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Why Market Timing Fails in Volatile Markets


The coronavirus crisis has been a fascinating time to be an investor. Over the past few months, the market has whipsawed from extreme depression to euphoria and everything in between. Moves of several percentage points every day have been frequent, and it has been almost impossible to predict the long term outlook for companies based on their current trading performance.

Indeed, some companies have lost all of their revenues in the crisis, and it doesn't look as if they will be returning anytime soon. Other businesses have prospered, although costs have increased, compressing the profit margins. Some stocks have surged after declaring bankruptcy, and others have plunged after reporting better than expected profits.

Investors who've tried to time this market have likely been disappointed. There has not been a good time to buy stocks in the past six months. At the height of the crisis, in late March, it looked as if the financial world was on the edge of failure.

Even Warren Buffett (Trades, Portfolio), who's built a fortune buying when others are selling, seemed cautious. Since then, even though the economic data has deteriorated, the stock market has improved. We could be at the beginning of what might be a very long and drawn-out recession/depression, perhaps even with continued high stock prices.

Why market timing does not make sense

The experiences of the last few months have, if anything, taught us how futile the act of market timing (or trying to time the market) is. We cannot tell what the future holds for stocks, and it is impossible to predict short-term market movements.

Buffett has been preaching this approach for years, especially in 2009, when the world was reeling from the financial crisis. His comments are interesting because they clearly explain why investors should not be looking to try and time the market in uncertain times. Rather than trying to time the market (which is all but impossible), we should be concentrating on price instead.

Here's an excerpt from Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) 2009 annual meeting:

"I'm going to be buying investments for the rest of my life. And I would much rather pay half of X than X. The fact that I paid X yesterday doesn't bother me if I get - as long as I know the values in the business...it just makes sense that when things are on sale, that you should be more excited about buying them than otherwise...I never know what they're [stocks] going to do. But I do know when you're starting to get a lot for your money. And that's when I believe in buying...

We don't have an opinion about where the stock market's going to go tomorrow or next week or next month. So to sit around and not do something that's sensible because you think there will be something even more attractive, that's just not our approach to it. Anytime we get a chance to do something that makes sense, we do it. And if it makes even more sense the next day, and if we've got money, we may do more...

So picking bottoms is basically not our game. Pricing is our game. And that's not so difficult. Picking bottoms, I think, is probably impossible, but - When you get - when you start getting a lot for your money, you buy it."

These quotes tell us a lot about the Oracle of Omaha's investment strategy. They also provide an excellent roadmap for investors in uncertain times. There is no point in trying to time the market and pick a bottom.

Instead, it is better to concentrate on value and buy a stock when it offers a lot of value. If it is impossible to tell if the stock is over or undervalued, then it may be best to stay away.

Disclosure: The author owns shares in Berkshire Hathaway.

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This article first appeared on GuruFocus.