Buy and Hold Beats Active Investing

[bhobba]

As some may know, I have started stock investing/trading again with two Australian ETFs, VDHG and YMAX. YMAX sells covered calls on the Australian ASX 20, while VDHG is a Vanguard fund of other Vanguard funds managed using Markowitz portfolio theory.

Anyway, I decided to supplement that by buying some direct shares, and other ETF's as recommended by a service here in Aus called Motley Fool (it is in other countries like the US as well).

This led me to investigate the buy and hold strategy practised by Warren Buffet compared to more active investing, which is why I haven't been posting much. What I found was surprising.

My investigations have shown buy and hold beats active approaches hands down when tax is taken into account - at least compared to the approaches I am aware of. Remember, when you sell a stock for profit, you pay tax. There is no escaping it. The caveat is you must buy suitable stocks/funds and use the right strategy. You can beat purchasing and holding an index fund after-tax, in fact, by a wide margin:



This, however, ignores the power of Dollar-Cost Averaging, where you regularly put money in the market, even during downturns. That can make a significant difference because during the times you would have been in cash, the market is cheap, and when it recovers, the money you put in then makes a larger than usual profit. This is illustrated in the following analysis of a stock picking service (in fact, the one I use, but it is their extreme opportunities service rather than the buy and hold stock advisor service - I will give its results later).



It just beat dollar-cost averaging into an index fund. After-tax, however, it would have lost. I do not know if the first moving average strategy detailed in my first link beats Dollar-Cost Averaging after tax, but it will be a lot closer.

The point to take from this is to buy and hold is very difficult, perhaps even impossible, after-tax, to beat if combined with dollar-cost averaging. You must regularly invest in the stock market. In the last few months, I have been buying direct shares/ETF's. I buy $1000 of the stock recommended by the stock advisor service each month. I also regularly add to my VDHG and YMAX ETF's. Unlike the extreme opportunities, it is buy and hold. Occasionally it will recommend selling a stock - but I plan to ignore it after seeing what happened to some stocks after they recommended selling it. Over time you will end up with many stocks - but that is OK. Some will perform poorly, some well, and occasionally super well. The super well stocks make are what seems to make the strategy more profitable than just buying the index. However, you can't predict which stocks will be that profitable. For example, they recommended buying Dominoes at $7 in 2012. Now it is $125. They recommended selling it and taking profits, but I would have kept it. Later they recommended repurchasing it at a higher price. That is why I personally will never sell - you can't predict what a stock will do long term. That is why I eventually (if I live long enough) will have a lot of stocks bought for $1000.00. You want to latch onto one of these super stocks. The others usually perform OK. The few duds have their loss limited to $1000.00, which is why I have no problem never selling. $1000.00 is the most I can lose.

Stocks like Dominoes do not come along often, but every couple of years, they do appear. Over the last ten years, a similar analysis was done comparing dollar-cost averaging into the index to stock advisor buy and hold picks. The index gave about 45% - their picks 75%. How is that possible when we have funds, ETF, etc., all trying to beat the index? Yet after fees nearly always fail? I think (but could be wrong) it comes down to buy and hold. Most analysts seem to have about a 1-year time frame in picking stocks. The Stock Advisor analysts have a 5-year time frame. Short term, the recommendations may not do well, but over the long haul, most do. What they want is a stock like Dominoes. Latching onto one of those is what gives the outperformance. Comments I have seen about their stock picks saying I am down - say 20% - what a rip-off - fail to understand the strategy. That is why professionally managed funds do not use it. Due to losses, the fund may go out the back door as people sell. You must have faith in the strategy.

So what is the takeaway here? Dollar-cost average into stocks/funds with good long term potential and buy and hold is a strategy very hard to beat. I use Motley Fool Stock advisor because they recommend stocks/funds (yes, they sometimes recommend funds like the NASDAQ 100) for the long term. I am sure other services and/or stock screeners can do a similar job. I leave finding those up to you.

One enhancement to the strategy has been shown to beat ordinary buy and hold. As Warren Buffet frequently does, it is to sell puts to purchase stocks on the cheap. But that is another story. I am looking to give it a try, along with other options strategies like the wheel, and see what happens. Selling covered calls on your accumulated stocks/funds is an excellent way to generate income when retired without selling your shares/ETF's. Some stocks that have boomed, like Tesla, pay no dividend yet have risen, like Dominoes to large prices (that stock does pay a small dividend).

