For most investors, trying to time the market is a waste of time and usually ends up being a waste of money. This is particularly true for long-term investors.
Over a period of, say, five or 10 years, it doesnât really matter whether or not you buy a stock at $75 a share or $78 per share.
What really matters is how much value that business creates over the next decade.
For traders, it is a little different. If youâre trying to make money over a period of several hours, market timing is very important.
Unfortunately, most individual investors and traders just donât have the right information to be able to make the most of these opportunities. Deeper-pocketed Wall Street investment banks usually have the advantage.
Warren Buffett (Trades, Portfolio) has never tried to time the market. He has always known that trying to predict what the future holds for stocks over a short-term horizon is a foolish enterprise.
Instead, he is always trying to select businesses when they look attractive compared to their intrinsic value and are able to create value in the long run.
Buffett's comments on market timing
He tackled the subject at this yearâs Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) annual meeting of shareholders. Responding to an audience question, he said, âWe havenât the faintest idea what the stock market is gonna do when it opens on Monday.â
The Oracle of Omaha went on to add, âI donât think weâve ever made a decision where either one of us has either said or been thinking we should buy or sell based on what the market is going to do, or for that matter, on what the economyâs going to do. We donât know.â
Stock selection matters
Buffettâs track record of selecting stocks suggests he is good at timing the market. However, it is not necessarily timing the market that he is good at, but buying stocks when they trade at discounted valuations.
If one is able to select a stock when it is trading at a deep enough discount, one should end up with a favorable return, especially if that company is generating a high return on shareholders' equity. Granted, there will be some occasions when Buffett's involvement with a business is enough to ignite a rally in the stock, but this is rare.
He has also helped companies improve their financial positions in the past, which generally has a positive impact on investor sentiment.
Nevertheless, investors should not confuse his track record of selecting equities with market timing luck. One will never know what the future holds for the stock market, even someone as wealthy and experienced as the Oracle of Omaha.
All one can do is try and buy stocks when one thinks they are undervalued. Working out how much a business is worth is far more important than trying to guess whether or not the market will go up or down next week.
âWe have not been good at timing,â Buffett said. âWeâve been reasonably good at figuring out when we were getting enough for our money. And we had no idea when we bought anything, but we always hoped it would the down for a while so we could buy more. ... I mean, that stuff, you could you could learn in fourth grade.â
The most obvious recent example of this is Buffettâs decision to acquire 14% of oil giant Occidental Petroleum (OXY, Financial). The investor started buying months before the rest of the market realized the opportunity.
This strategy might not be suitable for all investors. It requires patience and a high level of emotional intelligence to remove oneself from the day-to-day generations of the stock market and focus on underlying value. That may be why some investors rushed to attribute market timing to Buffett's success. It seems like an easy shortcut anyone can copy. In reality, there is no shortcut for business analysis.
