long term buy and hold strategy. I much prefer something more along the lines of Watsa/Templeton... buy stuff people hate (that is in your circle of competence, selling for $0.50 but worth $1.00) and when it comes back into favour (trading closer to $1.00) sell... repeat as often as possible.

 

I love the line in the Rothschild book on bear markets..."there is always a bear market somewhere".

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Hamblin Watsa are also macro market timers. Their time horizon looks to be 3 to 5 years. Look at the short term concentrated bets they have made over the years (long US Treasuries, CDS, muni bonds and now equities). That is not buy and hold investing.

 

 

I'm not sure it counts as market timing if you have a time horizon of 3 to 5 years. 

 

HWIC saw the crazy systemic problems we had and capitalized on an opportunity to both hedge against a huge market drop and make a huge profit in case of such a drop.  I think this would be a very interesting strategy to apply across the globe in markets where systemic problems are building up. 

 

That is, there will continue to be huge bubbles in equity markets that are less developed than the U.S. -- I'm thinking BRIC, Eastern Europe, etc. -- so maybe one could do what HWIC did in these  bubble markets when it looks like things are spiraling out of control in terms of the real economy.  Of course, I believe it was Keynes who said that the markets can stay irrational longer than you can stay solvent, so you wouldn't want to bet the farm on such systemic collapses.

 

 

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Its been years since I've read Peter Lynch but I remember he wrote about how only a handful of good days in the market were responsible for most of the gains we've had over the past 100 years.  He continues by saying that since the Expected risk adjusted return from his stock is higher than any other similar asset at any given time he should always be fully invested. 

 

 

All things considered, I think its Its penny rich pound foolish to be selling stocks at half of intrinsic value hoping to buy back at 40% of intrinsic value some day in the future. These guys are building a fortress at Fairfax.  If you are worried about market risk, hedge...I just don't understand the rational behind capping future gains...implicitly you are saying that there is no way they float toward intrinsic value.  Book value barely begins to tell the story of this company, why obsess about where the puck has been?   

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There are many ways to interpret data.  Even Jeremy Siegel the bull stay in equities forever and ever wrote in his book that following a simple 200 Simple moving average ended up lowering volatility significantly while matching the gains of equities over all.  The problem with buying and holding an index is that it can be very volatile and that the long term is ok if you're investing for 150 years but most of us don't invest that long.  Here are some interesting links:

 

http://chinese-school.netfirms.com/Warren-Buffett-interview.html

 

Dow Jones Industrial Average

Dec. 31, 1964: 874.12

Dec. 31, 1981: 875.00

 

Dow Industrials

Dec. 31, 1899: 66.08

Dec. 31, 1920: 71.95

 

There's an interesting article here:

 

http://news.goldseek.com/MillenniumWaveAdvisors/1235315243.php

 

skip to the bottom: "Living in Paradise"

 

 

here is the 20 year commentary:

 

We can divide the 20th century into 88 twenty-year periods. Though most periods generated positive returns before dividends and transaction costs, half produced compounded returns of less than 4%. Less than 10% generated gains of more than 10%.

 

...

 

There were only nine periods from 1900-2002 when 20-year returns were above 9.6%, and this chart shows all nine. What you will notice is that eight out of the nine times were associated with the stock market bubble of the late 1990s, and during all eight periods there was a doubling, tripling, or even quadrupling of P/E ratios. Prior to the bubble, there was no 20-year period which delivered 10% annual returns.

 

...

 

In the 103 years from 1900 through 2002, the annual change for the Dow Jones Industrial Average reflects a simple average gain of 7.2% per year. During that time, 63% of the years reflect positive returns, and 37% were negative. Only five of the years ended with changes between +5% and +10% -- that's less than 5% of the time. Most of the years were far from average -- many were sufficiently dramatic to drive an investor's pulse into lethal territory!

 

Almost 70% of the years were "double-digit years," when the stock market either rose or fell by more than 10%. To move out of "most" territory, the threshold increases to 16% -- half of the past 103 years end with the stock market index either up or down more than 16%!

 

Read those last two paragraphs again. The simple fact is that the stock market rarely gives you an average year. The wild ride makes for those emotional investment experiences which are a primary cause of investment pain.

 

...

Not understanding how to manage the risk of the stock market, or even what the risks actually are, investors too often buy high and sell low, based upon raw emotion

 

...

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Personally, I have no appetite to follow Buffett's long term buy and hold strategy.

 

and yet there's very few investors who became billionaires on the same scale as buffett. in fact, buffetts long term record leaves everyone else in the dust. not so much his 40 year record of plus 20 percent annual gains, tho thats nothing to sneeze at. but the fact that there are so many others who have comparable annualized gains of plus 20% over time & yet somehow dont havent benefitted from comparable wealth creation as buffett, either for themselves or for their investors. clearly, there's something to be said for for a buy & hold philosophy, & even more to be said for his 'favorite' (& where many of the pundits/commentators get it wrong is to quote web on this as IF 'favorite' meant it were his ONLY investment strategy) buy & hold forever one...if you can find enough stocks at the right price to fit the bill. compounding tax free at high rates of return gives you a huge edge over long time frames. compounding with relatively few taxable events over long stretches is the next best thing. 

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