Market timing isn’t everything, but nor is it nothing

Benj Gallander and Ben Stadelmann
Friday, October 10, 2003

Any good system should comprise a mix of many ingredients. Unfortunately, the basis of many stock-picking methods is a narrow melting pot that ignores key spices that would enhance the recipe. And market timing’s reputation is sufficiently bad that many investors have relegated it to the recycled grocery bag for weekly garbage collection.

Despite market timing’s poor status, however, many people refer to it unwittingly. “Jim, do you think markets are too high?” “Wally, have the markets got ahead of themselves?” “Pedro, given current valuations, is there a lot of upside left?”

Not so long ago, we would also continually hear: “Marilyn, have markets bottomed yet, or is their more danger in store?” Currently, that question yields the response: “The market has bottomed; it’s safe to buy stocks again.” This assessment is often proffered — without a trace of irony — by the same dough-head who says, “It’s not market timing, but time in the market.”

Last December, many questioned why we only bought technology stocks. Besides our belief that the chosen corporations’ valuations were wan compared to their potential, we considered market timing as an incentive to buy. Markets were a shadow of their previous length, and the tech sector in particular was whimpering.

The three positions that joined the portfolio were Corel, Network Equipment Technologies and Novell. Since then, Vector Capital Corp. acquired Corel at the equivalent of C$1.47, a swift return on our purchase price of $1.21.

Seventy-five percent of Network Equipment was dispensed at $11.74, distancing our purchase price of $3.65. The stock has wobbled recently, but the upside potential remains solid.

Novell has done about a double, and our target price of $12.44, if we are right, suggests it will do that again, plus a stretch.

While our timing on the purchase of these three was pretty much spot-on, we do not profess to have any special insight into when markets or stocks will crater or jump. However, it is within our realm of understanding to postulate when indicators suggest that an arena is overbought or overwrought. Last Christmas, the latter was clearly in evidence.

Market timing is a useful investment tool for those with the temperament to do it prudently. From this vantage point, one can gain insight as to whether the future may hold overcooked dough — or a yummy chocolate croissant.