By now, you've likely heard the phrase "toeverything a season." Back in the 1960s,the Byrds sang about this in their hit song. Interestingly, this same philosophyapplies to the stock market. Maybe you don't thinkof it in these exact terms, but it too cannot escapelife's seasonal changes.
ROTTEN APPLES AND STOCKS
Stocks are similar to any other commodityor object that carries a value.Each investment has an optimal time tobuy and an optimal time to sell (ie, a season).This means, of course, that stocksare not going to continuously reach newhighs. In their lifetime, most stocks willreach an all-time high that they willnever achieve again. Look at any stockfrom the early to middle 20th century.Going back to the days of steel leadership,big names like Bethlehem Steeland US Steel that experienced tremendousgains eventually reached a pointwhere these gains were eliminated.
Selling fruit is a practical example ofoptimal timing. When a piece of fruit is picked offthe tree, it has a value, which increases as the fruitripens. When the fruit reaches its ideal ripeness, theseller can get the highest value when they sell it. Ifthe seller opts to hold onto the fruit and wait for amore eager purchaser, it will begin to spoil and theseller will be left with worthless fruit. Thereis a need for sell rules for any item an investor isattempting to sell, and market timing is important.
It has been accepted that market timing is riskyand unrewarding. However, the influx of technologyon Wall Street is convincing many investors toquestion this belief. With the help of technology,market timing is becoming the most successfulmethod of investing today. Technology has completelyrevolutionized the financialindustry and the individual investor.
Many brokerage firms and investorsare opposed to market timing, however.They are convinced it creates more workfor them. Yet, if no market timing or sellrules are in place, an investor may holda security until it is worth next to nothing.Like the fruit seller, they're left witha worthless piece of stock. Manyinvestors are in this position right now,still holding popular 1990's stocks likeNortel Networks (NT), WorldCom(WCOM), and Lucent Technologies(LU). Unfortunately, their season haspassed, and most, if not all, of the late1990's gains have diminished.
In the past, market timing was nearly impossibleunless you were on the floor of the stockexchange. The only way an investor could checkstock prices was by looking in the newspaper thenext morning or hassling their broker for a quote.In addition, the trading commissions were outrageous,creating a deterrent for selling or buyingstocks with any frequency. Now, however, WallStreet is only a computer or cell phone away.There is no longer any distance between theexchanges and the individual investor.
Today, an investor can check a stock's fundamentals,chart, and current quote easily with theclick of a mouse. In fact, investors can placeorders for as cheap as $7 per trade and have ittriggered immediately, without a runner on thefloor. Investors can also monitor and see all theaction of any stock that is publicly traded,including all the bids and asks.
The combination of all these new tools anddevices creates incredible opportunity for aninvestor. One of the opportunities that investorscan take advantage of thanks to this technologyis limiting their risk exposure—a goal of mostinvestors. Of course, many physician-investorsare too busy with their practice and other pursuitsto become technically proficient at markettiming. This is where a talented money managercan come in handy.
While no market-timing model is perfect,trimming exposure to market downturns overtime can pay off. For example, let's eliminate thebest 5 trading days of every year, beginning withthe first year investor A made an investment. Inthis case, in January 1966 investor A beganinvesting $1 in the S&P 500 and continuedinvesting this dollar amount until October 2001.This investment would now be worth $11.71.Because we eliminated the best 5 days of eachyear, investor A's $1 decreased to 15 cents. If, onthe other hand, investor A invested $1 with the 5worst days of each year eliminated, the $1 investmentwould now be worth $988.65.
Michael Doranis a private
affiliated with Sierra
Capital Planning in
northern California. He
runs a fee-based business
and a hedge fund
for qualified investors.
For more information,
call 877-467-8657 or
visit www.sierrainvestor.com. Christopher Nezbethcontributed to