Market Timing

“It is About Time in the Market, Not Market Timing!” — this is a quote that is repeated over and over in the media and blogosphere by anyone and everyone, until those words completely lose their meaning and simply become something that is repeated as a mantra. While I agree with the overall premise of the argument, the concept is a bit more nuanced and needs addressing. In one way or another, market timing has to play a role in each investor’s moves else you might as well just set your cash on fire and watch the flames.

What is Market Timing

Over the course of last few months, as I have resorted to selling more of my broad equities, I have received a lot of emails and comments calling me out that I am trying to time the market and making “one of the biggest mistakes of my life”.  Really? Biggest mistake of life? How exactly? How is going to cash and not participating in this stock market charade the biggest mistake of my life? It is not just me…I see similar comments on other blogs when they sell their equities and move to safer investments or cash.

Market timing for most people seem to equate with trading in and out of securities on a daily or weekly basis. While there are traders who can make a living doing this, I am not smart enough to figure this out and will go as far as to say that its extremely difficult to make money when you compete with the big institutions who have far better resources at hand. But as the time horizon increases — medium and long term investments (again, this is subjective — but for me, medium term is 1-5 yrs and long term is 5+ years) provide more unknowns and no one knows how things progress. This added uncertainty levels the playing field in a way by bringing in more randomness to the world.

Sticking your head in sand is not a strategy!

I will not name some of the folks I have beef with, but I have heard some unbelievable comments and tweets. I routinely see something along the following lines:

“Dont worry about the valuation. Ignore what the stock price is and always buy blue chip stocks that pay dividends”

WTF?! Im sorry…If you so badly want to give me your money, I will happily take it and sell you my overpriced stock. Better yet, just transfer your cash directly to me and lets cut the middleman/broker out.

If there is one single most important thing in business and investing, it is…valuation. You always, absolutely have to pay attention to valuation. Ignoring valuation and blindly buying any asset at any price is a recipe for disaster.

Valuations are a cornerstone of business and investing and I will talk more about it later. If you are willing to risk majority of your capital to make 1, 2 or 3% in dividends for a stock that is ridiculously overvalued, you are going to get slaughtered! Those first few years of dividends don’t even matter if you are overpaying for a stock negating the returns that you perceive. Remember that common shareholder’s dividend payout come way down on the totem pole. During a recession/liquidity crunch/financial crisis, there will be a long list of creditors who will be paid well before the board of directors of a company even consider paying common stockholders. 2008/2009 was not that long ago and yet most investors seem to have forgotten the lessons.

Its Not Just Selling…Buying Counts as Market Timing Too

Don’t forget that the act of buying is also market timing. You are essentially entering into a position with confidence that the stock price will rise and meanwhile may or may not earn income via dividends during the holding period. Unless you subscribe to a more passive investing approach of dollar-cast averaging broad index funds (although an argument can be made that this is market timing too), buyers are as much of market timers as sellers!

Market timing should really mean that you are confident enough to put your capital at risk in order to make money. This means that the risks are substantially lower and the rewards far outweigh the risks. The latter portion is extremely important and investors should not lose focus on that point. Why bother investing and putting your capital at risk if there is a high likelihood of losing most of your capital. The understanding of the risk-reward situation is limited in most retail investors due to lack of self-awareness and other psychological issues. Market psychology plays a much bigger role than most retail investors care to admit. Market timing does not necessarily mean trying to call the exact bottom and exact top. One quote that stands out from FI Fighter (paraphrasing) that hits the nail on the head:

“Forget about trying to capture the top 10% and the bottom 10%. You will never time it perfectly….but the remaining 80% is accessible when you want to ride the bull market”

Thats enough abstract talk…lets put it in plain words with the real world.

Current Market

The stock market today is hovering around all-time highs. Back in 2009/2010, when the bull market started, we saw rampant (1) earnings growth which saw great returns for a few years. Putting money into the stock market in 2009/2010 was almost a no-brainer — it was pretty clear that recession was behind us (originally high-risk due to some unknowns but subsequently subsided to low-risk-high-reward scenario) and companies were finally starting to grow again. After that came (2) multiple expansion, where stock prices saw continued growth and investors enjoyed prosperity. Multiple expansions have played a huge role in most bull markets (including the current one) and usually lasts a few years. Next comes (3) earnings contraction, which we’ve been noticing for the last year or so. Most companies have seen falling earnings even after considering the immense stock buybacks to buoy the EPS numbers. Not only that, but companies have discarded the GAAP measures and coming up with unique financial metrics to massage the numbers. Dig a little deeper and you realize that the GAAP earnings are far worse than already suggested by the “earnings recession” (the media likes to portray it as something localized and doesn’t have wider consequences). This is where are currently in the cycle, which is a high-risk-low-reward situation. But yet, stocks continue to hover near the all-time highs.


