Friday, March 1, 2013

Benjamin Graham: Timing vs Pricing Stocks

From Chapter 8 of The Intelligent Investor:

"By timing we mean the endeavor to anticipate the action of the stock market—to buy or hold when the future course is deemed to be upward, to sell or refrain from buying when the course is downward. By pricing we mean the endeavor to buy stocks when they are quoted below their fair value and to sell them when they rise above such value. A less ambitious form of pricing is the simple effort to make sure that when you buy you do not pay too much for your stocks. This may suffice for the defensive investor, whose emphasis is on long-pull holding; but as such it represents an essential minimum of attention to market levels.

We are convinced that the intelligent investor can derive satisfactory results from pricing of either type. We are equally sure that if he places his emphasis on timing, in the sense of forecasting, he will end up as a speculator and with a speculator's* financial results." - Benjamin Graham

Back in 2009, Warren Buffett said the following:

"We don't try to pick bottoms. To sit around and not do something sensible because you think there might be something better…. doesn't make sense. Picking bottoms is not our game. Pricing is our game. And that's not so difficult. Picking bottoms is, I think, impossible." - Warren Buffett

Buffett: Picking bottoms is impossible

Market participants attempting to get the timing right (something that seems more close to futile than not) end up distracted from what's important: Making price versus valuation judgments that, over the long haul, will get the best possible result at the least risk.

Attempts at timing is inherently speculative and a distraction away from the all-important price versus value discipline.

Mispriced assets often seem to get sorted out in nearly, if not completely, unpredictable ways in terms of timing. It's important to be realistic -- when the timing does happen to work out -- about the real reasons why. Successful moves don't always get the scrutiny they deserve.

Sometimes the favorable outcome was more about luck than great foresight.

Sometimes it has little to do with having some unusual talent for predicting the amount and timing of price movements.

Not knowing when a favorable outcome was mostly accidental is a recipe for future mistakes.

An approach dependent on lucky or accidental outcomes is destined to result in even bigger losses down the road if it leads to unwarranted overconfidence. A few successful outcomes resulting more from good fortune, less on real foresight, might encourage that market participant to put even larger amounts of capital at risk (with maybe less favorable outcomes). I'm not saying no one can effectively time these things (even though my interest in such an approach is effectively zero). I'm saying those that try had better have a realistic view of their own abilities.

Overestimation of one's own talent in this regard will likely end up being very expensive.

The good news is a long-term investor doesn't have to get the timing right if sound price versus value judgments are mostly being made. Mistakes are inevitable, of course. The key is keeping them small and infrequent. One way to keep them small and infrequent is to always pay an appropriate discount to a well-judged valuation. An appropriate margin of safety is protection against small misjudgments (since valuation even done well is inherently imprecise) and the unforeseen adverse developments that inevitably arise in an unpredictable world.

Developing competence when it comes to understanding how price relates to the value of an asset is a good use of energy.

Attempts at timing the market generally isn't.

Expect wild fluctuations in price and allow that inevitable dynamic -- Mr. Market's inherent moodiness and -- to serve.


* Earlier in Chapter 8 Graham writes: "If you want to speculate do so with your eyes open, knowing that you will probably lose money in the end..."
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.