IS MARKET TIMING RELEVANT?
By: Edwin Potsiwa
Equity players have witnessed a big jump in prices over the past two weeks. Both the heavy cap and light cap investors were rewarded by the re-rating of the bourse. However the market has taken a setback, which other quarters think is just temporal. In view of this development one thing that I decided to share with the followers of the ‘Financial insight‘ column is that of market timing. Is timing of any essence in investment? May be yes may be no! There are different schools of thought on market timing in the investment community in general. If you were to ask an active trader the answer is a resounding yes. The traditional value investor of the Buy Hold style thinks otherwise or says that it depends.
Market timing is the act of attempting to predict the future direction of the market, typically through the use of technical indicators or economic data. Timing the market may involve taking a calculated portfolio position movement in a stock or a mutual fund. Put simply it is the art (not an exact science) of taking or exiting an investment position at the ‘right time.’ The question that an investor has to ponder about is; “does the time I buy or sell a stock all that important?”. Why bother if I have made some splendid return or why bother about the time if after careful fundamental analysis or (even technical analysis) that XYZ is a strong buy? Can one consistently earn above average returns through market timing? Some investors, especially academics, believe it is impossible to time the market. Other investors, notably active traders, believe strongly in market timing. Market timing is critically important in a volatile economy like ours. The investor need has to use market timing in an unconventional sense. Despite following a passive investment style, the Zimbabwean investor can not afford to buy a portfolio take the briefcase and close the dealing desk until next year. The investor, more than ever, needs to be actively watching for changes in macro economic trends and other price sensitive information.
I propose an active passive value investment approach under the current economic conditions. The value investor needs to time the market as well. He can not just blindly place an order in an overvalued market. Similarly anyone can benefit by market timing. In our day to day lives we have bought essential items in quantities more than we normally need on news of a price hike. We have bought a real estate property when the estate agent indicated that the price will be 30% more next week. The principle is relevant even in your portfolio management decisions. It is an appropriate decision for one to buy ahead of results he anticipates to be exceptionally good. I am not talking of insider trading bro, but just your reasonable expectations. Equally the same, you may decide not to commit your money market funds for long if macro economic fundamentals strongly suggest an interest rate hike. You better wait and invest at the right time at a better rate. If the stock has reached your ceiling target but 10 days before your horizon date, are you not better off taking profits now? You would agree with me that you are. My mutual fund investors can equally benefit by knowing the appropriate time to take positions. They will attempt to accumulate when the market is subdued because the unit price is also low and cheap. Taking you down the memory lane, good market timers took long positions soon after the market crash following the announcement of the new withholding tax on listed securities. They are all smiles to the bank! A good farmer knows the time to start studying the clouds. Even if he knows that there is money in tobacco and possess the right skills, manpower and the soil, he never forgets the importance of ‘rainy timing’. The wise investor equally needs to know the appropriate indicators that signal him that time has come to buy or sell security X.
Until next week, Time wisely
This article is published for general investment advice and it must be noted that the price of
equities and the income derived from them can rise as well as fall. Neither First Mutual Limited nor the author shall be held liable for any losses as a result of the investment advice
contained in this article. It is important that specific investment advice is sought as each
investor’s investment will be dependent on their circumstances.
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