Thanks
Bill

 

[Vanadium 50]

Note that different countries have different tax laws, which may mpact the analysis.

 

[StevieTNZ]

I've always wanted to, myself, get involved in the FOREX market. I should read up more about how it works; at the moment all I know is it is a high risk market. But I've got a couple of good books published by reputable companies on the matter which I should probably read.

 

[bhobba]

I've always wanted to, myself, get involved in the FOREX market. I should read up more about how it works; at the moment all I know is it is a high risk market. But I've got a couple of good books published by reputable companies on the matter which I should probably read.

I know a bit about FOREX. IMHO, share options are much better. For example, I plan to use the virtually riskless strategy used by Warren Buffett. You have several undervalued stocks you would like to own. Many would use limit orders and see what they could get them for. Instead of a limit order, you sell a put. You get paid for doing that. If you don't get the share for the price you want, you keep what you are paid and keep doing it. I am doing it with AT&T right now, even though I am in Australia. It is a quality company selling at low prices and paying an eye-popping dividend. US Motley Fool has issued one of its rare all-in buys on the stock. So I sold a put for $22 (and got paid $81) and will see what happens. Either way, I win. Then there is the covered call. You pick a price well above what it is trading for. Sell a call. Again you get paid. If it doesn't reach that price, you keep the money and repeat. If it does, you still keep the money and have sold the shares for a good profit. You can keep doing it and collect the premiums for selling calls and puts. The only issue is it must be on a stock you want to own anyway. And if it gets sold, you are not so married to it; losing it would not keep you awake at night. Combining them on one stock, i.e. selling puts, then when you eventually get it selling calls, then when it gets exercised selling puts and so on is called the wheel strategy. It is an excellent way to generate passive income. The only problem is it may crash well below your put price; you will need to put it in your long term portfolio to recover. As I said, it must be a stock you want to own.

 

[bhobba]

Note that different countries have different tax laws, which may mpact the analysis.

Of course - and if you are retired or not. You may have the ETF as a long term holding, but of course, you need money to live. You likely have some cash and can hold out for a while - but exactly when to sell it is an issue - the market may be down. It is called the failure of portfolio theory. So when you retire, wait for the sell signal on the strategy to take at least some profits. Personally, though I would sell calls on the ETF. Trouble is here in Aus the ETF's I own are not available for call options. A good one for that strategy used a lot in the US is the ETF SPY - the S&P 500.

Thanks
Bill

 

[BWV]

Dollar cost averaging is a losing strategy, just invest 100% of your target equity allocation in the market day one:

A) given the existence of a risk premium, the stock market outperforms cash more often than not
B) the market is just as likely to go up during your dollar cost averaging period then tank the day after you average in your last dollar as it is to decline during the averaging period

Selling calls and/or puts (covered call = short put plus cash, its the same payoff so has to be priced the same) cannot add value in a competitive, efficient market - to add value somehow the options must be mispriced in your favor to the extent that they add value net of transactions costs (ignoring taxes which makes the comparison worse).

 

[bhobba]

Dollar cost averaging is a losing strategy, just invest 100% of your target equity allocation in the market day one:

I am not advocating dollar-cost averaging if you have the money upfront, although some do support it, even though it is generally agreed to be suboptimal in that case:
http://economics-files.pomona.edu/garysmith/papers/DCA.pdf

I advocate it for systematic investing, where you get money at regular intervals and invest it then. That is how most people invest. It concerned the crossover strategy to increase returns from investing in an index fund. If you do not invest when the market is falling, you do not get the upside when it grows. If you started with a fixed amount, then the over 300% increase in returns, even accounting for tax (of course it depends on the rate of tax - where I am in Aus it would be about 25% for the average working person) makes the first strategy in the link I gave the more profitable strategy. It is related to the Donnelly Zone System I use to allocate between defensive and growth assets:
https://investingtimes.com.au/wp-content/uploads/2015/04/The-Zone-System-research-paper.pdf

Selling calls and/or puts (covered call = short put plus cash, its the same payoff so has to be priced the same) cannot add value in a competitive, efficient market - to add value somehow the options must be mispriced in your favor to the extent that they add value net of transactions costs (ignoring taxes which makes the comparison worse).

