“Timing the market” is a term often met with skepticism. After all, who can predict where prices will go next? Yet, veteran investors understand that while market timing can be risky, it’s not as impossible as it may seem. Here’s what they know.
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What is market timing, really?
At its core, market timing involves trying to buy investments when they’re undervalued and sell them when they’re overvalued. The goal is simple: buy low, sell high. Investors who practice market timing often rely on a combination of technical analysis (examining past price movements) and fundamental analysis (evaluating factors like earnings, economic conditions, and company health) to predict price changes.
While the idea sounds straightforward, it’s far from easy.
Why timing the market is so tricky
Market movements are notoriously unpredictable, especially in the short term. Prices are often influenced by investor emotions like fear and greed, which can create volatile swings. Even expert investors struggle to time their moves perfectly.
For instance, missing out on just a few of the market’s biggest gains can severely impact long-term returns. That’s why many investors prefer to keep things simple by dollar-cost averaging – investing a set amount at regular intervals, regardless of price.
The risks of waiting for the perfect moment
Many market timers make the mistake of waiting for “perfect” entry points. However, this strategy can backfire. As the market tends to rise over time, missing out on a series of steady gains can result in significant missed opportunities. This is why partial buys at reasonable levels can often be a smarter approach, even if the timing isn’t ideal.
A real-world example: Bank of Nova Scotia
Let’s look at a practical example: Bank of Nova Scotia (TSX: BNS). This long-standing Canadian bank has been paying dividends since 1833, making it a solid blue-chip stock. Recently, however, the bank faced challenges, including a dividend freeze for eight consecutive quarters – an unusual move for a company that traditionally raises its dividend.
Despite these short-term struggles, the bank’s earnings remain resilient over the long term. Historically, it has been profitable, though earnings fluctuate in line with economic cycles. Currently, the bank offers an above-average dividend yield of 6.1%, and its stock price has dropped 13% from its 52-week high, providing a potential opportunity for savvy investors.
Veteran investors who keep an eye on the company’s fundamentals might consider this a good time to buy partial positions, especially as the stock is trading at a 12% discount to its intrinsic value according to the analyst consensus price target.
Why long-term investing still wins
Despite the appeal of market timing, successful investors like Warren Buffett have long advocated for a long-term approach. Instead of obsessing over short-term price swings, Buffett suggests focusing on buying quality companies and holding them for years, letting their value compound over time.
While market timing can work for some, it’s a high-risk strategy. You have to time right for both the buy and sell action. For most investors, a focus on the long term and quality businesses and an eye on fundamentals, perhaps supported by technical analysis, often prove to be a more reliable path to wealth.
