Random Musings Regarding Market Timing
July 20, 2010
– Comments (22) |
RELATED TICKERS: ARNA
, JGBO
, REV
Yes, I know, no one can perfectly time a market and I'm not saying that I can either, but over the course of the past twelve years I have definitely had a better than 50/50 chance of properly predicting the directional movement of a stock, group of stocks, or index. So don't go bursting my bubble just yet, and don't go grabbing your copy of "A Random Walk" and start waving it at the computer because that's not what I'm getting at. I'm just going to throw out a series of possibly unrelated thoughts on market timing and see if they somehow make sense by the end of this blog, ergo why this is titled "Random Musings." This will also be somewhat shorter than most of my blogs because I think I know what I want to say and it won't take seven pages to say it.
Market timing isn't an exact science. In fact, it's not really a science at all. To some extent it's a gut feeling, but more or less when I'm trying to time an entry or exit point, or simply determine whether or not a company, sector or index is a buy or a sell, I basically ask myself one question....
Is this stupid?
Seriously! I'm not kidding! Just ask yourself, does this make sense or is this stupid and that will get you about a 65%+ accuracy in the stock market. I'm not saying you'll be the next multi-millionaire, but it will put you on the path to making your own financial decisions instead of dogpiling my picks as Bullishbabo pointed out (lol).
So clearly if I were you I'd want to know if there was a formula for "stupid" and unfortunately I'd have to tell you no. I can't say that I've done hours of due diligence on every company I've come across, nor can I say that I can recall every financial fact about the 2000 or so companies I've followed throughout the years, but chances are I've done the 5 minute quick snip-it of that company on more than 3 occasions in the past year or two and based on that alone can determine whether or not what I'm seeing is in fact... stupid!
So what is stupid? Well, it depends what you mean by the word "is"... Thank you Mr. Clinton! Actually stupid to me is usually some sort of unwarranted deviation from the norm. Sometimes this can be just company specific and sometimes sector specific, but I usually describe it as a deviation from the norm.
Examples you say? Ok, how about Revlon (NYSE: REV) trading at $13 despite a massive debt pile and a seriously negative book valuation. All they did to restructure their debt is push off the repayment another three years while tacking on an even higher interest rate! That is stupid!
Not all stupid has to be bad however! Let's take the example long recommendation from today, Jiangbo Pharmaceuticals (NASD: JGBO). Jiangbo is a Chinese generic drug and supplements company that has about $6 in net cash on hand and produces about $2-$3 in operating EPS each year. They closed today's trading session at $7.50 a share. So basically the company is trading at $1.50 over net cash and will make 133%-200% more than that difference in profit each year. That my friends is stupid!
Are you catching on here that timing certain stocks and the market is actually not as hard as investors make it out to be. Keep in mind I'm not trying to catch an exact bottom with falling knives, nor am I trying to call a top on overheated companies or indexes, but I am trying to get close so as not to be stuck in a losing position that continually goes in the opposite direction.
I admit that very basic point and figure technical analysis can help in identifying "stupid" stock entry and exit levels so it wouldn't be a bad idea to brush up or at least become familiar with the most basic tenets of technical analysis (ie. trend lines, channels, head and shoulder formations, pennants, triangles..the very basic stuff). Use what you know about technical analysis in its most basic form to give you a rough indication of where you think the stock will fall or rise to before you make your buy or short recommendation. And here's the key part to this... don't be stupid yourself. If you determine that stock XYZ makes good fundamental sense to buy at $22.50 according to your chart, maybe put a buy order in at $22.65... what's a couple pennies? Keep in mind other people are also trying to not be stupid out there and will be waiting for the exact same bounce point. This way you don't miss your entry level, you get in relatively close to the bottom, and if it doesn't hit, then you're not hurt. Be utopic in your entry points, but smart about the level you choose to input as your buy or short.
Do all things "stupid" have to pertain strictly to brick and mortar fundamentals? Absolutely not. Although I am constantly ragging on biotechnology companies it usually comes with a reason. Sometimes I don't even need to look at a balance sheet to see that a company is in trouble. If you are a company like Arena Pharmaceuticals (NASD: ARNA) and you have no product and you'll be waiting until 2013 before you even remotely have the chance of having one, and your stock price is up 200%... then something has gone stupid! You see folks, this isn't tough, you CAN do it too!
All you have to do is ask yourself if what you're looking at makes you scratch your head and say "Damn...that is really stupid!" Go with your instincts and you will normally be right.
I just finished reading what I've written so far and it made me laugh... I expect this to provoke some discussion, hopefully it won't be too stupid =)
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