What great audacity!
The conventional financial media constantly barrages with the advice, “Don't try to time the market. Buy and hold. Buy now, and hold. "
At the same time, the same financial media constantly barrages us with advice that implicitly (NOT explicitly) tells us to time the market: “10 Best Stocks to Buy Now. " and so on.
We're constantly told that nobody can make money from trying to time the market, yet we're constantly advised to do things that - in effect - are in fact market timing.
And we're told that's what the professionals do. Mutual fund and portfolio managers, traders and so on constantly buy and sell, and vary their exposure to the market based on their evaluation of where the market is going in the short run (which is market timing. )
With this book, Stein and DeMuth rise above the noise to deliver one firm, clear-cut message. Yes, you can time the market, using these proven guidelines.
They start out by making a simple point. When it comes to buying everything else in life, we do have a sense of what's expensive and what's cheap. So why not apply that to buying stocks? Buy them when they're cheap and you're bound to have better results than if you buy them while they're expensive.
They also point out something that should be obvious but is one of those things so out in the open that we don't think about it - the market moves every day because people and institutions are buying and selling individual stocks and indexes. Millions of shares. What's that but market timing?
Stein and DeMuth also agree that nobody knows where the stock market is going in the short run. The techniques they offer for timing the market have been proven to work in the LONG run - the longer the better. They compare results for 5, 10 and 20 year periods. They don't claim you'll double your money by next month. They don't know where the stock market will be next month, and neither does anybody else. Their studies show that market timing works as long term strategy.
They start out with the premise that a stock's price must be related to its expected future return. The premise of the Anti-Market Timers is that there's no relationship between a stock's price and its expected future returns. The time to buy is always “now. " But that assumes shares of stock are mere pieces of paper, and don't represent ownership interest in a particular business.
But they do represent ownership in a particular business. And if you can buy that ownership interest for $100 instead of $200, that just makes sense. Would you pay $1,000,000 for a hot dog stand that nets just $10,000 a year? Even if everybody else you know is doing that? But wouldn't you pay $10 for it? There's a price at which that hot dog stand is cheap, and a price at which it's too expensive.
Also, Stein and DeMuth do not claim they can help you pick good stocks. This book is about timing the market, not individual stocks. They advise buying the S&P 500 index.
Stein and DeMuth studied and tested the results of buying into the S&P 500 based on various criteria, and then tracked where the market went in the future. This book outlines the various techniques they found that did in the long run prove to make more money.
This book could also be called a guide to contrarian investing, because buying when stocks are cheap means that you're buying when other people are avoiding them. During the bull markets such as the late 1990s, you don't buy. The authors must know that very few people are capable of following this advise through the long term.
There's also the problem of waiting for the right time to buy. Not many people in the their 20s are capable of setting out on a firm, life-time investment plan. If there's a bull market and stocks are cheap, how many people 25 years old are willing to say, “Well, I'll just invest in bonds until the next bear market. "?
Over an average lifetime of 65 to 85 years, people will see various bull and bear markets, but how many of us properly take advantage of all these opportunities over the long term. Either we're not informed (I wish I'd read this book 40 years before it was written) or other factors come into play. (I remember my grandfather saying that he could have gotten rich during the Depression, because he had a good job and therefore money to buy stocks - when they were very cheap - but his wife wouldn't let him. )
Also, most of us have only small amounts of money to invest at a time, as we work and receive our paychecks. We might get an occasional inheritance or insurance settlement, but of course such things come when they come, and infrequently.
Therefore, I'd most recommend this book to people who expect to soon receive a large lump sum of money, and are wondering what to do with it.
However, those of us who invest through payroll deductions to a retirement fund can also benefit from this book. I am assuming that you are able to choose where your money goes, and that you can switch money in your retirement account.
When the indicators in this book tell you the market is too expensive - switch your money from stocks to either bonds or a money market account and also send your payroll deductions to a bond or money market fund.
When the indicators in this book tell you that stocks are cheap - switch your savings from bonds or cash to stocks and use your payroll deductions to buy stocks.
Just what exactly are the indicators Stein and DeMuth use to time the market? It'd be unfair to reveal the details, but I can say they look at the price to earnings ratio, dividend yield, Tobin's Q ratio (a company's replacement cost divided by market price of all its stock), price to book value ratio, the price to sales ratio, and price to cash flow ratio.
They provide a website that keeps track of the current figures.
As someone who recommends investing for income, I have to admit to a prejudice for dividend yield. The accounting scandals at Enron, Tyco, WorldCom, and other companies have shown that “earnings" is a figure subject to fraudulent manipulation. Price to sales ratio and price to cash flow ratio measure the cash health of the company but not how much you'll benefit from it. Tobin's Q ratio and similar ratios (such as price to book value) measure a company's balance sheet, not how much income it's generating.
Dividend yield, however, is cash in your pocket. Furthermore, if the stock's price never goes up, who cares? You're collecting the dividends.
Copyright 2007 by Richard Stooker
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