# Can you time the stockmarkets ?



## Brendan Burgess (20 Sep 2001)

tyoung in a post on the cult of the equity said the following:

<!--EZCODE QUOTE START--><blockquote>*Quote:*<hr>  A lazy kind of thinking has replaced risk analysis. It goes something like this:

Equities are the best performing asset class over long periods of time. 
Therefore they should be the primary(sole)asset class for longterm investors. 
You can't beat the market so don't try. Just buy the market.
Market timing doesn't work so don't worry about valuations because of the above.(stocks always win and You can't pick winning stocks). 
Stop thinking and just buy index/tracker funds. <hr></blockquote><!--EZCODE QUOTE END-->

This summarizes my views on the stockmarket exactly. I even agree with the characterization of my thinking as "lazy", though I would have preferred the word "efficient".

I have learnt a lot from the debates on the Cult of the Equity. But is there any evidence that you can time the markets ? It's not enough to say that markets are overvalued.  You must also say what the correct value is and identify the price at which you are prepared to buy back into the market. 

I thought that the Japanese stockmarket was ridiculously overvalued at 40 times earnings. Then it climbed up to 80 times earnings.  

I "knew" that the technology companies were grossly overvalued. I knew that it was a bubble. I read the justifications of the ridiculous values and I laughed at them. I was savaged on the Motley Fool for doing so. I looked for a way of profiting from this overvaluation, but I couldn't find one. 

Sir Ivor, tyoung and others are laughing at my blind faith in equities, just the same way that I laughed at the blind faith of a large number of  technology investors. 

But what is the "correct" price of a stockmarket ?  Can we ever know what the correct price is ?  Maybe there is a range of prices ? For example the price should be somewhere between 10 and 20 times earnings. If the price is above 20 times earnings - sell all your shares. If the price is below 10 times earnings, borrow to invest in the market.  If the price is 40 times earnings, try to find a long term a put option on the index. 

It seems that a higher price earnings ratio was justified a few years ago as the World economies were roaring ahead. Now growth has slowed down and uncertainty has increased dramatically , the price earnings ratio should be lower. But how much lower ?

Let's agree that the American market, is still overvalued at 20 times earnings. What is the correct value ? Let's say that it declines to its correct value over the coming 2 years until it reaches 16 times earnings. Should you then invest in the market again at that stage ? Or should you wait until it reaches 10 times earnings ?  If the US market drops by 50% over the coming 2 years, will anyone feel like investing in the market ? 

But what is the American market ? I don't have the figures, but I understand that p/e of 20 is inflated by huge p/e ratios for Microsoft and other technology stocks. So maybe most of the stocks are correctly valued. But now we are into stock picking. 

Jim Grant seemed very confident in his assertions about the overpricing of the market.  I had never heard of him before. I haven't heard of anyone who has consistently called the turning points in the market. What is Jim Grant's record ?

What about the Irish market ? The p/e ratio of the top ten companies is about 14 at the moment.  This ranges from about 8 for AIB to 25 for Elan.  Is this overall value of 14 justified ? I don't want to discuss individual stocks, but it is certainly reasonable for some stocks to be valued on a much higher basis than others. 

My advice to simply buy the top 10 Irish stocks looks reasonable in retrospect. To be honest, I didn't give much thought to P/E ratios. I was aware that Irish institutions have been big sellers of Irish stocks for technical reasons, so I felt that they might be good value. But this was more a gut feel than any incisive analysis.  If the Irish market was priced at 30 times earnings, I would have given the same advice.  Would this have been wrong ?

Let's say that overseas investors recognize the value of Irish shares and push the p/e to 30 over the next two years. I will feel very smug about the advice I gave in the first edition. But should I now say that the market is overvalued ? 

What is the p/e ratio of the Eurostoxx 50 ? I have absolutely no idea. It could be 10. It could be 50. I just don't know. Which goes back to tyoung's description of me as lazy. 

Do I need to moderate my advice to invest all your money in equities to something like this:

"Over the past 150 years, equities have always provided the best long term returns. But during those years, there have been many periods of huge overvaluation and undervaluation. If you happened to invest while stocks were grossly overvalued, it would have taken you up to 10 years to beat an investment in cash or gilts. The best long term strategy is to be fully invested in the stockmarkets. Many commentators feel that the American and European stockmarkets are currently overvalued. In the longer term, this doesn't really matter. But in the shorter term, you might lose some sleep "


Brendan


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## Freddie Kruger (20 Sep 2001)

I posted some of the following on the old site back in June/July but as I cant access the archives here goes, again!!

