It's a well-known fact that time in the market is so much more important for an investor's long-term returns than timing the market. Both amateurs and pros can and do lose their shirts -- or at least, a large percentage of their potential profits -- trying to guess when the market is about to hit a top or a bottom. That's why the Fool is a fan of the buy-and-hold for the long haul approach as no one can accurately know when to get in and get out.
Even so, we have services that feature both watch lists and price points to look for, which some might see as a contradiction to our long-standing opposition to market timing.
In this segment from the MarketFoolery podcast, Chris Hill, Aaron Bush, and Simon Erickson examine the subtle differences between buying for the long term when the price is right, and jumping in and out of the market based on hunches about which way it's going to move next, as well as what strategies you should use for putting stocks into your portfolio.
This podcast was recorded on June 22, 2016.
Chris Hill: Marketfoolery@fool.com is our email address. From Dan Smith in South Korea, "I've been listening to all the Motley Fool podcasts for about a year now and learning a lot. One thing I'm still confused on, is why your services still have things like watch lists or attractive price points for stocks. It seems like a constant theme is that no one can predict or time the market, but isn't waiting for the price of a particular stock to come down, just another way of timing the market? Why not just always buy the stock whenever you have the money available, regardless of what the stock is currently trading at?"
Aaron Bush: It's a good question.
Chris: It's a good question, Aaron, what do you think?
Aaron: I totally agree with the phrase that time in the market is much more important than timing the market. Generally, that tends to be true, but alas, there are no firm rules here and context is king in pretty much all of it. For example, there are times where valuations get super lofty. We've seen bubble through history. There's even more hype on a micro economic basis, just looking company by company. From that fact alone, I think it makes sense to at least be price conscious.
How you approach this also depends on your investing style, so there isn't really a right or wrong answer here. If you want a more concentrated portfolio, it might make sense to wait until you are very certain that a stock will give you good returns, which could be a totally different philosophy than somebody who is younger, is more willing to take risks, who wants to own more businesses. They'll be OK just buying a company that has good prospects for a decade on, then only after that, when they're looking at potentially making a larger percentage with their portfolio, will they start thinking about the price more and more.
There's a lot of different ways to twist all of that. I would say that everything is contextual, and thinking about this question, through the specific context of your like portfolio and strategy will help you come up with the best answer for yourself.
Simon Erickson: Yeah, I agree with what Aaron said. I mean, what can you model. If you're building a model and you're coming up with a price target, how sure are you with the inputs that you're putting into that model. If it's a business, like a Starbucks or Walmart, maybe you can, with a high degree of accuracy, get the inputs correct on a model like that. If you're putting something like an eCommerce player or a tech company, or somebody that's going to sell software, or even social networking. When Facebook first came out, nobody knew how big that was going to be. Something that has the majority of the value of the company in the future, that is unknown, you're going to get it wrong. So don't let a price target that is out there for a 12 month forecast, convince you to not buy a stock that could have a really really big future.
Chris: Well, I think Dan sounds like one of those people who is at that point in his life, where he is taking the approach of, "Hey, if I've got some available money, I want to put it to use right away and I'm not looking to necessarily get the best possible price." We have seen that in the past with a variety of different companies. One that comes to mind is Facebook. When you think about where Facebook was trading roughly 8-12 months after it's IPO and it had dropped down. I remember walking around this building talking with analysts, some of whom were looking at it and just saying "Well, this is nuts, that Facebook is trading this low," that's just sort of crazy.
To me, Aaron, some of the examples that leap to mind the quickest, are the ones on the extreme, where a quality company, the price has been knocked down on it's stock where you're like, "Well that's just stupid," and on the flip side, it's, and I don't mean to pick on them, it's Shake Shack trading at $90 a share, where you're just like, "Wait a minute, that's insane," that it would be that high.
If I were someone interested in shorting stocks, that is one I would short.
Aaron: Yeah, I think it really is, again, contextual and it really just depends on what exactly you're looking at. One thing I would say though, is, if you are someone who is regularly investing money, that's me, that's a lot of other people, you have a watch list, because you cannot invest in everything all at once also. You have it to study it over time, look at it over time, so you can figure out at any given time, which one you should go for when you have the money.
Call it timing, call it something else, you still have to pick and choose.
Chris: One thing that you've just alluded to is not directly addressing Dan's question, but is something that investors should always keep in mind, and that's fees. What are the fees ... If you have a system set up where you're not paying high fees and you can make more frequent purchases, that's great. But for a lot people, there is some sort of transactional fee and it is something you always want to keep in mind.
Aaron: I think we normally say, the general rule of thumb around here is to keep the fees 2% or less of your trading. I would go a little further to say, you don't need to trade like crazy, you don't need to buy everything. You should at least put some thought into what you're buying, instead of just being like "Oh, that looks cool, I'm going to buy it," because price doesn't matter. That doesn't really work out for you very well. Every context is different. Having a watch list can still be important I think.