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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: porcupine --''''> who wrote (977)	11/11/1998 11:38:00 PM
From: Freedom Fighter	Read Replies (1) \| Respond to of 1722

Market Timing and Value Investing >>This may seem like market timing, but it isn't. It is setting the standard for investment at a level where the spread between the expected return on the stock and its alternative is high enough to cover all the associated risks.<< >If one is in the Market at some times and out at others, one is timing, regardless of the criteria employed. That's okay for people like you and Buffett. My view is that it is not a good idea for the average investor. Apparently, Dreman concurs< I think we differ in our definition of market timing as it relates to investing. I have always thought of market timing as making investment decisions based on projections of where the market will be heading. One can make those decisions based on technicals, economics, liquidity, or other sorts of projections. "I think we are going up." "I think it is a bull market." "I think it's a dead cat bounce". That sort of thing. In my mind that does not include value. This is the way it is usually written about and discussed. Value investing is basically buying undervalued businesses based on a set of value identifying criteria and selling them if they become so dear that they will return less than the alternatives available. Following such an operation, one will find himself with varying cash levels as a result of dividends, occasional sales, special distributions or new savings. Throughout a career, the investor will never have any idea where the market is going and never make any investment based on any view on the matter. The general market level and the scope of the investor's expertise will control the cash level. Under almost no circumstances (except perhaps Japan in the late 80's) will the investor find himself "out of the market" (a market call). I have been 100% invested on many occasions without any clue about where the market was going. I am conservatively positioned now because I can't find anything I am familiar with that is undervalued based on my understanding of what intrinsic value is. I still have no idea where the market is going. I am just refusing to make bad investments. I can't consider anyone that refuses to do doing stupid things as a market timer. It would seem to me that an operation that encourages 100% stock investment at all times could be very risky and at times could be poor advice. I agree that with you that it is a strategy designed for those that can't make informed judgments on value. But it is based solely on a belief that the past better performance of stocks will repeat itself in the future. It makes no effort to determine if the relationships have changed in ways that will make the future different from the past. As you say, it is not market timing though. It can also present traps. An example of one trap is present even now. In the 30's - 50's interest rates were 2.5% - 3% and PE ratios were 10-12 for much of the time. The same is true as far as the relationships go for a lot of the rest of market history. It's not too surprising that stocks outperformed bonds over any reasonable period of time by a significant margin. But yields are now 5.25% on governments, 6.5%+ on AAA corporates and PEs are 29. At a minimum the performance gap will be dramatically reduced. There is also now the potential for a very very long period of underperfomance by stocks because the relationships have been turned on their heads. It could be a multi-decade thing under the worst scenario. Let's say PEs returned to 10. (Something they have done in every decade except the 90's) We could be at DOW 9000 twenty+ years from now. The past record gives no indication at all of that possibility because we have never in history had these relationships. Only Japan has.......to a greater degree. "Past performance does not guarantee future performance". I think a better approach for uninformed investors is to have an asset class (stocks, bonds, cash, gold, foreign securities, real estate etc..) ratio that is suitable for that investor based on his age, immediate needs, 5-10 years needs etc... The new savings that are accumulated should be dollar cost averaged into those asset classes at that ratio and adjusted accordingly to the needs. He would then tend to accumulate whatever is cheapest in the largest quantity. He should also be aware that at least one asset class will probably be a net drag (and that could be stocks). But he can take comfort in the words of a former Indy 500 winner. "To finish first you must first finish!" Wayne Crimi Value Investor Workshop members.aol.com