Question: I just read in Aswath Damodaran’s Investment Philosophies: “In practice, there is almost never a consensus among investors on whether markets have hit bottom or peaked at the time that it occurs. It is an interesting fact that optimism about the future is greatest just as markets top out and the market mood is darkest just as markets turn around. To succeed at market timing, you cannot wait until a bottom has been established before buying or for a market top before selling. If you do, you will miss much of the subsequent payoff.” What do you think? – Salve Duplito, registered financial planner, owner of Empower and Transform OPC, Transformare coach, YAMAN Coach, radio anchor, consultant and editor.
Answer: Jesse Livermore, touted as the world’s greatest stock trader, said that you do not preempt the bottom or the top, which he calls inflection points. You wait until there is a continuation of the inflection point as supported by volume. Sure you will miss out on some of the gains. But you will also be managing your risks.
It is next to impossible to predict the bottom or the top because you will need the following day’s data to confirm that. Time in the market is more important than timing the market.
If you look at it, the valuation of a company, a stock or the market in general is really influenced a lot by psychology, by what the majority thinks the true value is, even though the market can sometimes be way off the mark.
It is similar to saying that everyone sees a healthy leaf as green in color. But in reality, a healthy leaf’s color is everything but green because the leaf absorbs all the colors in the spectrum of light except green.
Many times, reality is what the majority perceives it to be. This is how things become viral. This is how products become bestsellers. This is how ordinary people rise to stardom. This is how people win elections.
So, does that mean that people are just wasting their time and money in hiring fund managers and investment advisers when these cannot call the bottom or the top of the markets? The answer is most definitely no. Fund managers and investment advisers figure out the intrinsic value of companies through fundamental analysis and augment their research with technical analysis to see opportunities in current consensus valuations that are way off the mark.
Fund managers are like airline captains. While other requirements need to be complied with, pilots, according to www.thrustflight.com, need to log at least 1,500 flight hours to apply for a position in an airline. Add to that the time needed to work up the airline ladder and you are looking at around 15 years.
The captain plans the route according to his flight itinerary and goes through long checklists prior to actual takeoff. Before the flight itself, the captain checks in with the passengers to give an overview of the flight path and time, and what to expect in terms of the weather’s impact on the flight. He assures passengers that safety is among his main concerns while doing everything in his power to keep the flight pleasant and uneventful. While in flight, he makes course corrections as necessary given the unpredictable nature of weather and manage air turbulence along the way. He updates the passengers on the plane’s location and on whether the plane is about to descend. Finally, he expertly and safely lands the plane.
Fund managers and advisers perform similar tasks when it comes to investing, from planning your investing period and returns as tempered by your risk preference, to managing/advising on portfolio allocation and rebalancing as needed to navigate the rough markets, and finally getting you to land safely on your financial goals. Fund managers and advisers take no less than a deep dive into what investors need and how the markets can satisfy those needs. And just like with airline captains, fund managers and advisers need to have both expertise and experience.
If you cannot expertly fly your own investment plane, hiring fund managers and advisers is the best thing to do. INQ
Send questions via “Ask a Friend, Ask Efren” free service at www.personalfinance.ph, SMS, Viber, Twitter, LinkedIn, WhatsApp, Instagram, and Facebook. Efren Ll. Cruz is a registered financial planner (RFP) and director of RFP Philippines, seasoned investment adviser, bestselling author of personal finance books in the Philippines and a YAMAN Coach. To consult with a YAMAN Coach, email yaman@personalfinance.ph. To learn more about personal financial planning, attend the 98th RFP Program this October 2022. To inquire, e-mail info@rfp.ph or text 09176248110).