Market Timing Tips Every Investor Should Know

It's a long-held belief that market timing and investing are mutually exclusive, but the two strategies work well together in producing solid returns over a number of years. 

The effort requires a step back from the buy-and-hold mindset that characterizes modern investing and adding technical principles that assist entry timing, position management and, if needed, early profit taking.

This set of technical tips can guide your investments through a gauntlet of modern market dangers:

https://www.investopedia.com/articles/active-trading/043015/market-timing-tips-rules-every-investor-should-know.asp

Would you rather be a Jesse Livermore or a Warren Buffett?

Every one who has ever bought a company share or a mutual fund must have heard of Warren Buffett – one of the wealthiest men on earth and a firm proponent of long-term value investing principles. His holding company, Berkshire Hathaway, has made immense amounts of money for its shareholders and owns stocks is some of the largest and most well-known companies. His annual letters to shareholders – liberally sprinkled with worldly wisdom - are avidly read by investors and fund managers all over the world.

But who is Jesse Livermore, and why should he be compared with Warren Buffett? Those who have already read ‘Reminiscences of a Stock Operator’ by Edwin Lefevre may skip to the last paragraph. For the less informed, here is Jesse Livermore’s fascinating story:

A farmer’s son, Jesse left home in 1891 and joined a brokerage firm in Boston, USA posting stock quotes. He was 14 years old. He started placing small wagers in a ‘bucket shop’ – a gambling establishment that accepted bets on stocks and commodities without actual physical delivery. Sort of like our earlier ‘badla’ and current F&O trading. In a year, he had made $1000 (equivalent to about $25000 in today’s money).

He continued betting for a few more years till he got banned from the ‘bucket shops’ for making too much money. He left for New York and started proper trading in the stock market. In 1901, within a year of his first of three marriages, he went broke. His wife refused to lend him her jewellery to start afresh and their marriage fell apart.

In the crash of 1907, Jesse observed a liquidity crunch and heavily shorted the market. He ended up with a profit of $3 Million – a huge amount in those days – and promptly blew most of it away on a bad cotton trade. He had developed certain trading rules for himself, but forgot them in his panic. He listened to other people’s advice and kept adding to his already losing position. By 1912, he had debt of $1 Million. During and after World War I, he not only made good all his losses but had multiple homes and cars in different parts of the world. At age 41, he married an 18 year old dancing girl.

Then came the crash of 1929. Liquidity conditions were similar to that of 1907, and Jesse shorted stocks as if there was no tomorrow. Almost every one lost money in the great crash. Livermore ended up with a whopping $100 Million profit. In 1933, he married for the third time. It was his wife’s 5th marriage. All her previous husbands had committed suicide.

By 1934, Jesse Livermore went bankrupt again. No one knows how he managed to lose such a large sum of money. In 1940, he shot himself. A suicide note for his wife stated that he was a failure and this was the only way out.

Those of you who do not like the boring, long-term buy-and-hold investing style of Buffett and prefer the excitement and adrenaline rush of short-term trading, here is a famous quote from Jesse Livermore: “The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.”

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How to build wealth using a buy and hold strategy

The investment gurus have all advised investors to follow a buy and hold strategy to build long term wealth. Investors, fund managers, academics like Warren Buffett, John Bogle, Jeremy Siegel, Phil Fisher, Peter Lynch have provided us with their tried and tested methods.

Yet, whenever a bear attack makes the market trajectory go haywire (i.e. in any direction but up!) all kinds of 'new' theories start to appear and re-appear. Fundamentals and technicals are all hogwash. It is all about sentiment and momentum. It is a traders' market. Buy and hold is dead.

The last named theory has been bandied about quite a bit of late. Probably by those unfortunate folks who got all excited by an ever-rising bull market and got in pretty much near the very top. I have been there and done that, and lost a pile of money.

But that didn't make me go out and search for a new theory. It taught me that to make money in the stock market, you can't jump in feet first without any inkling about what the market is all about, and how some companies make real profits in a sector while many do not.

You've got to pay your dues. By losing money, and by spending the time and effort to learn how to analyse a company by studying the Annual Report in detail AND how to look at technical charts to analyse the supply-demand mismatch in the market.

You can pick the best company and buy it near the market top, and you may not make any money for years. You buy the same company near a market bottom and sell it when it gains 25% or 50%, and you can miss a multibagger.

However unexciting and boring it may sound, investment is serious business. It requires patience, perseverance and discipline - not only to build serious wealth, but to keep it from disappearing.

There lies the main problem with trading. You make money fast, and you lose it faster. The odds are better in a casino. After you pay the brokerage and your taxes, you may find that you would have been better off keeping the money in a savings bank.

Strong, well-managed companies have various ways of rewarding their shareholders. A bonus this year; a rights 3 years later; regular dividends; share buy-backs. After a few years you find that your 100 shares have become 350, plus the market value has tripled. There is one condition. You have to stay the course. Flitting in and out of stocks will only make your broker rich.

Take the example of ICI Ltd. A staid paints stock that was going abegging at Rs 85 in 2002. In the seven years since, it has paid a total dividend of Rs 85 per share. No bonus. No rights. A share buy-back last year, and the stock is at Rs 500! I'm still holding.

What do you think, dear reader? Do you feel the buy and hold strategy may be the way to long term wealth? If not, why not?

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