Buy and Hold Beats Active Investing

[kyphysics]

Because you can't predict the price moving forward, except for the general upwards trend, so if you have money to invest you are better off investing it now than trying to time the market.

For small amount, I'd agree. I wouldn't personally lump sum a huge amount in, though, per the discussion on the previous page.

I also don't think valuation-selection is the same as market timing, as I've had this debate innumerable times. Market timing is holding out, because one thinks the market may go lower and they can get a better price. No one can predict that (and so, you probably cannot pick the bottom when it does dive). Valuation-selection or "valuation timing" is simply waiting for a good price. That may come right before a recession (not necessarily during or after). It could come at the peak of a bubble. It could be any time.

A value investor can go years without buying anything. Francis Chou, when asked how long he could wait, famously said 10 years. I'm not so strict! I don't use the Graham-Dodd 50% margin of safety, for example. I pretty much give it all up or just use a smaller one (depending on how confident I feel about my understanding of a business). I feel I'd be waiting for eternity if I invested that way and miss some of the best performers. But, I'm pretty picky still and it works for me. To summarize: "valuation timing" is not the same as market timing. But, for the average investor, it really probably is best to just DCA into a S&P 500 fund like Warren Buffett says. Even someone hell bent on value investing should probably still have a baseline strategy of DCA-ing into VOO/SPY/SPX for like 10% of their portfolio or so. I know lots of people who do that, as they don't have a big enough ego to believe they are the next Warren Buffett.

 

[scompi]

Because you can't predict the price moving forward, except for the general upwards trend, so if you have money to invest you are better off investing it now than trying to time the market.

I agree with this. I like the "set it and forget it" strategy. Trying to time the market is like gambling. Less so if you know what you're doing, but still like gambling nonetheless.

 

[kyphysics]

I agree with this. I like the "set it and forget it" strategy. Trying to time the market is like gambling. Less so if you know what you're doing, but still like gambling nonetheless.

I'll leave this topic alone after this, but I have to say, value investing is NOT timing the market!

I've had this debate 100x (exaggeration) it feels and people often conflate valuation-selection with valuation-timing/market timing. It is not. I'm not obligated to buy a house at Case-Shiller all-time highs. I can sit back and rent or live with my parents, etc. In the same way, I am not obligated to buy U.S. stock indexes (I'd actually rather buy the disliked emerging markets right now) or individual stocks at ridiculous valuations either. I can wait and be more selective.

I like Zoom ($ZM) a lot (and think it will steadily increase users and revenue over the next decade and probably keep it's ~30% margin), but would NOT ever have bought at $550...$500...$400...$300...I would have bought at $200, but changed my mind...it's now $162 (OMG!).

Before I get accused of market timing, I always feel the need to make these distinctions. I know what market timing is and agree it's flawed. But, I'm not doing that. Okay, that's my final 2-cents.

 

[kyphysics]

I actually might take a stab at $ZM tomorrow and DCA down if it falls. I wouldn't buy above $160's range.

 

[scompi]

I'll leave this topic alone after this, but I have to say, value investing is NOT timing the market!

I've had this debate 100x (exaggeration) it feels and people often conflate valuation-selection with valuation-timing/market timing. It is not. I'm not obligated to buy a house at Case-Shiller all-time highs. I can sit back and rent or live with my parents, etc. In the same way, I am not obligated to buy U.S. stock indexes (I'd actually rather buy the disliked emerging markets right now) or individual stocks at ridiculous valuations either. I can wait and be more selective.

I like Zoom ($ZM) a lot (and think it will steadily increase users and revenue over the next decade and probably keep it's ~30% margin), but would NOT ever have bought at $550...$500...$400...$300...I would have bought at $200, but changed my mind...it's now $162 (OMG!).

Before I get accused of market timing, I always feel the need to make these distinctions. I know what market timing is and agree it's flawed. But, I'm not doing that. Okay, that's my final 2-cents.

Let me give two examples.

1) I bought AMD stock in 2019 (around $40) when the P/E ratio was well into the 100s. It had just rallied from in the teens. I held for a little while, hoping to get another rally. Analysts were saying that it was way overvalued. I listened and sold for very little profit. Today, AMD stock is around $130.

2) I bought a house as a rental property in the summer of 2020. My family and friends urged me to wait because real estate was severely overvalued at the time. I didn't listen. Today, similar houses in the same neighborhood are selling for $200,000 more than what I bought at.

I also have examples of investing at high valuations and getting burned during the eventual downturn. My point is: nobody knows what's going to happen, not even the professionals. Choosing to invest everything today versus waiting for a lower entry point carries the same risk (in my opinion, based only on my experience). I choose to invest everything today because it is less work and requires less thought, freeing my mind for things I can actually control.

 

[russ_watters]

My point is: nobody knows what's going to happen, not even the professionals. Choosing to invest everything today versus waiting for a lower entry point carries the same risk (in my opinion, based only on my experience). I choose to invest everything today because it is less work and requires less thought, freeing my mind for things I can actually control.