S&P 500 Earnings Growth Rate (Source:

What could happen going forward? One of two things. Either we see a (4) multiple contraction (commonly known as ‘market crash’) — a natural and healthy part of the economic cycle; or companies will magically start growing their earnings justifying the high stock valuation. I dont know about you, but my money is on the former and not the latter.

Do I know when this will happen? No. Just like you, I do not know what the future holds and when the markets will crash.  If I did, I would short the market perfectly. But be assured that the markets will crash — everything is cyclical. And on that front, I have read comments from some saying: “What if the stock market never crashes and will keep going higher and higher”. Lol….Famous last words! 🙂

Market Timing in the Business World

Think about the businesses you are a shareholder in. The smart businesses are good market timers. They are ahead of the curve and make a product or service that will create enough demand to fuel the company’s lifecycle. They pick up assets when they are underappreciated and hated by the rest of the world. If the same mentality applied as some retail investors who say not to pay attention to valuation and just buy at whatever price, those businesses would not exist in a few years and would be driven into the ground.

You have to look no further than companies like Berkshire Hathaway (BRK.A, BRK.B). Companies like Berkshire always build up a huge reserve of cash in the late stages of bull market. The current reserve stands at a whopping $65B. Why isn’t BRK putting money to work? Why isn’t it depleting its last penny and putting it in the stock market where it can earn more than $2-3B in dividends? (Surely, they’ve heard of how amazing everything is in the financial world these days :p )  Again history provides a lesson here. BRK uses its massive hoard of cash strategically during recessions, liquidity crunches and/or financial crises. During the 2008/2009 crisis, BRK was getting sweetheart private deals picking up massive assets for pennies that were not available to the general public. In similar events, you and I as retail investors will never get that sort of a deal but there’s still a lesson to be learned. Build you cash reserve BEFORE the crisis and wait for those fat pitches.

Another example is Franco Nevada Corp (FNV). For those unaware of this company, it is a streaming and royalty focused company in the precious metals space. It has the best assets in the gold and silver space (they have other exposures too – such as oil & gas). Have a look at the video below and pay close attention on the strategy they take. During the gold bear market of 2011-2015, they were buying underappreciated assets left, right and center. Now that gold and silver have entered a bull market and the junior miners can raise money easily, they have started looking elsewhere for underappreciated assets. The company is so strong financially and holds such fantastic assets, that they literally have to do nothing for the next 30 years to reap the rewards of their deals. Now that is some lucrative deal-making!  FNV is not chasing after higher multiple companies ignoring the valuation — which is the point I try to make with this post.

The deal-making of FNV is so good that the stock’s steady appreciation speaks for itself. Note that gold and precious metals just went through a bear market from 2011 to 2015. For what its worth, the company is also a dividend payer and grower making it an ideal foray for DGIs into the gold space.


But why invest in gold? As one (ex-?) reader commented in the past on this blog:“Gold is a garbage investment”, which truly was spoken from a standpoint of ignorance. I will leave that for another day as it needs a long separate post 🙂

31 thoughts on “Market Timing

  1. Thanks for the great rebuttal to all those anti-market timing emails you get. Well-done!

    I also engage in a little market timing myself, to be honest. Because as you said, sticking your head in the sand is not a strategy. You must have an action plan for when stocks get too expensive and risk a bear market. And although my market timing exploits aren’t perfect, they still help protect my downside and give me a lot of peace of mind.

    I’m also happy that you made the point passive index investing with dollar-cost-averaging is a type of market timing, too. I totally agree. In fact, I would even go as far as to say that these market-cap weighted ETFs are also a form of momentum investing,

    Anyways, for now economic data continues to look pretty good (as far as I can tell) but will continue to watch closely for the first signs of recession.

    • Hi Jay,
      Passive index investing is also a form of market timing and momentum investing. I read some great commentary recently about some of the thoughts that Ive had for a few months now. The power is now weilded by the index fund managers who decide which stocks go into those index funds — so, index funds are touted to be all passive, but the fact is that index managers are adding/removing stocks (manipulating?) those indexes regularly. So, not so passive after all.