"If we review the performance of the US stock market as measured by the S&P 500 over the past 30 years, we see the return has been over 3,800% or 13% p.a. If we now review the monthly returns for this index and exclude the best 18 months i.e the months with the highest returns, then the return for the index would be just half the original return or 6.8% p.a. This is the same return as cash deposits over the period. Half ot the 
returns were achieved in 18 separate months, that is one and a half years in total out of a 30 year period.

Furthermore, if we exclude the 48 best months, then the return would be zero. Over the 30 years or 360 months that investors may have invested in the US stock market, if they had decided to switch out of the market for these 48 separate months i.e. less than 15% of the duration of their investment, they would get no return on their investment. A zero return on one's investment over 30 years(technically 26 years) because of not being in the market less than 15% of the time!

The lessons are clear. If investors want to increase their wealth over the long term, they should invest at least a portion of their assets in a diversified portfolio of equities. Over the long term, equities have outperformed all other major liquid assets. However, in the short-term, equity markets are volatile, as stock prices are influenced by many different factors including interest rates, economic cycles, political influences and investor sentiment. Therefore, long-term investors need to be able to focus on staying invested for the long-term and look through the short-term volatility associated with equity markets. This is despite the temptation to switch one's investments out of the market in what appears to be difficult times. As we have shown above. if a long-term investor is out of the market for even 15% or 1 in every seven months of the time during the period of their investment, one could end up with a zero return. Stock matkets are most generous to long-term investors provided they remain long-term investors."

Hooman Kaveh, Investment Director, Irish Life International Multi-Managers Ltd.


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## tyoung (21 Sep 2001)

*Market timing etc*

Nobody's laughing at anybody. I don't disagree with you as much as you think.
    Please explain why equities outperformed in the past and why they should continue to do so in the future. 
    If the lesson of the last 150 years is that equities outperform then the market had certainly absorbed this and repriced itself upward. 
    I think you have to make some attempt to price the market and act accordingly. If having a less than 100% equity holding leads to a lower longterm return then so be it. There have been enough periods in the past where the stockmarket have underpoerformed for me to be wary of a 100% equity portfolio all the time. the Japanese market is now back at 1984 levels. Is 17 years the longterm.
    Markets have since repriced themselves downwards over the last 18 months.  The prudent investor should  now be increasing his/her equity exposure. 
   Irish stocks in particular look attractive for the longterm investor. 
  I fully agree with your comments about Irish Fund Managers selling Irish stocks in 1998 and 1999.


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## Mithrandir (21 Sep 2001)

*Why Irish Top 10*

Brendan, given we're now firmly in a eurozone currency/ economy, I'm curious to know why you haven't adjusted your recommendation to top eurozone stocks? Is it just plain old brand familiarity, grown at a time when there was such a thing as the punt, and a stand alone Irish economy?

After all the case I'd have thought is stronger, unless one wants higher risk, and returns, ie (a), the top eurozone stocks are 'large stocks' compared to Irelands 'mediums' and 'smalls', and hence should be less volatile,  (b), you will get a better diversification since the Irish market is really a market of stocks, and not a stock market in the complete sense, and (c), you will not suffer from liquidity risk?

Surely you should routinely provide this comparison. I advise clients that they should set a risk premium, perhaps an extra 2 to 3% pa for investment in ISEQ stocks. If they don't get rewarded they should opt for the better risk / reward trade off with 'Large' Euro stocks. Remember if you added up all the capitalisation of every stock on the ISEQ, you just about make a top 10 Eurozone company!

What dya think?


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## the bear (21 Sep 2001)

*can you time the markets*

I think it's a very dangerous situation when everyone "knows" that stockmarkets will outperform other kinds of investments in the long run. It's difficult to find a market commentator who would disagree with this incontrovertible fact. When everybody thinks the same way, then clearly the risk lies in the opposite happening. 

In 1998 during the Asian crisis, everybody knew dollar/yen was going from its then level of 145 to 200 and beyond. Long Term Capital Management goes belly up, has to sell their huge dollar/yen position which in turn led to the entire market to dump their positions in a move which saw the dollar lose 30% of its value in a couple of days. It still hasn't recovered and is preventing Japan from getting out of the doldrums.

A prominent US family, (I can't remember the name) had to sell 135 million Disney shares tonight to meet a 2 billion dollar margin call. It's no use telling them that Disney will outperform in the long-run(they had the position since 1984).

When margin calls start, they can really snowball-common sense, financial theory and trading strategies all go out the window-it comes down to simple supply and demand.

This weeks slaughter is just the tip of the iceberg.


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## Marion (24 Sep 2001)

We all make decisions. We buy homes, we don't know if we are buying at the "best" price or not in terms of timing - we buy at the price which the market dictates at the time.