Less effort is a good reason, but the risk is definitely not the same in buying now vs waiting. You're more likely to miss-out on gains than profit from a temporary dip.

Talk of individual stocks is, to me, a separate issue: it's trying to beat the market on picking, which is another thing amateurs can't reliably do.

 

[scompi]

Talk of individual stocks is, to me, a separate issue: it's trying to beat the market, which is another thing amateurs can't reliably do.

Indeed, but that's where the most money is made (and lost). A separate issue though...

 

[kyphysics]

Bought some $ZM today at $158.xx

Please don't go out of business!

 

[kyphysics]

WOOHOO I'm up a buck on my $ZM! Move over Warren Buffett!

 

[xodarap]

Because you can't predict the price moving forward, except for the general upwards trend, so if you have money to invest you are better off investing it now than trying to time the market.

Agents always tell you now is the best time to buy. There were numerous finance academics who said the tech market was grossly over-valued in 2000, and they were right.

 

[kyphysics]

Less effort is a good reason, but the risk is definitely not the same in buying now vs waiting. You're more likely to miss-out on gains than profit from a temporary dip.

I would push back a little on this and say that it depends.

It's a complicated topic, so it can be hard to entirely encapsulate into one or two sentence principles. On the one hand, studies do show that a random dropping of a large sum of money (e.g., inheritance) into the stock market immediately (i.e., on the exact day you get it) is 2/3 more likely to be more profitable to you over the course of many decades vs. dollar-cost-averaging in. That's because markets tend to rise. Studies show that for every 3 up days, there is only 1 corresponding down day (magnitudes notwithstanding). However, as noted earlier, those studies do not seem to be valuation-conscious. They seem to randomly try to across like 100 years of history.

What is not accounted for, yet also shown in numerous studies too, is that when you buy stocks at extreme valuations, you tend to get very bad results/returns over the ensuing years. Sure, the market can go up for another year or two, but over the next decade, your returns are likely to be very poor. JP Morgan has the following graph, which shows there is no correlation between forward P/E and 1-year returns (anything can happen in the short-run), but that there is a strong one going out 5 years:

This makes sense. You never know when a market may correct, but you know it always will. If I'm looking at a CAPE Shiller P/E of 38 (current bubble and highest in U.S. history) and know the historical norm is 16, then
I know to be cautious.
Inverse CAPE is another measure (and better than forward P/E, due to misleading fickle earnings) for understanding what your likely returns are going to be:

...and there are numerous other measures that do the same.

In a way, both studies/theories/principles/approaches are true. You obviously cannot market time in the sense of predicting when and/or how much the market may go down. But, you also cannot expect to make great long-term returns from buying at hyper-valuations. So, what to do? DCA-ing is one solution. Warren Buffett (per the video I posted on the previous page) seems to prefer that over lump summing. Another approach is to have hedges or just be a little more cautious during periods of ultra-high valuation. Perhaps still buy as normal, but maybe a bit less. And, then, during periods of very low valuation, perhaps be willing to buy more. This avoids an all in vs. all out approach, which does seem unhelpful.

In my view, one can also just look beyond the U.S. if the U.S. markets are hyper-valued. Usually when one region is hyper-valued, other regions of the world are great bargains (and will outperform in the ensuing 5-10 years).

 

[bhobba]

The right price is always today's price.

Just use dollar-cost averaging:


I don't even bother using the Donnely Indicator for tactical asset allocation anymore. Rebalancing works nearly as well. And while the indicator works there is no way of knowing how long a bull or bear market will last.

Thanks
Bill

 

[kyphysics]

Talk of individual stocks is, to me, a separate issue: it's trying to beat the market on picking, which is another thing amateurs can't reliably do.

There is a reliable way to beat Warren Buffett I heard a few years ago:

Just buy Berkshire whenever he draws down. I did just that (B shares, of course!) in 2020. I outperformed him, lol!

 

[kyphysics]

How low can Cathie Wood's ARKK go?

 

[bhobba]

How low can Cathie Wood's ARKK go?

Who knows. It was wildly overvalued.

Thanks
Bill

 

[bhobba]

I'll leave this topic alone after this, but I have to say, value investing is NOT timing the market!

It is the exact opposite. We know eventually, the market will recognise an undervalued stock was undervalued. The thing is, we do not know when. The market is dominated by the FAANG stocks (Facebook, Apple, Amazon, Netflix and Google). All are very good companies, just way overvalued. It looks like the correction has started. Just today, someone asked me, with the market looking like it will fall, is it a good idea to sell Puts. My reply was, it depends. If you want to do the Warren Buffet thing, sell puts on FAANG stocks at about .05 delta and follow it down, accepting assignment if it happens. Otherwise, do what I am going to do - I will be putting a Call Spread on the S&P 500.

Thanks
Bill

 

[kyphysics]

The market is dominated by the FAANG stocks (Facebook, Apple, Amazon, Netflix and Google). All are very good companies, just way overvalued.

I think Netflix and Apple were closer to the way overvalued side. Amazon was in the middle.

Facebook and Google were fairly valued.