Time In The Market And Value Investing Is Not Market Timing

I am a value investor, and all my investments are made with a long-term objective in mind. Consequently, I am a believer that time in the market is often what matters most. However, I will qualify that remark by saying that you also make your money on the buy side. What this means to me is that time in the market will benefit you most when your initial investment is made at a sound and/or prudent valuation. 

Additionally, if you can buy or invest in a stock at a very attractive valuation your long-term results will even be better. But perhaps best of all, the lower the valuation you pay relative to a company’s intrinsic value, the less risk you take and the more money you eventually will make. The risk I am referring to is price or valuation risk. 

The reason the risk is lower is because a company is trading at fair value or undervalued levels is less likely to fall as much in a bad market as an overvalued company. Moreover, in the long run a company’s stock price will align with fair value. Consequently, if fundamentals remain solid, it is virtually an inevitability that stock price will recover and most likely advance to new highs. However, this is not market timing because it is not an attempt to forecast short-term price movements. Instead, it is simply calculating the fundamental value of the business based on an estimated discounting of future cash flows to the present value. Which further implies that this is a long-term thinking concept.

To my way of thinking, what I simply stated above is common sense, and many agree with me. On the other hand, there are those that simply cannot or will not embrace or accept the notion of long-term. However, to be fair, there is a reason why many investors cannot embrace or maintain the patience to trust that fair valuation will inevitably manifest. Unfortunately, most investors are quick to judge their holdings over a timeframe that is too short. Therefore, in his 1996 Berkshire Hathaway annual report Warren Buffett provided this sage advice: “if you aren’t willing to own a stock for 10 years don’t even think about owning it for 10 minutes.”

Nevertheless, the real problem is that although the reversion to the mean, as statisticians would call it, are virtually an inevitability, the time it takes the reversion to occur is not precise. Once again Warren Buffett explains it quite succinctly with the following quote: “The fact that people will be full of greed, fear or folly is predictable. The sequence is not predictable. Warren Buffett.”

My Inspiration for This Article: How Long Do You Wait for An Undervalued Stock to Recover?

Although what I’ve written above is truthful and accurate, it lacks a level of precision that many people want or need. Consequently, as a value investor, one of the more common questions that I receive goes something like: how long must I, or how long do I, need to wait before the mean reversion rewards me?  Investors have a strong need and desire for precision in that answer, however, the unfortunate truth is that the required timeframe often can or will try the investor’s patience beyond what they can tolerate.

Therefore, what I believe investors really need is an antidote to sooth their anxiety. Trust is the only remedy that I believe could accomplish this. However, investors cannot trust short-term stock price volatility because it is not only unpredictable, it is also very irrational at times. Consequently, you cannot really apply logic or common sense to irrational behavior. Of course, if you could, it wouldn’t be irrational.

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Disclosure: Long AAPL, IBM, MDT, AFL, CSCO

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or ...

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