When I bought my home, I didn't know, nor did the builder/auctioneer know that prices would escalate within 18 months. If they had they would have charged me a higher price - If I had, I might have been tempted to buy 2 or 3!

Likewise with shares, we don't know what the best time is but we make investment decisions based on our needs at the time and the availability of cash to enable us to satisfy those needs.

Some journalists/economists are advocating "bottom fishing" for the adventurous - but this of course is crazy - how do they know that the markets have bottomed out - others are urging caution because the markets may fall further  - but this of course is equally crazy because they don't know what the  market position will be late this evening not to mention 2 months/2 year's time.

We can't time the markets. If I decide to be adventurous, I will be buying at a price which is lower than I would have paid last March, but I may be buying at a price which is greater/less than I might pay if I decide to wait for another month. 

If I can't time the markets in terms of buying a strict application would suggest that equally I can't time the markets in terms of selling  - how would I know what is the <!--EZCODE BOLD START-->* right*<!--EZCODE BOLD END--> time to sell my accumulated investments? I would, by this logic, just leave it invested for eternity and never take it out, because <!--EZCODE BOLD START-->* timing*<!--EZCODE BOLD END--> suggests that I might be taking it out at the wrong time and so I might be paper rich and cash poor. 

But this of course defies logic. If I need the money, I will sell even if it isn't at the optimum price - but, I won't know this except in hindsight.

<!--EZCODE BOLD START-->* Perfect*<!--EZCODE BOLD END--> timing is all about luck! Nothing else Being in the right place at the right time. The market system exists <!--EZCODE BOLD START-->* because*<!--EZCODE BOLD END--> nobody can call the <!--EZCODE BOLD START-->* perfect*<!--EZCODE BOLD END--> time. But, this doesn't mean that knowing this that I won't make investment decisions which may affect my quality of life. Is there a distinction to be drawn between timing for buying and timing for selling?

That's my cent worth.

Marion :hat


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## tyoung (25 Sep 2001)

*The Greater Fool Theory*

Marion,
          You buy a house to live in. It may turn out to be a good investment or it may not, but that's not why you bought it.  Of course you could buy an investment property, but then things like price, mortgage rate and rental income become critical.
           Stocks are  financial assets. The only reason to buy them is to make money. It is irrational and counterintutitive to say that price doesn't matter. Unless of course you hope someone else will buy a pig in a poke when your turn comes to sell.


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## Brendan Burgess (25 Sep 2001)

*Re: The Greater Fool Theory*

Hi T

Who said "price doesn't matter" ?

If we conclude that the market is overvalued, then we must make another decision when the market is correctly valued. 

Marion has pointed the main difficulty in timing the market - you have to be right twice and your correctness has to beat the dealing costs. 

At what stage on the way up did you sell out of equities ? At what stage will you buy back in ? 

Price does matter when it comes to buying a home, which is what I assume Marion is talking about. If you can time the stockmarkets, you might be able to time the property market. I have heard "experts" suggesting that property is overvalued and we should sell our homes to buy back in later ! 

Brendan


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## john (28 Sep 2001)

*the time is now*

U should drip feed your money into a good fund now while the unit prices are low over the next 12 months.When the prices rise over the next few years you will be laughing.


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## Mithrandir (1 Oct 2001)

*Brendan's Irish Preference*

Hi Brendan,

Just reviewing this good thread, and was hoping you could answer my earlier question. Thanks.


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## Brendan Burgess (2 Oct 2001)

*Re: Brendan's Irish Preference*

Hi Mith

If you are buying shares directly, it is very awkward to buy Euro shares. Irish shares are very well diversified with exposure to Europe and America as well as Ireland. 

I am not saying that you should not buy Euro shares. I did once and it has been a continuous headache ever since. I don't know of any individuals who have bought Euro shares directly, but I am willing to learn from their experience.

If you are buying a tracker, then buying a Eurostoxx tracker is just as good as buying an Irish tracker.

Brendan


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## JackHack (23 Nov 2001)

*time and a place*

On buying Irish Shares, many small investors would think to avoid the ISEQ as money gravitates towards bigger markets and so returns there would be greater.

Is the answer to that then to buy ISEQ shares which 
also have listing on NY or London?

Also on timing, if you had 10k to invest on the ISEQ
would you let it sit in N'Rock for another 4 months 
or buy the shares now.


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## Brendan Burgess (24 Nov 2001)

*Re: time and a place*

Hi Jack

Money does gravitate towards the bigger markets, but that could well mean that there is better value in the Irish markets. All the Irish fund managers sold out of Irish shares to rebalance their portfolios thus creating artificially good value in Irish shares. I don't know if this has been corrected for fully yet. 

