John,
Don't you think economic cycles, product cycles, and valuation are legitimate reasons for
switching in and out of markets?
Why not buy when markets are historically cheap and sell when they're historically
expensive?
I think as long as you realize the limitations of any timing approach, it is OK. I would never invest the bulk of my assets with a timing approach. It is easier said than done to say that you are going to sell before the next recession. More often, you end up sold out of equities when the big rally occurs.
Trying to put a value on the market as a whole, which is what started this topic of conversation, is an extremely crude and imprecise approach. We first started with market cap relative to GDP and then discussed an appropriate P/E for the "market" as a whole. The problem with these is you can't arrive at a price range that is any more precise than, say, 30-50%. How are you going to time with this blunt of an instrument?
I think that if you stick to the basics of individual company analysis and not buy companies that are overvalued given your criteria, that you will be OK. That, of course, doesn't work if you are using mutual funds, but even there you can avoid those that are concentrated in richly priced stocks.
Really, the whole nature of investment is inherently difficult. There is no simple solution. But, I believe that long-term approach that captures the growth in the earnings over time is the surest method. But it ain't easy either. |
