Friday, May 13, 2011

Beware of Market Timing.

A very insightful tid-bit from claphands22 (who posted it on my favorite message board):

I had committed a cardinal sin: I had become a market timer. It was a slow process cataloged by a first glace at a Case-Shiller's index then by a monthly, then weekly, then daily look at GuruFocus's "Where Are We With Market Valuations." I became skittish about investing because I thought the markets were too overvalued, I figured I should be timid about my positions because of a possible market revaluation. Yet now, I see I was just being a market timer. To use the supermarket analogy of investing, I was saying no to 50 cent pound bananas because the strawberries and peaches were selling for 10 dollars a pound. I was letting the prices of other securities dictate my position size and what I invested in - not my own independent valuations.

To be clear, I'm not saying you should be fully invested 100% of the time. If you don't see a security with a large enough margin of safety, don't buy it or if a position size keeps you up in night you should trim it down. Yet, don't let the market's valuation keep you from purchasing a great idea.

Here is a comment from Buffett about investing his personal money during the 2000 Nasdaq high. Notice market valuations didn't keep him away from making a rational investment choice.

I have less than 1% of my net worth outside Berkshire and when the Nasdaq hit its high, I had nearly all of it in REITs, which were selling at a discount to their liquidation values. (BRK Annual Meeting 2005 Tilson Notes, via )

Market valuations is a tool you should be careful using since they can infect your thinking. Beware of using market valuations because they might use you.

Disclosure: None. This is not advice of any kind. Always do a ton of research in regard to anything that I say, talk, write, or so much as even think about.

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