During, say, a week, shares generally fluctuate in price. If you are positive on a stock, you notice the fluctuation and put in a limit order to try and get it at the lower point of that fluctuation. It is a widespread practice. Sure it means you occasionally miss out on a share, but many don't worry - there are tons of shares with good prospects, and you move to another one. By good prospects, I mean value investing which numerous studies have found outperform growth stocks and the market as a whole, not necessarily consistently but when tracked over long periods. There are always several such opportunities available. That's why I subscribe to a stock analysis service - they do the work of identifying these opportunities. Cash Secured Puts does precisely the same thing, except you get paid for doing it. It is a riskless way of purchasing shares and getting premiums for doing what many would do anyway. Warren Buffett does it all the time.

Selling covered calls is a way of keeping your shares and getting paid. You will eventually get called, but if you were going to sell the shares anyway (to live on, for example), you get the covered call premium which can easily be enough to live on until you sell the next call. If you get called, it will be at a price higher than if you sold it when writing the call. Of course, the price could fall during that time, and you missed out on a possibly higher price. It is a strategy best done during a rising market. But then again, if the price is falling, you can keep selling calls for the premiums. Furthermore, while you will eventually get called, you have all the premiums you collected while the price was falling. If you assume a 50:50 chance of rising or falling over the long term, the profit or loss of waiting will balance out, but you get paid the call premium during that time.

All the wheel strategy does is combine the two. The worse that can happen, providing you are doing it on a stock you want to own anyway, is the price falls so low the premiums you have received will not cover what you can sell it for, so you put it in your long term portfolio.

Thanks
Bill

 

[kyphysics]

Dollar cost averaging is a losing strategy, just invest 100% of your target equity allocation in the market day one:

A) given the existence of a risk premium, the stock market outperforms cash more often than not
B) the market is just as likely to go up during your dollar cost averaging period then tank the day after you average in your last dollar as it is to decline during the averaging period

I've debated the lump sum vs. DCA approach with acquaintances before.

Studies have shown if you inherited a large sum of money, putting it all into the market on Day 1 beats dollar-cost-averaging 2/3 of the time. The market's "natural state" is to go up. For every 1 day down, there are 3 up days in the markets (not specifying magnitudes). Free economies naturally expand. Technology improves our work and lives. People have children and populations grow. More economic production is naturally created and naturally stocks follow. The only issue is you could get really unlucky by putting that lump sum in 1/3 of the time. It could be right before a huge crash and you're buying in at ridiculous valuations - a la 2000-2001 dot com bubble.

Warren Buffett has said he wouldn't lump sum a big money in, but rather invest over time (a la DCA).

I think the studies showing lump sum winning 2/3 of the time have to be taken with a grain of salt and real life thinking. If one could assume a 40-50+ year time horizon (in an ideal environment/vacuum) of not needing that money, sure maybe lump summing would be fine. But, every day real people, sometimes have issues pop up and may need some of that money.

 

[kyphysics]

Additionally, those studies don't account for valuation levels, if I'm not mistaken. They just look at like 100 years and randomly ask what would happen if you shoved a huge sum in at anyone particular point.

I mean...it's obvious if you're shoving $1M into the U.S. market in March 2000, that lump sum approach probably won't net you a good return. If it was shoved into the NASDAQ, God help you! 15 years later to break even (and that's just nominally...you're still down on inflation)!

You can look at charts that show shoving in at super extreme valuations always nets very bad returns over the next decade or so...

 

[BWV]

Ok, but ‘the market goes up 2/3 days’ or ‘the economy growing ‘ is not a sufficient argument against DCA, the necessary condition is the existence of a risk premium for stocks.

https://en.wikipedia.org/wiki/Risk_premium

 

[kyphysics]

Ok, but ‘the market goes up 2/3 days’ or ‘the economy growing ‘ is not a sufficient argument against DCA, the necessary condition is the existence of a risk premium for stocks.

https://en.wikipedia.org/wiki/Risk_premium

The lump sum 2/3 finding was based on a kind of perfect vacuum condition in which you could just sit back and never touch those investments for decades. Let the economy grow and markets naturally grow.

Yes, an equity risk premium is something to factor into whether one should hold stocks or not. Certainly when interest rates are low and inflation are high, cash is getting crushed. One thing I learned, though, is that there can be moves within a trend.

