You Cannot Time the Market, So Don't Even Try

For years, I have told you that you cannot time the stock market.  This week, there was a fantastic reminder of that and I wanted to share it with you.

As many of you know, during the worst market lows in March of 2009 and was telling you that there are always opportunities in the market (or elsewhere), I invested a substantial portion of my personal net worth and the net worth of my businesses in shares of General Electric including a special type of stock option known as a LEAP because I believed that GE at $6 per share was stupidly cheap.  I rarely, if ever, discuss individual investment positions because I believe my focus should be on teaching you how to think about investments so you can make your own decisions with the input of your qualified financial adviser. Nevertheless, General Electric provided far too valuable of a "teaching moment" to explain what I was doing and why (and as one of the largest companies in the world, there was zero chance of market impact).

At the time, I believed that within 5 years General Electric should be able to get earnings per share back to $2.  That would mean the current stock price was really trading at a price-to-earnings ratio of three (3).  The implication was that the earnings yield on this stock would be 33.33% or greater.

In the 12 months since those purchase decisions were made, General Electric has recovered to $18.07 per share.  The important point, however, is that most of these gains happened in short, brief, sudden bursts of activity that could not be predicted. In fact, General Electric has risen more than $2 in the past few weeks alone, representing a substantial percentage gain on news that the CFO sees the dividend being increased next year as the company returns to normalcy.  If I had sold our GE two weeks ago in order to "buy it back at a lower price" as opposed to focusing on whether or not I thought the shares were still undervalued, this would have been timing the market and I would have left all of the gains that enriched us over the past handful of trading sessions on the table.

I was encouraged to see that 20 and 30 year old investors were using the recession to buy distressed assets, and as I pointed out to some of my friends, the housing crisis was really just a transfer of wealth from the older generation to the younger generation.

Focus on value investing and, specifically, the price you pay.  Don't consider investing in any stock or bond that you don't understand.  You should be able to explain how a company makes a profit and what the risks are.  Otherwise, highly diversified low-cost investments such as index funds are probably more appropriate for you.