I suggest that you can't time the market. Why would you leave your money for another 4 months? Why not 6 months or 12 months? If you can't time the market, invest when you have the money.

Brendan


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## CM (24 Nov 2001)

*Sacrilege!?*

<!--EZCODE BOLD START-->* Money does gravitate towards the bigger markets, but that could well mean that there is better value in the Irish markets.*<!--EZCODE BOLD END-->

Brendan - surely you're not suggesting that EMH is bogus! :eek


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## Grundy (24 Nov 2001)

*Supply and Demand*

<!--EZCODE QUOTE START--><blockquote>*Quote:*<hr> Money does gravitate towards the bigger markets, but that could well mean that there is better value in the Irish markets.<hr></blockquote><!--EZCODE QUOTE END-->  Similarly in the residential property market money tends to gravitate towards, say, Ballsbridge rather than Tallaght.  And indeed there is some very good relative value in houses in Tallaght.  However, unless it is envisaged that at some stage in the future these gravitational forces are going to correct themselves there is no reason to believe that houses in Tallaght are a better investment just because they are better value.:jem


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## iAmBonkers (2 Feb 2002)

*holding off....*

Timing..?

This is one that still has me wondering.
With 20K ready to invest directly in stocks I personally am holding off and leaving the cash in a Nrock 30 a/c as it seems that there's a lot of uncertainty as to wheather were at the end of a brief recession or on the verge of a prolonged slump, prolonged by the ammount of debt held combined with the low inflation.
With a 5-10yr investment horizon missing the boat on the initial gains but being more confident of growth is better than investing in a slump that may go on for years (take Japan).

I'm also looking forward to hearing more arguments as to why investing solely in the ISEQ is sufficient. That idea seems more shakey now after we see the Irish Government Pension Fund has gone virtually all overseas.


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## Dynamo (2 Feb 2002)

*Timing*

Hi Bonkers,

Lots of people are asking the same question as you about the state of the world economy, and coming up with lots of different answers. But as far as investment timing is concerned, the key point is probably the following - by the time <!--EZCODE BOLD START-->* YOU*<!--EZCODE BOLD END--> know more clearly whether we've been in a short slump or something much worse, then <!--EZCODE BOLD START-->* EVERYONE*<!--EZCODE BOLD END--> will know, and stockmarket prices will have moved accordingly. Unless you have some special source of information, which is improbable on a global macro-economic question, then trying to time your investment is futile.

Your question on the Irish only shares is valid, and you are correct that the National Pension Fund has taken a global view of its investments, in which exposure to Ireland is proportionate to Ireland's size in the global investment market (ie tiny). I think this approach has a good deal of merit, and indeed anything else would probably have been impossible for a fund of that size. Brendan has responded that it is easier (and less expensive) to invest in Irish shares that overseas shares as an individual Irish investor, and that the large Irish companies are international in their scope.


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## tedd (4 Feb 2002)

*Re: Timing*

In a general sense, I agree with the philosophy that you can't time the markets. However, I think if you follow a very small number of shares over time you get a sense of their trends and you develop an opinion as to whether they are something you would buy and hold or not. You also get an idea of what sort of price range is reasonable for a particular share. I think this sort of research increases your chance of spotting a good opportunity to buy.

This, of course, is no protection against the fluxes of the global economy or against a huge crash but sometimes good buying opportunities arise at such times and if you put in the groundwork, I think you increase the likelihood of benefitting from such events.

regards,
tedd


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## sherman (5 Feb 2002)

*Re: Timing*

One of the grand old men of Wall Street, I think it was JP Morgan, was asked how he became wealthy through the stockmarket. "I never buy at the very bottom nor sell at the very top" was his reply. Trying to outfox the market by being too greedy is a mug's game - buy when you think the value's there, sell when you're happy with your gain and move on to the next opportunity. There's a big difference between maximizing returns and being blinded by greed.


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## Brendan Burgess (6 Feb 2002)

*Re: Timing*

Hi tedd

It might appear that you can spot trends by following a few shares, but this is purely a trick of the mind. Humans like order and we tend to impose patterns on randomly generated data in an effort to make sense of it. 

You read all this guff from technical analysts about shares breaking in and out of their trend lines - it's as reliable as astrology.

Have a look at this [broken link removed] and you will see lots and lots of predictable patterns.

Brendan


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## tedd (6 Feb 2002)

*Re: Timing*

Hi Brendan,

What I mean is that if you follow a company over time, you become familiar with its management, its product or service and its bottom line. You have a better chance, I believe, of making a good investment decision than by randomly selecting shares from the ISEQ. 

tedd


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