Everyone likes to discuss and compare “time in the market” versus “timing the market” and many would say that time in the market beats timing the market.
Time in the market beats timing the market – almost always.
Ken Fisher
Warren Buffett believes trying to time the market wastes time and is hazardous to investment success.
Trying to time the market is a fool’s errand. In fact, you might be better off trying to beat Usain Bolt in a footrace or Michael Phelps in the pool because it’s harder “than competing in the Olympics.”
Don’t try to time [the market] yourself because you’ll probably lose,
Ray Dalio
“Time in the market” refers to the length of time an investor holds an investment in the stock market. It emphasizes the importance of staying invested over the long term and taking advantage of the long-term potential of the companies we invested in and the power of compounding returns. Especially index with ETFs (though it can also be sector or country ETFs), the idea is that over time, the stock market tends to rise, and staying invested for a long time allows investors to benefit from the market’s overall growth.
On the other hand, “timing in the market” refers to the practice of trying to buy and sell stocks based on short-term market trends and fluctuations to maximize profits. This approach involves attempting to predict when the market will rise or fall and buying or selling stocks accordingly. Timing the market can be difficult to do successfully and often results in higher transaction costs and lower returns due to missed opportunities and market volatility.
In summary, time in the market is focused on long-term investment and patience, while timing in the market is focused on short-term trading and taking advantage of market fluctuations.
Let’s get the context right and not subscribe to these concepts literally and in blind faith.
To time or to hold?
The difference is how long we hold our investments.
Some may hold their trades within a trading day, for a few days or weeks; these are short-term and perceived as timing the market. Some may hold them for months, years or decades; these are longer term and perceived as time in the market.
Our outlooks about the future and its predictability
Different traders and investors have different outlooks of the future and its predictability.
All past declines look like an opportunity, all future declines look like a risk.
Morgan Housel
Things look obvious in hindsight. At the very moment, we do not know what will happen next. Being unsure or worried about the future and the long term, we tend to think short term. It seems easier and more comfortable to trade/invest on a short-term basis and book our gains and losses than to hold on for a more uncertain long-term unsure of how our profits or losses will evolve with time.
Long-term investors find too much volatility in the short term which is hard to interpret. They are confident of the great companies continuing to do well as their potential keeps unfolding.
To time or to hold: What is your investment objective? What do you invest and hold?
Everyone has different experiences and preferences in investing and trading, investing strategies and types of stocks and assets to invest in. We are different in our circumstances, risk appetites, temperaments, emotions, preferences, needs, priorities, goals, levels of understanding and experience in finance, investment, and money management. These influence our decision-making in investing and personal finance.
Some prefer to time their market for more quick profits. They develop the skillsets to navigate through the short-term with their charts and reads of the situations.
“Time in the market” is dependent on our ability to find potential muli-baggers that we are confident to hold. Are we able to find them and be confident to hold? If not, this strategy will not happen.
What works for you may not work for others.
Skills and experience matter more
Both can be difficult. “Timing the market” requires accurately and consistently predicting the future movements of the stock market, which is inherently unpredictable in the short term. We have to know how to cut our losses and book our profits to have a net profit. Trying to time the market for profits can result in missed opportunities and losses.
“Time in the market” requires confidence, conviction, rationality, patience and a long-term perspective. Here, we have to know how to manage the losing and poor-performing stocks and the multi-baggers. Market volatility adds more emotional swings (greed and fear) that make it difficult to hold and adhere to plans.
To succeed in either or both require good strategy, experience, capability and good emotional management to make money consistently.
When “time in the market” is difficult
Imagine you have a few stocks that keep appreciating to become multi-baggers.
- There are constant temptations (let’s realise some profits and spend!) and anxiety (the economies, interest rates, inflation, ec — there are many things to worry about) to trim. Their allocation within the portfolio keeps rising with profits. We can feel uncomfortable with the burgeoning gains.
- Pullbacks are painful and hard to handle. For example, the cost price was $10 with 100 shares, it went to $50 (400% return; $4,000 profit) and dropped back to $40 — this represents a drop of 20% and the return dropped to 300%. Because of the low-cost base, there is more volatility. Should we sell or add?
Imagine if a friend had introduced you to Warren Buffett in 1972 and told you, “I’ve made a fortune investing with this Buffett guy over the past ten years, you must invest with him.” So you check out Warren Buffett and find that his investment vehicle, Berkshire Hathaway, had indeed been an outstanding performer, rising from about $8 in 1962 to $80 at the end of 1972. Impressed, you bought the stock at $80 on December 31, 1972. Three years later, on December 31, 1975, it was $38, a 53% drop over a period in which the S&P 500 was down only 14%. You might have dumped it in disgust at that point and never spoken to that friend again. Yet over the next year it rose from $38 to $94. By December 31, 1982, it was $775 and on its way to $223,615 today—a compounded annual return of 20.8% over the past 42 years.
An excerpt appeared in Value Investor Insight, Chris Mittleman’s shareholder letters
100 Baggers: Stocks That Return 100-to-1 and How To Find Them
- When we take profits and want to buy back, it is difficult to buy back. They cost much more. Do we buy and have such an outsized allocation for these stocks in our portfolio?