      Paying attention to macro events is an important part of investing. You will miss the forest for the trees otherwise. No one can time the market perfectly, but when there are obvious signs of trouble brewing, you have to switch gears and protect your assets — if that means losing out on a couple of percentage points of performance and/or income for a year.

      Thanks for stopping by and commenting

  2. JC says:

    Well thought out article R2R. Valuation is the most important thing, and the second most important thing. It’s always about the relation between share price and the value of the company. I’m definitely not Investing fresh cash directly in the markets right now without an escape plan (selling puts so I can always buy to close the position at a loss if need be).

    Although there is another scenario and that’s that the market just sits here and does nothing while the earnings start to grow and reduce the valuation. Although given the macro headwinds and panic/herd mentality I doubt that will happen.

    At some point buying the dip won’t work and it’s then that you better hoped you paid attention to valuation.

    • Hi JC,
      The fact that you dont want to deploy new capital into the market should be a good indication of where we think the market is. Definitely overvalued by most measures. But will this market continue to hover fueled by the central banks buying everythign under the sun? Perhaps.

      I am more interested in looking at different cycles and find that gold and silver provide a much better opportunity now that the bear market has ended and a new bull market has started off.


  3. Even Warrent Buffett sells stocks to raise capital, if he didn’t take profit and move into cash positions, he wouldn’t be able to make the huge profit for his company today. He cashed out on suntrust just the right time before the financial collapse. The. Buying GS, BaC Wfc at the bottom price.

    • Yes, Buffett may tell people that his ideal holding time is forever, but if the investment doesnt make sense, he doesnt think twice about selling and getting out of the position. The cash reserves provided some great deals during the financial crisis. Im sure similar deals will be made during the next one.


  4. Well said buddy. If the valuation at which you buy, which provides our best guess at what your future return will be, than what does?! Haha. Almost all great investors take profits on some investments in order to have capital ready for better opportunities. Some, like myself, have been wrong by being early. I am happy to take that risk in order to 1) have dry powder for better opportunities, and 2) be sure my capital will be preserved over the near term. I won’t stay in cash forever, but I am happy with it for the near term.

    Have a great weekend, adn thanks for carrying the banner for “open minded” investors everywhere!

    • Making the call a bit early as you did really isnt all that bad. So what have you really missed in the last few months by not participating in this market — a couple of percentage points in dividends? You are sitting on big cash positions and that will give you immense power to steer your family’s finances during the next recession.

      Thanks for stopping by and commenting. Always appreciate your input

  5. pacer45 says:

    I think the more practical question than ‘is the market overvalued?’ is ‘by how much ?’ – I don’t think you’d find anyone arguing with you who is going as far as to claim current valuations are a bargain.

    Its hard to judge by the language used at what level of pullback you’d decide to deploy the cash and be (give or take) 100% in. But I get the impression you’re more bearish than I am, and looking for a pretty big drop.

    Personally I’m around 25% cash now, but it would not take a huge drop to get me back in. I think somewhere around 10-15% down there would be enough individual stocks fair value that I’d be more or less all in.

    • Thats the million dollar question, isnt it? 🙂 I dont know how much the market is overvalued by. If I had to hazard a guess — its a LOT! Hard to put a number on it.

      The way things are currently positioned in the market, the next financial crisis will be as bad if not worse than the next one. However, the central bankers might still be able to put a floor on things — but Im sure will open up a whole new can of worms if they take drastic steps like NIRP.


  6. I’m certainly in agreement that valuation is paramount. I can’t understand why people would criticize you when you deem it important to sell for your own reasons… it’s your portfolio and your’s to manage as you see fit!

    All the best and keep up the good work R2R!

    FerdiS, DivGro

    • Bingo! Last few days, arguing about what I am doing with my money — this is the thought that kept popping into my head. Why do I have to justify what I do with my hard earned money to someone else? Its the price we pay as a public blog I suppose 🙂

      Thanks for stopping by, FerdiS.

  7. Very nice post R2R. I agree with you – trying to squeeze a 2%-3% dividend yield out at these highs seems quite potentially dangerous.

    I also agree a market crash is much more likely than earnings growth, the tail seems to be wagging the dog at the moment.

    I don’t think there’s anything wrong with identifying that nearly all opportunities are highly priced across the world – so simply don’t invest. I do find it interesting that you have chosen gold & silver as opposed to cash to ride out the storm. I suppose if gold hits it off, you will gain from that too. FNV does sound like a good option to invest in.

