I don’t know how to time the market.
I wish I did.
If I could do marketing timing I would have bought US stocks in in the early 90s (I was pretty young but still!). Sold in early 2000, bought in October 2002, sold in October 2007, bought in March 2009.
That would be fantastic.
Unfortunately I’m only good at timing the market in hindsight.
This of course isn’t useful, since my broker doesn’t let me backdate trades.
John: “[Phone rings] Hello, TD Ameritrade?”
TD Ameritrade: “Yes, this is TD Ameritrade.”
John: “I would like to buy 100 shares of the Vanguard S&P 500 Fund at the 1992 price.”
TD Ameritrade: “….[click]”
In all seriousness though, the above chart does say something about the long-term benefits of buy and hold (but you have to buy and hold for very long periods of time and suffer through large drawdowns).
But I’ve always wanted to do better than a long term buy and hold strategy. I think the best way to do that is through value investing.
US Stocks and Bonds are Overvalued
Today I was reading a MarketWatch.com article by Thomas H. Kee Jr. in which he states, “Ultimately, liquidity matters more than valuation to professional investors, and it is far more important to the market than any of the noise we are hearing.”
I think he is right insofar as what professional investors care about. The performance of US stocks since 2009 bears this out.
This is also supports my belief that US stocks and US bonds are in a bubble, the rise in price of these asset classes is based on liquidity (central bank money printing) and NOT valuations.
But if markets have anything to do with the real economy security valuations will eventually return to a market-based and realistic level of valuation regardless of central bank injections of liquidity.
Let me summarize what I’ve said so far.
1) Stocks and bonds are in a bubble due to central bank manipulation called “liquidity”
2) I don’t know how to time the market
In other words I know that stocks are overvalued but I don’t know when they will revert to a valuation based on company performance and realistic valuation.
So I don’t want to buy stocks that I know are overvalued when I don’t know when they will crash.
Buy Stocks at a Discount
I don’t know how to time markets and I believe US markets overvalued so I take the approach of value investing.
By investing in stocks that are trading for less than their book value I have a built in margin of safety.
That way I have good reason to believe I’m not buying a security that will drop radically in price since a value stock is by definition already undervalued.
I think it’s a great way to grow wealth in good times and bad.
Later this week I’ll be unveiling some additional refinements to my value investing metrics.