Timing the market when to buy, sell or hold

Corollary to my recommendation to start investing for the long term last week, I was beset with the undying question of when to buy, sell or hold a stock.

Market timing is an indispensable part of the investing process. It plays a key role for both the long-term and short-term investors in winning their stock plays.

Operating in every step of the process is an investing style which, among others, helps your market timing, particularly when to buy, sell, or hold.  There are four common investing styles used for the purpose: growth, value, momentum and technical.

It is believed that followers of these four methods have grown big enough to form a critical mass that their trading activities have, to a large extent, palpable impact on the trading outcomes in the market.

Spawns

There are additional investing styles that are also in current use.  Some are combinations or spawns of the four major styles.

One is the fundamental type, which is similar to value investing. Instead of focusing on the relationship of P/E to the earnings growth ratio, the fundamental investor focuses on a company’s balance sheet or assets. Another is income investing that focuses on companies that pay dividends and its history of dividend increases. There is also what is called active trading or day trading.

Lately, there is “hybrid trading” and “style surfing”. The former uses both technical and fundamental investing tools, and the latter uses styles that appear simply to be effective at the moment.

For these investing styles, there are two strategies: top-down investing and insider trading. The former “involves looking at the overall picture of the economy and then breaking down the various components into finer details like examining the different sectors to select those that are expected to outperform.” The latter, of course, needs no further explanation.

Investing does not require competence in rocket science.  You can succeed armed only with basic math, common sense and qualitative abilities.

Market timing actually draws significance from the basic market adage to “buy low and sell high,” which in recent times had been modified by market players as they braved the wild volatility swings in the market of today into “buy high but sell higher.”

Now that the practice of short selling has been allowed, too, under some circumstances, the adage has taken a new twist. This is to “sell now and buy lower later.”

Bottom line spin

Whatever it is, the ultimate objective is to make money in the end. One must end with a profit after deducting costs of trading against the net sales proceeds realized from the investment play.

The logic is simple. Unfortunately, it’s not also that simple to do.

Despite due diligence efforts, losses can still happen. Things sometimes do not turn out as planned due to extraneous circumstances. In normal conditions, failure is certain when you neglect or disregard the required best practices in arriving at a good answer to the question.

To start with, outright guessing is not part of the best practices in timing the market.  Needless to say, this approach has driven many into huge losses.

The market is not random.  And while it’s in constant flux, it is actually adjusting to the varied forces unfolding before it.  Thus, it is rational that winning your game in the market requires the use of intelligent foresight.

To be continued

(You may reach the Market Rider at [email protected], [email protected] or at www.kapitaltek.com.)