I'm bullish equities (at least, nominally - it's possible they stay flat or lose value in real terms) for the 2020's decade, as the U.S. deleverages it's 130%+ sovereign-debt-to GDP. The playbook from history is clear.

No superpower nation ever defaults officially/nominally. Instead, they inflate their debt away at default levels and financially repress treasury/bond holders. It happened after WW2, when we had 128% debt-to-GDP. Treasury holders got their money back, but it was devalued by 33% in the following decade and another 33% in the 1970's. Holding cash was worse (no yield at all). The Fed printed money and purposely held interest rates below inflation (in YCC - yield curve control).

Assets (anything that cannot be printed/devalued) preserved wealth, depending on what you held and WHEN you bought them. The trend was bullish for assets, but within a bullish trend on stocks, real estate, commodities, rare art, collectibles, etc., there were moves within the moves.

WHEN you bought certain of those assets mattered a lot to your returns. Buying $ZM at $500, despite it likely doing okay (and better than cash) over the next 10 years, is kind of dumb. At current valuations, it's slightly expensive in my book. I think it needs to be 20-25% cheaper at around $120-130.

I'd rather hold assets of any sort vs. cash for the coming decade. But, I think one can still buy them during big dips and hold cash for dry powder/optionality in markets. That's what I'm doing right now.

 

[StevieTNZ]

A good book I have, and should probably finish -- https://link.springer.com/book/10.1007/978-3-642-04835-7

 

[bhobba]

I'd rather hold assets of any sort vs. cash for the coming decade. But, I think one can still buy them during big dips and hold cash for dry powder/optionality in markets. That's what I'm doing right now.

Personally, if I had a million dollars, I would do what Warren Buffett does. It is not the dollar-cost averaging that is effective; it uses put options to get it cheaper. You have 1 Million and want to buy an S&P 500 ETF. You do monthly put options at progressively lower prices, $100000 worth at 5% lower (for which you get at the moment about a 100% whopping return in payments), and the rest at 30% lower (that is how much it fell due to covid) for which you still get about 30% in premiums. Just keep repeating each month until all are bought. You can collect a lot in premiums, even though it may take a few years to get your position. The premiums would be greater than any rise in the index.

You could of course do the whole 1 Million at 5% lower, but you do not get those whopping premiums for as long.

In fact, this kind of riskless options trading has me so intrigued I signed up for a course on the various low-risk use of options by the chief options trader at SMB Capital Management. I can see myself not buying shares in future, just getting them by put options as Buffett does.

Thanks
Bill

 

[BWV]

Personally, if I had a million dollars, I would do what Warren Buffett does. It is not the dollar-cost averaging that is effective; it uses put options to get it cheaper. You have 1 Million and want to buy an S&P 500 ETF. You do monthly put options at progressively lower prices, $100000 worth at 5% lower (for which you get at the moment about a 100% whopping return in payments), and the rest at 30% lower (that is how much it fell due to covid) for which you still get about 30% in premiums. Just keep repeating each month until all are bought. You can collect a lot in premiums, even though it may take a few years to get your position. The premiums would be greater than any rise in the index.

You could of course do the whole 1 Million at 5% lower, but you do not get those whopping premiums for as long.

In fact, this kind of riskless options trading has me so intrigued I signed up for a course on the various low-risk use of options by the chief options trader at SMB Capital Management. I can see myself not buying shares in future, just getting them by put options as Buffett does.

Thanks
Bill

holding cash and selling puts is exactly the same as buying stocks and selling calls, so the returns should be identical

interestingly due to some construction differences, the CBOE put-write index (PUT) has outperformed the buy-write index (bxm) but this outperformance is likely not repeatable

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2894610

https://acgnet.com/getattachment/845363f3-97c7-4ac9-be31-762e60b9143d/BXM-PUT-Update;.aspx

 

[bhobba]

holding cash and selling puts is exactly the same as buying stocks and selling calls, so the returns should be identical

Not quite. If you want to buy, as we do in this case, you either get the stock or remain in cash and collect the premium. It can sometimes take a while to get your price. Some buy and hold value investors (Warren Buffett types) on some stocks while waiting to get their price to collect the cost of the store or more - strange but true. Indeed, if you want dividend rather than growth stocks, or a combination of both until you get the store you can collect more than the dividend:



You can buy and then sell calls. But you may get called and have to repurchase it. Of course, you have collected premiums during that time.