    The amount of share buy backs and manipulation of accounts is worrying and staggering.

    If the DGI aristocrats manage to remain aristocrats after a crash, I suppose some DGI investors may be vindicated in their thoughts that all they’re after is income (even if their total return has taken a smashing).


    • Glad you liked the post, Tristan.

      I think thats a good way to look at it. If things are looking bad, dont invest. Nobody is forcing anyone to participating in this market except greed. The fact that investors are willing to risk anything to get 2 or 3% in dividend is astounding.

      I’ll be sitting this storm out and wait for sunny days 🙂


    • Interesting, tq. I have not taken any short positions as I dont know how long I will have to wait for this crash. For now, I am ok staying on the sidelines.

      Thanks for sharing

      • tq says:

        Agreed, I should have said mostly in cash with a small amount allocated towards shorts. I am also using a high interest savings vehicle within my BMO investorline trading accounts to at least get some interest on a large portion of my cash. I like it because I can get out of it anytime without any penalties.


        • Ah ok. Its painful to watch the savings accounts yield much, but sitting on cash is the smarter thing to do now imo. Once the next recession hits us, we will be provided with plenty of opportunities.

          Best wishes

  8. Hey Sabeel. Thanks for sharing a great post.
    At the end of the day, do what you have to do. The bottom line is that you and your wife and family is top priority. Only you guys knows what’s really best for your life and investments. Stocks can be bought back at anytime. There’s always another deal and opportunity. However, protecting your nest egg and preparing before the downturn / crash begins is just smart to me.
    Do it up and keep building up wealth. Cheers.

    • Thats the thing isnt it. Its personal finance…and what you do with your portfolio is your business. We have to do what we feel is the right thing to do for our family and future. Im glad you sold and moved to cash as well instead of caving to the naysayers.


  9. Valuation is a huge piece of the equation, and we tend to focus on it heavily on the buy side. I typically prefer buying and holding dividend stocks, so I don’t focus as much on finding the right time to sell an over-valued stock. I don’t consider grabbing an undervalued stock as timing the market though, because I have no problem jumping on a stock once I identify it is undervalued. I would consider it timing if I said “I’ll just wait for it to drop another 5% from the current point.”

    My general thought is that trying to time is just a fools game. We can’t predict the market nor do we have access to the proper real time information needed to successfully time. Anyone that tells you differently is setting themself up for a royal smackdown one day down the road.


    • Hi Bert,
      I would argue that buying is just as part of a timing as selling. I have selling most DGIs (including myself in the past) look at stock discard an investment because the yield was too low — which is the factor of the price. So inherently, most investors are market timers whether you look at it one way or another. The fact that you have identified something as undervalued means that you are timing it. This is not a bad thing. Market timing gets a bad rap, but paying attention to valuation, as you have concurred, is paramount.


  10. Great post Sabeel! This message was a smack in the face that I think most retail investors need to be hearing right now. Timing the market gets a bad rap but it is by far the easiest, quickest, and least risky path to early FI.

    If you want to know where we are headed next, study the past and use history as a guide.

    During the dot-com boom, everyone was buying internet stocks hand over fist and greed permeated throughout… During the subprime boom, the same exact thing happened with real estate… Guess what? Both sectors went bust, and anyone who got caught at the top was massacred during the downturn… But ironically enough, anyone buying at those market tops was arguing why prices should only keep going up and how valuations don’t matter b/c it’s different this time!

    Valuations ABSOLUTELY matter! They ALWAYS do! You win on the buy side of the trade… It doesn’t matter if we are talking about cash flow/passive income, or capital gains/appreciation… It’s all the same…Deep value is deep value, and you ONLY ever get that buying into periods of immense fear when everyone is scared and refuses to play… During these “buying opportunities of a lifetime” when the merchandise is selling for 80% to 90% off, I also assure you that people will be telling you that you’re a total idiot for buying and taking huge, monumental risks!

    That’s just how human psychology works…

    But back to the present day — Does anyone get that consensus right now in today’s market? No! This current bubble is the Central Bankers’ bubble and just like dot-com and subprime, it will end in tears… The reason most retail investors can’t time markets is because we are internally wired to only like to buy when asset prices are going up… It makes us feel good and smart.

    Confirmation bias… Another deadly trap to avoid.

