Market Timing

“The idea that a bell rings to signal when investors should get into or out of the market is simply not credible. After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently.” Jack Bogle

During the 2008 financial crisis and economic uncertainty, global financial markets were melting down and Lehman Brothers filed for bankruptcy protection. The resulting economic recession and global slowdown brought unemployment rates in the U.S. as high as 10 percent. And, the U.S. stock market lost trillion of dollars in value as the S&P 500 experienced a single day drop of 90.17 points, nearly 9.04 percent.

Americans, and specifically American investors, believed inherently that the global economy and financial markets were collapsing. Fear and panic selling took hold worldwide. Both professional and retail investors started to sell and it didn’t matter what they sold. Yet, Warren Buffett was buying stocks that were rapidly falling in price when everyone else was panic selling and sprinting to cash.

“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” Warren Buffett

According to Buffett, “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful,” he wrote in the NY Times.

Additionally, Buffett wrote in his 2018 shareholder letter.

“Seizing the opportunities when offered does not require great intelligence, a degree in economics or a familiarity with Wall Street jargon such as alpha and beta. What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period — or even to look foolish — is also essential.”

There are several valuable lessons investors learned from the 2008 financial crisis that can be applied towards today pandemic driven crisis. The lessons are based on the same principles that allowed Buffett to invest so effectively during the crisis. To sum them up:

Don’t panic and sell stocks simply because the market is crashing. When times get tough, Buffett is invariably a net buyer of stocks. For this reason, he keeps billions of dollars in cash on the sidelines — so he can take advantage during times of investors’ fear and panic selling.
Focus on best-in-breed companies trading at discounts. A great example was Buffett’s investment in Bank of America and Goldman-Sachs.
Don’t try to time the market. Just because the market has crashed doesn’t mean it can’t go down more. It certainly can. Instead of trying to invest at the absolute market bottom, focus on stocks you want to hold for the long term.
Understand that no stock or industry is completely immune. Back then, many investors had a disproportionate amount of their portfolio in financial stocks because they were thought to be safe. Essentially, no stock or industry are safe.

Warren Buffett believes intrinsically that “it is a waste of time and hazardous to investment success trying to time the market”. In a 1994 annual letter to shareholders, Buffett wrote:

“I never have an opinion about the market because it wouldn’t be any good and it might interfere with the opinions we have that are good. If we’re right about a business, if we think a business is attractive, it would be very foolish for us to not take action on that because we thought something about what the market was going to do. … If you’re right about the businesses, you’ll end up doing fine.”

Bottom line: As long as investors keep a level head and maintain a long-term perspective as Buffett does, investors should come out of it just fine, if not stronger than they went in.

Sources:

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