So your point is taken - it just seems more direct selling puts.

Thanks
Bill

 

[kyphysics]

I don't mess with options, because you could have them expire worthless.

I prefer straight up buying, holding, and selling stocks. Lots of ways one can make money in the stock market, but I stick to a very simple method that works for me.

 

[bhobba]

Lots of ways one can make money in the stock market, but I stick to a very simple method that works for me.

The number one thing about investing is "what speaks to you". I like long term buy and hold with the majority in ETF's and some satellite shares. I am very drawn to selling options. I am not buying - but selling. Buying is more like gambling - but I do not mind using them in strategies like the running start iron condor (they often have strange names). The number of strategies options has fantastic. It is like selling insurance - the odds are in your favour.

Thanks
Bill

 

[kyphysics]

The number one thing about investing is "what speaks to you". I like long term buy and hold with the majority in ETF's and some satellite shares. I am very drawn to selling options. I am not buying - but selling. Buying is more like gambling - but I do not mind using them in strategies like the running start iron condor (they often have strange names). The number of strategies options has fantastic. It is like selling insurance - the odds are in your favour.

Thanks
Bill

Yeah, the strategies are indeed pretty interesting! I've seen people's logic for how to approach some options. I guess it's too "complicated" for me and I'm just a simpleton of buy and hold value investing. I'll take some shots at growth investments too...but I prefer value investing 90-95% of the time.

 

[kyphysics]

I use Motley Fool Stock advisor

I used to read Motley Fool (US version). It was interesting, b/c the founders like to brag about how they beat the market for years. They'd show their impressive charts and how they bought Amazon and Netflix early on and held.

Their "Rule Breakers" principle of being willing to buy expensive transformative companies with great long-term potential even at all-time high prices was interesting too (Amazon was a constantly example).

I think their "style" just doesn't fit me. They had huge losers too (although, still beating the market overall). Yes, they do some value investing, but their growth investing and combo growth/value picks can be head-scratching to me and I'm not comfortable with them.

 

[BWV]

Not quite. If you want to buy, as we do in this case, you either get the stock or remain in cash and collect the premium. It can sometimes take a while to get your price. Some buy and hold value investors (Warren Buffett types) on some stocks while waiting to get their price to collect the cost of the store or more - strange but true. Indeed, if you want dividend rather than growth stocks, or a combination of both until you get the store you can collect more than the dividend:



You can buy and then sell calls. But you may get called and have to repurchase it. Of course, you have collected premiums during that time.

So your point is taken - it just seems more direct selling puts.

Thanks
Bill

There is something called the volatility risk premium, which - at least historically - has provided better risk-adjusted returns for short-vol strategies like covered call/ selling collaterlized puts (again because of put-call parity they are the same), or iron condors. But there is an element of ‘picking up pennies in front of a steamroller’ to any short vol option strategy as you remain exposed to large drawdowns if the market tanks

https://www.aqr.com/-/media/AQR/Documents/Whitepapers/Understanding-the-Volatility-Risk-Premium.pdf

 

[bhobba]

I think their "style" just doesn't fit me.

I use the Australian version. I do not know what the US version is like, except it has a reputation for beating the market. Here they do a video on each stock buy. I don't always agree - but often I do. I usually buy it anyway because, while I feel I can do stock analysis using screening tools etc., I am retired and really can't be bothered. So I outsource it to them. If you want to do your research, here is the best screener I have found:
https://meetinvest.com/free

I like the Geraldine Weiss strategy personally, but I think all are valid. Most of the time, I find their stock picks do not meet the criteria for any of the systems. So I think they use a 'discretionary' rather than a systematic approach. If you look on the internet, many of their recommendations are supported by other analysts - but not all.

It's the best screener I have seen - yet I heard a rumour it may be closing at the end of the year.

Thanks
Bill

 

[kyphysics]

Anyone interesting in buying $ZM stock? Tempting.

 

[StevieTNZ]

@bhobba , will you make enough money this year to buy me this villa - https://www.beauchamp.com/villa-sale-sumptuous-classic-estate-super-cannes-cab1582 ? I'll be your best friend for the day!

