I am a market timer. I reduce portfolio risk and earn excess returns by selling securities that are overvalued and buying securities with the proceeds that are undervalued. Once I couple the purchase of a security with the sale of the security, I am no longer a buy and hold investor, and I must cheerfully and defiantly define myself as a market timer. In making this statement, I am joining the ranks of the most reviled investors on the planet, all of whom are considered to be uneducated, easily swayed by investment fads and mass media, and most importantly, are doomed to fail in their investment strategy. The reason for certain failure is that, unlike buy and hold investors, the decision to sell based on the valuation of securities is fraught with risk that timers will improperly assess value and sell too early or too late. On the other hand, buy and hold investors live in a mythical world of certainty where security valuation doesn’t matter, and so they ignore valuation in their investment process. This leads to the somewhat ironic state of affairs where proud market timers who are using valuation to minimize portfolio risk are instead considered to be high risk investors, and buy and hold investors who ignore security valuation are considered to be risk averse.
We all realize that the popular perception of market timing is one where portfolios are traded in extremely short investment time frames, and portfolio diversification is considered irrelevant because investors are willing to take the risk of going to an all-cash position when they feel risk positions are unsafe. I happen to believe that this manifestation of market timing is a high risk strategy, but only because I don’t believe that investors should ever be 100% certain in their forecasts, and therefore being 100% in stocks or cash is a little too much risk for my taste. Nevertheless, the idea of being out of the market when it is deemed to be a high risk investment due to poor valuation deserves at least polite applause, regardless of the tactics that are employed.
To be a “market timer” is to join a group of investors that should be celebrating their determination to properly manage portfolio risk. I believe that searching for good values, coupled with portfolio diversification, are the two unbreakable rules of investing and the two tactics that can’t be ignored by investors in properly managing risk in their portfolios. So let’s hear it for the market timers out there. (If I were a musician I would make up a fight song for them.)
