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!

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Do You Love Your Investment Holdings?

Consider your investment portfolio. Do you hold stocks (or other securities) in companies that you love? Do you tend to disregard or ignore articles that highlight the bear case for that investment? If yes, you could setting yourself up for a common pitfall when it comes to investing. Falling in love with an investment is one of the worst things an investor can do for overall returns. As humans, it is in our nature to like/love things that are familiar to us. This is not just applicable to stocks or investments, but for everything in life.

I was recently listening to the Masters in Business podcast with Daniel Kahneman. Daniel Kahneman is a world renowned psychologist, best known for his work on the psychology of judgement and decision-making. Even though he is a psychologist, he is a Nobel prize winner in economics (awarded in 2002). His research explained and shed light on why the investing world falls for the same traps over and over. One of his most cited study is the Prospect Theory, which among other things summarized that humans value gains and losses very differently. Losses have a far more emotional impact than equivalent amount of gains. For e.g., losing $5 has a stronger emotional impact on most people than finding $5. The overall psychological impact is charted as shown below from the Kahneman & Tversky study. As noted, the curve falls faster towards the left than it rises on the right, indicating the overall psychological impact.

prospect-theory

I highly recommend you listen to the podcast, but if you do not have the time or patience, have a listen starting at the 41:45 mark. As Prof. Kahneman explains, the familiarity of ownership makes humans think highly of that entity. In his words, “Almost everything that is familiar….you like better”.

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Top Investment Picks for 2016 – Q1 Update

Top Investment Picks for 2016

At the start of the year, I polled 33 bloggers for their top investment picks for the year 2016. The original post can be found here. The picks ranged from small- to mid- to large-cap investments and even one recommending holding cash. All in all, very interesting picks. As promised, here is a quarterly update on the picks.

Note that these picks are simply meant to be a fun exercise and should not be treated as investment advise one way or another.

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Top Investment Picks for 2016

Top Investment Picks for 2016

As the new year rolls out, I decided that it would be a fun experiment to run and collect top investment picks for 2016. I reached out to the community of bloggers that I regularly interact with and asked them to participate in this collection.

The rules were simple: Pick one investment (either a stock or a fund or a commodity or any other form of investment), and present a short & quick investment reason behind the pick. Most bloggers I reached out to were happy to comply and shared their pick. I intend to present the data here in this post and track the investments over the course of 2016 on a regular basis (on a quarterly basis perhaps?).

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The Problem with ETFs

ETF

We read everyday on the media sites and blogs across the web that Exchange Traded Funds (ETFs) are the best options for investors as they are a cheaper alternative to mutual funds and are a great way to invest. While I agree with that viewpoint, I think it is important to also consider the problem with ETFs.

This post is inspired by a comment from Monsieur Dividende on my post on The Importance of Diversification. In that article, I discussed why it is important to diversify and how studies have shown that unique risk decreases significantly even with as little as 12 stocks in a portfolio. MD made a point that once you get to a high number of holdings, say 40-50 stocks, you are better off simply owning an ETF. While I agree that most investors are better off investing using ETFs, I have a couple of counter arguments to that point.

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