 

[StevieTNZ]

@bhobba , will you make enough money this year to buy me this villa - https://www.beauchamp.com/villa-sale-sumptuous-classic-estate-super-cannes-cab1582 ? I'll be your best friend for the day!

Actually, I want that villa PLUS this now - https://robbreport.com/shelter/home...ith-21-bedrooms-and-30-car-garage-1234656533/

 

[jtbell]

Here's my example of an extremely "lazy" buy-and-hold portfolio.

During my teaching career, I contributed to my college's 403b tax-deferred retirement plan, run by the Teachers Insurance and Annuity Association (TIAA). It once had a virtual monopoly on retirement plans at colleges and universities in the US, and is still a major player in that field.

I started in 1984, the second year after I finished my PhD. At that time, TIAA had only two investment options:

• The TIAA Traditional account is a sort of "stable value" fund which can never decrease in value. It has an interest rate that, from what I've read, more or less follows long-term interest rates but with a time lag. My version has a guaranteed minimum rate of 3%, which is a good deal right now.
• The CREF Stock account is a broadly-based stock fund, 70% US and 30% non-US. As far as I can tell, it more or less matches a similar combination of US and non-US total stock market funds, althougn TIAA does some active management to try to do a bit better.

My only decision was how to divide my contributions.

In the early 1980s, inflation and interest rates were high. During my first year, 1984-85, TIAA Traditional returned more than 9%. Stocks, on the other hand, had been stagnant since I started high school 16 years earlier. The Dow-Jones Industrial Average first came close to 1000 about that time. It spent the 1970s bouncing around at and below 1000. It didn't pass 1000 for good until about 1982, which was clear only in retrospect some years later. (Of course, this doesn't take dividends into account, which I didn't appreciate at the time.)

Therefore when I started, it wasn't at all clear to me which account would be "better". So I split my contributions 50/50. I kept them at 50/50 until I retired 32 years later. Around 1990, TIAA added some more investment options, including a real-estate account, but I was too lazy to investigate them and maybe re-allocate my contributions.

I started by contributing about 10% of my salary, including the extra contribution from my employer. I increased them occasionally, and made one last big increase in 2010, in a final push towards retirement. I haven't withdrawn any money yet.

Here are the results. The first graph is in "nominal" dollars, not adjusted for inflation.

This graph is inflation-adjusted in terms of today's dollars.

The third graph, in "nominal" dollars, compares my cumulative contributions (mine plus employer) to the total value.

I'm not going to say what the vertical scale is. Its unit isn't an "obvious" number.

In retrospect, if I had known that stocks were going to do so well during 1985-2000 and 2010-onwards, I would have put a larger fraction into CREF Stock. If I had gone 100% stock and stuck with it, I'd have about 40% more money in these accounts now. Nevertheless, I have no regrets, because I have "enough". The current total is about 35x my current annual expenses (in my late 60s), after accounting for the income taxes that I'll have to pay on withdrawals from these tax-deferred accounts, and not accounting for my Social Security payments, which I haven't started yet.

 

[kyphysics]

Hopefully, no one bought the dot com peak tech stocks, nor the Feb. 2021 ARKK/non-profitable tech/meme stocks. Might take another 10 years to recover for the latter - that'd be 2030's, lol.

Buy and hold, but please buy at the right price!

 

[russ_watters]

Buy and hold, but please buy at the right price!

The right price is always today's price.

 

[kyphysics]

The right price is always today's price.

Because you think markets are efficient? Because you're thinking of just dollar-cost-averaging?

 

[russ_watters]

Because you think markets are efficient? Because you're thinking of just dollar-cost-averaging?

Because you can't predict the price moving forward, except for the general upwards trend, so if you have money to invest you are better off investing it now than trying to time the market.

 

[Vanadium 50]

Buy a stock, and when it goes up, sell it. If it don't go up, don't buy it.

 

[kyphysics]

Because you can't predict the price moving forward, except for the general upwards trend, so if you have money to invest you are better off investing it now than trying to time the market.

For small amount, I'd agree. I wouldn't personally lump sum a huge amount in, though, per the discussion on the previous page.