    What we need to be doing is the complete opposite… When people are getting complacent and buying anything that moves, we need to run for the hills in fear… which is exactly what you are doing right now.

    But the main reason why timing the market is so hard comes down to this — Investing is the most addicting drug out there. Most who get started, don’t ever want to stop… Sitting on the sidelines for 3, 4, 5, years (or even longer) has almost zero appeal for most everyone except the disciplined investor who refuses to overpay for assets as is willing to wait for buying opportunities of a lifetime, where you can indeed make $1 million+ in a single cycle…

    Sound far-fetched? Anyone who thinks so just needs to study history and see for themselves that all asset classes behave like sine waves, moving both up and down.

    All the best!

    • Well said, Jay. The insights that you provide is what I enjoy with our conversations — valuations matter no matter what — whether we are talking cash flow, passive income, capital gains etc. Market timing does get a bad rap. History serves as a great lesson but yet most people tend to ignore. At the same time, people put way too much emphasis on history. DGI is a backward-looking model that puts too much emphasis on “past performance will predict future behavior”. There may be a plethora of reasons on why a company did well in a period of timeframe …. we look at 1, 3, 5, and 10 year dividend growth rates as purely numbers and try to project what the future will bring. I argue that its not possible to treat these companies/stocks in a vacuum. Times change and the companies that adapt will flourish. The rest will die. Simply because a company has existed for 100 years and paid dividends for 50 years is irrelevant.

      Its a sign of the times isnt it? Buy everything! I heard a great quote on the human psychology from Michael Maubousssin during a podcast — that we humans tend to buy when we feel good and sell when we dont. That surely is plain as daylight these days when investors are gobbling up any subpar stock that has a dividend yield. The central bankers have blown a bubble into almost every asset class. Theres only a few pockets left where undervalued assets exist and thats what I intend to target.

      As always, thanks for stopping by and sharing your thoughts

      • Sabeel,

        Great point you make there about history! Past performance indeed does not always predict future results… That’s something worth keeping in mind right now, considering the fact that we are stuck at ZERO and markets have never existed in a prolonged period of ZIRP and NIRP… A most artificial environment, if you will.

        That “juicy” 3-4% yield might not even be tempting at all in the future if say something happens to the bond market and we experience a mean reversion… This could make paying a premium for income today look rather foolish tomorrow… But who knows? It’s anyone’s guess what will happen tomorrow…

        Also, stock markets are NEVER guaranteed to fully recover after a substantial crash/correction… As the Nikkei proved in the late 1980s, and dot-com in 1990s, you can go decades and never hit those lofty peaks again…

        Valuations are key b/c the markets themselves are unpredictable.


        • Haha yeah. We might look back at this and realize how insane were we to think that 2 or 3% was a good return on investment and piling money into risky assets with questionable books. The small dividend amounts have been a drug for this income starved world and retirees (and young investors too) have completely gone bonkers taking unnecessary risk in this environment where the fundamentals are collapsing.

          Good point about the Nikkei. The Japanese investors are still hurting from their issues and there is no end in sight.


  11. You put it right on the money R2R. Knowing when to buy and more importantly sell is huge. I really like reading about how you handle your investing. Youre doing a great job.

    It seems the sharpest minds are doing what youre doing now and consolidating out of these high priced stocks. Good move!

    • The market fundamentals are collapsing, yet most investors seem to not care with their hard earned money. It is the reason why I have been liquidating since this summer. Market timing, whether you consciously try to do it or not, is something everyone does and rightly so. Paying attention to valuation is what will help you make progress as an investor, else you will be fueling someone else’s dream otherwise.

      Thanks for stopping by and commenting.

  12. Great post R2R,

    I would also point one issue. Tones of money were printed and what happened?

    Investors are buying bonds for appreciation of capital (due to declining rates) and buying shares for dividend yield. Perception of risk/return has changed…

    On the other hand look how much are falling companies which disappoint with results – lately for example 10% down by PPG Industries – historically impossible. Volatility is huge on particular shares…

    Best regards,

    • Hah…yeah thats the mad state of things isnt it? Buying bonds for capital appreciation and stocks for yield. Nothing seems normal about this marketplace. Companies continue to struggle churning out those revenue and earning numbers. Theres a lot of questionable statistics and numbers both from corporate sector and the Fed front. We’ll have to wait and see how things turn out this time — but meanwhile, I will time this market and sit on the sidelines with my cash 🙂


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