“Buy right and hold” is hard. It looks easy. All kinds of situations can occur during our holding period — some perform badly right from the start, some perform badly and do well, some do well and then badly, some do well with occasional crashes, etc. It needs the right temperament, skills and experience.
The longer you invest, the more you respect what you are up against.
Ian Cassel
Also, we are more likely to avoid losses than to seek out equivalent gains (loss aversion). This can lead to irrational investment decisions, such as holding onto losing stocks or selling winning stocks too early. “Time in the market” becomes a hope for losing stocks to recover rather than a portfolio of high-quality stocks to multi-bag.
A related article: The great investing myth (2): Buy and hold
Our ability to “timing the market” accurately and consistently?
Using Amazon as an example,
- It dropped 44% in 2008 during the Great Financial Crisis followed by a rally of 162% the following year. The same happened in 2022 when it crashed almost 50% and climbed back 23% year to date.
- There are several years with huge gains (> 50%).
Given the rallies and crashes, the more relevant questions for at-the-moment situations are:
- Will we be able to buy back at the low with at least the same number of shares after we have sold high?
- There will be situations where we miss selling the high and it drops. Will you sell or buy back?
Looking in hindsight, it looked stupid to do nothing; to just hold. It looked smart to sell high to book profits and buy low again.
The question is whether YOU can do these consistently and make more than just hold and do nothing.
Not mutually exclusive
They need not be mutually exclusive and binary. We have several trading and investing strategies with a few baskets of stocks. Hence, we can buy and hold our stocks in a variety of days, weeks, months, years and decades. When the market is too euphoric and greedy, the stocks become overvalued or the investing thesis becomes not valid: we can trim and/or sell. When we believe that high-quality companies will continue to be great, hold and buy more at lower prices.
Be flexible.
Time in the market = Dollar cost averaging
Often, time in the market is associated with dollar cost averaging for retail investors. The investor invests a fixed amount of capital regularly regardless of the market cycle and the price of the security. The approach reduces the impact of market volatility and eliminates the effort of timing the market. It prevents a poorly timed lump sum investment at a potentially higher price. It removes the greed and fear emotions we have with timing the market. It is an easy and simple approach to invest consistently for the long term.
Time in the market = Buy low, sell high (too) = Timing the market (on a much longer time frame)
“Time in the market” does not mean just dollar cost averaging. It can also mean buying low and selling high in a much longer time frame. Of course, investors have to buy low and sell high to make money and they are aiming to make a lot. Yes, you can say that they are “timing the market” on a much longer time frame; profiting on the potential of the multi-baggers.
Warren Buffett is famous for saying, “Be fearful when others are greedy, and be greedy when others are fearful.”
Berkshire Hathaway has huge cash holdings and it does wait patiently for the right opportunity (i.e. market crashes) to buy cheap.
In my whole adult life, I have never hoarded cash, waiting for better conditions. I’ve just invested in the best thing I could find.
Charlie Munger
During the 2008 Great Financial Crisis, Berkshire Hathaway went on a buying spree with total investments in September and October 2008 exceeding $15 billion.
Bruce A. Karsh of Oaktree Capital (where Howard Marks is the co-founder and Co-Chairman) saw the buying opportunity of a lifetime in 2008. Oaktree Capital ploughed money into distressed debt at a torrid pace, investing more than $6 billion over three months.
These investors wait patiently for the right time (market crashes) to buy aggressively.
Time in the market does not mean not buying when there is a bargain and not selling when the market gets euphoric. Huge market swings where markets swing from being over-valued to under-valued represent good opportunities to buy and sell for good profits.
A related article: The great investing myth (1): Buy low, sell high
Time in the market ≠ Hold forever; don’t sell
What we hold matters. Hold the best.
Time is the friend of the wonderful business, the enemy of the mediocre.
Warren Buffett
While Warren Buffett strongly advocates long-term investing, the time element is good for great companies and bad for lousy ones. The great ones will keep compounding but the lousy ones will decay with time.
However, high-quality companies and their moats may not last forever. Their best days may last a few years; only a few can last through decades. Keep validating whether our investment thesis is still valid.
Time in the market ≠ Fully invested with little spare cash
Some have the perception that “time in the market” means the investors are buying regularly and their monies are fully invested in the stock market through dollar cost averaging. Not necessarily; it is a personal choice. Many great investors always have cash waiting for the opportunity to buy during crashes.
Experience yourself, learn and pivot
Be flexible and explore; there is no need to “align” ourselves to either “time in the market” or “timing the market” camps. Their relevance should be a function of your strategies. Let’s not get rigid. Let our investing strategies guide the holding periods and what we do with our winners and losers.
Investors should explore and experience for themselves both “time in the market” and “timing the market” during periods of volatility, rallies and crash with their investing strategies. Many aspects of investing are behavioural and personal. They are easy to understand in theory and in hindsight but difficult to do profitably in the thick of actions. Also, be conscious and appreciate the long-term potential of high-quality companies. Learn and experience yourself, adjust to what suit you better to incorporate them into your strategies.
A related article: The Art of Execution: How the world’s best investors get it wrong and still make millions by Lee Freeman-Shor