I also don't think valuation-selection is the same as market timing, as I've had this debate innumerable times. Market timing is holding out, because one thinks the market may go lower and they can get a better price. No one can predict that (and so, you probably cannot pick the bottom when it does dive). Valuation-selection or "valuation timing" is simply waiting for a good price. That may come right before a recession (not necessarily during or after). It could come at the peak of a bubble. It could be any time.

A value investor can go years without buying anything. Francis Chou, when asked how long he could wait, famously said 10 years. I'm not so strict! I don't use the Graham-Dodd 50% margin of safety, for example. I pretty much give it all up or just use a smaller one (depending on how confident I feel about my understanding of a business). I feel I'd be waiting for eternity if I invested that way and miss some of the best performers. But, I'm pretty picky still and it works for me. To summarize: "valuation timing" is not the same as market timing. But, for the average investor, it really probably is best to just DCA into a S&P 500 fund like Warren Buffett says. Even someone hell bent on value investing should probably still have a baseline strategy of DCA-ing into VOO/SPY/SPX for like 10% of their portfolio or so. I know lots of people who do that, as they don't have a big enough ego to believe they are the next Warren Buffett.

 

[scompi]

Because you can't predict the price moving forward, except for the general upwards trend, so if you have money to invest you are better off investing it now than trying to time the market.

I agree with this. I like the "set it and forget it" strategy. Trying to time the market is like gambling. Less so if you know what you're doing, but still like gambling nonetheless.

 

[kyphysics]

I agree with this. I like the "set it and forget it" strategy. Trying to time the market is like gambling. Less so if you know what you're doing, but still like gambling nonetheless.

I'll leave this topic alone after this, but I have to say, value investing is NOT timing the market!

I've had this debate 100x (exaggeration) it feels and people often conflate valuation-selection with valuation-timing/market timing. It is not. I'm not obligated to buy a house at Case-Shiller all-time highs. I can sit back and rent or live with my parents, etc. In the same way, I am not obligated to buy U.S. stock indexes (I'd actually rather buy the disliked emerging markets right now) or individual stocks at ridiculous valuations either. I can wait and be more selective.

I like Zoom ($ZM) a lot (and think it will steadily increase users and revenue over the next decade and probably keep it's ~30% margin), but would NOT ever have bought at $550...$500...$400...$300...I would have bought at $200, but changed my mind...it's now $162 (OMG!).

Before I get accused of market timing, I always feel the need to make these distinctions. I know what market timing is and agree it's flawed. But, I'm not doing that. Okay, that's my final 2-cents.

 

[kyphysics]

I actually might take a stab at $ZM tomorrow and DCA down if it falls. I wouldn't buy above $160's range.

 

[scompi]

I'll leave this topic alone after this, but I have to say, value investing is NOT timing the market!

I've had this debate 100x (exaggeration) it feels and people often conflate valuation-selection with valuation-timing/market timing. It is not. I'm not obligated to buy a house at Case-Shiller all-time highs. I can sit back and rent or live with my parents, etc. In the same way, I am not obligated to buy U.S. stock indexes (I'd actually rather buy the disliked emerging markets right now) or individual stocks at ridiculous valuations either. I can wait and be more selective.

I like Zoom ($ZM) a lot (and think it will steadily increase users and revenue over the next decade and probably keep it's ~30% margin), but would NOT ever have bought at $550...$500...$400...$300...I would have bought at $200, but changed my mind...it's now $162 (OMG!).

Before I get accused of market timing, I always feel the need to make these distinctions. I know what market timing is and agree it's flawed. But, I'm not doing that. Okay, that's my final 2-cents.

Let me give two examples.

1) I bought AMD stock in 2019 (around $40) when the P/E ratio was well into the 100s. It had just rallied from in the teens. I held for a little while, hoping to get another rally. Analysts were saying that it was way overvalued. I listened and sold for very little profit. Today, AMD stock is around $130.

2) I bought a house as a rental property in the summer of 2020. My family and friends urged me to wait because real estate was severely overvalued at the time. I didn't listen. Today, similar houses in the same neighborhood are selling for $200,000 more than what I bought at.

I also have examples of investing at high valuations and getting burned during the eventual downturn. My point is: nobody knows what's going to happen, not even the professionals. Choosing to invest everything today versus waiting for a lower entry point carries the same risk (in my opinion, based only on my experience). I choose to invest everything today because it is less work and requires less thought, freeing my mind for things I can actually control.