Any good system should be a composite of many ingredients. Unfortunately, the bases of many stock picking methods are narrow melting pots, ignoring key spices that would enhance the recipe.
The reputation of market timing is such that many have placed it in the recycled grocery bag for the weekly garbage collection.
Despite market timing's poor status, when listening to a broad cross-section of investment chatter, it is commonly probed without recognition. "Jim, do you think markets are too high? Wally, have the markets gotten ahead of themselves? Pedro, given current valuations, is there a lot of upside left?"
Not so long ago, we would constantly hear: "Marilyn, have markets bottomed yet, or is there more danger in store?"
Current responses generally yield: "The market has bottomed, it's safe to buy stocks again."
This is often proffered without a trace of irony from the same dough-head who states: "It's not market timing, but time in the market."
Last December, many questioned why we at Contra the Heard bought only tech stocks. Besides our belief that the chosen corporations' valuations were wan compared with their possibilities, market timing was offering an incentive to buy. Markets were a shadow of their previous length, and the tech sector in particular was whimpering.
The three positions that joined the portfolio were Corel, Network Equipment and Novell. Since then, Vector Capital acquired Corel at the equivalent of $1.47, a swift return on our purchase price of $1.21. Seventy-five per cent of Network was dispensed at $11.74 (U.S.), distancing our purchase price of $3.65. The stock has wobbled recently, but the upside potential remains solid. Novell has done about a double, and our target price of $12.44, if we are right, suggests that again plus a stretch.
Now while our timing on the purchase of these three was pretty much spot on, we do not profess to have any special insight into when markets or stocks will crater or jump.
However, it is within our realm of understanding to postulate when indicators suggest that an arena is overbought or overwrought. Last Christmas, the latter was clearly in evidence.
Market timing is a useful investment tool for those with the temperament to exercise it prudently. From this vantage point, one can gain insight as to whether the future is revealing overcooked dough, or a yummy chocolate croissant.
Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter. This column first appeared on GlobeinvestorGOLD.com.