In Defense of Timing (beware--long post)
With all due respect to my elders and betters--from whom I would encourage correction--it seems to me that there has been a lot of loose talk and sloppy thinking here on the (rather pressing) subject of timing. There are only two basic arguments against trying to time one's entry into a stock: because timing doesn't matter and/or because it is impossible to do. The first is absurd. The second is true, but doesn't obviate the need to try as best we can.
As for timing not mattering, two fallacies have gained currency. The first involves Uncle Frank's advice that timing is not worth discussing because at any price a gorilla like Magilla is mighty nice. This may be true in the abstract, or when deciding whether to buy Magilla versus, say, a T-Bill or the S&P (although as Merlin has pointed out, SAP investors might disagree). But it does not help in deciding whether to buy Magilla now or three months from now, using the proceeds from other interim investments. Nor does it help in deciding whether to buy Magilla or his pretty young cousin Smilla. Such decisions REQUIRE an attempt at timing, in the sense of guestimating how the various gorilla stocks are likely to perform (both absolutely and relative to each other) in the near and medium term.
The second fallacy, intoned almost religiously by several, is that timing doesn't matter because we are investing for the long term. Scratching my head to figure out how so many intelligent people could believe this, I decided that it was because they were comparing the returns from, say, 15 shares of Magilla bought at $20 versus 15 shares bought at $30. If Magilla's price rises to $500 five years later, profits from the first investment will be $7,200 while profits from the second will be $7,050--a mere 2% more, or no big deal.
But surely this is the wrong comparison to make, because it is based on constant shares rather than constant investment stake. For someone deciding whether to invest a pocket of cash, the proper comparison is $300 invested in Magilla at $20 (yielding 15 shares) versus $300 invested in Magilla at $30 (yielding 10 shares). If Magilla has the right stuff and goes to $500 five years later, the first investment will still yield a profit of $7,200, but the second will yield only $4,700. Getting into Magilla at $20 rather than $30, in other words, would give you 53% more profit five years later--a very big deal indeed. BECAUSE OF COMPOUNDED RETURNS, IT IS PRECISELY FOR LONG-TERM INVESTORS THAT GETTING A GOOD INITIAL PRICE--AND THUS MORE SHARES FOR THE SAME MONEY--MATTERS MOST!
So if timing is crucial, why not do it? Well, because as Merlin and others say, it may be impossible to do. Although in the long run stock prices reflect fundamentals, in the short run they move rather randomly. So are we back to square one, having only fundamentals to go on in choosing between Magilla today and Magilla next month, or between Magilla and Smilla? Lindy gets Magilla at $25 because he's lucky, I get in at $30 because I'm unlucky, and Teflon gets in at $20 a week later because he was on vacation and Greenspan gave a bearish speech in the meantime? Perhaps. Nevertheless, the consequences of getting a better price are so important that any advantage over randomness is worthwhile--which is why even those who claim they "don't believe in timing" are driven to try anyway.
Let us take all-powerful Merlin as a case in point. Forced by events to choose among selling, holding, or adding to his Gemstar position under duress, he settles on the middle course for the moment--ostensibly the wise, non-timing thing to do, based solely on the need for due diligence before making such an important commitment: "Not having an understanding of the new entity to the extent that I think I understand Gemstar, I also wouldn't commit to a purchase of any additional shares."
But if we probe further, we find that this master of logic contradicts himself shamelessly. He posts, "The best way I can summarize my reaction to the news is that I've said for quite awhile that a settlement with TV Guide would be tantamount to Qualcomm's settlement with Ericsson. I believe that every bit as much today as when I first wrote it." Less than a week earlier, however, he told us that in retrospect he wished he had jumped on the Mighty Q as soon as the deal was announced: "I think it took me two weeks to do my research, during which time the stock went up about 50%. I should have realized that the downside risk was little and that I could have sold the stock if my research revealed something I didn't like." If both these statements are true and he is serious about not timing, then he should jump further into GMST at the open on Wednesday, q.e.d.
I submit that his reluctance to do so is in fact ALL about timing--and that it reveals him to be a master of the art despite his demurrals. Both he and Lindy (clever bastards!) predicted that the announcement of the deal would send GMST down rather than up. Neither wants to catch a falling knife, and so both are waiting for what they believe is a bottom. Nothing wrong with that; hell, if I had been as prescient as they I'd have done the same, and gotten a better price for my last tranche. But let's call a spade a spade.
My conclusion is simple. Like many things in life, timing is a task both impossible and necessary to attempt (because consequential). So rather than scorning it from a lofty perch, we should permit (and perhaps even encourage) intelligent discussion of it. The little girl in the cartoon had it right all along: "How MUCH is that gorilla in the window?"
tekboy@gemstaraveragecost76.com |
