Market Timing Vs. Fundamental Analysis: What’s The Difference Anyway?


Deep thought of the day: There’s a big difference between trying to time the market versus investing using fundamental analysis. Or is there?

If we’re doing it right, when we’re doing fundamental analysis, in our case using Revolutionary Trends, topline growth rates, underpinned with valuation metrics including price to earnings and price to revenue, we would find more opportunities when stocks are getting crushed and we’d find less attractive risk/reward when stocks have gone parabolic.

Which is exactly what we’ve done for the last twenty years and throughout the last couple years and so far during this wildly volatile year.

Here’s what I was writing in March:

Look, the US and the whole world are already in a major recession. Revenues at companies like Apple for the next 90 days could be down 20% or more versus what the analysts thought they might be. All those small businesses and large companies too that have too much debt and not enough cash but are seeing cash flow go negative as revenues disappear are in trouble. The government might help them. It’ll be tough for the Federal government programs to not get hijacked by the giant corporations as always, so small businesses are going to be adversely affected. That’s why the Russell 2000 is down another 10% today.

On the other hand, let’s flip the script and think about who’s going to benefit and how from the strange new world we find ourselves living in.

With all these universities and businesses and government offices shifting to online remote meetings and work, we need to own some of the companies that facilitate this. It’s most likely that even after the Coronavirus Crisis passes that this trend will sustain. And all companies will develop contingence plans for the future that includes letting employees having a lot more flexibility about working remotely. As evidenced in this Twitter thread that asks “Anyone know what companies universities use for online classes?,” it appears that Zoom is by far the de-facto standard platform for this remote work movement. So I am starting a position Zoom (ZM). As usual, I’ll start with about 1/3 of a full position and look to add more in coming days and weeks. Slack will also be a big beneficiary from this remote work environment. I’m adding to that position here too.

And this:

Look, I know this isn’t fun right now. Investing and trading is not supposed to be fun though. This is hard work. I wish I had just gone to cash a few weeks ago when I got all cautious at the top. Then again, my job’s not to try to time giant market swings with all my capital. At least, we trimmed and sold and got hedged at the top. Now we’ve been nibbling and covering some of the hedges when the markets are in panic mode.

I know that we will not catch the exact bottom just like we didn’t catch the exact top. But I know that I’d rather buy when the markets are in panic mode and I see a lot of stocks that I think are now trading at attractive valuations/entry points.

But in July, I wrote:

Tesla is up 500% from where we made it our largest position last year giving us 333% annualized gain since then. That might seem pretty good. But come on, think about it, talk about lame! Docusign is up almost 200% since we added it to our portfolio on March 12 for a 1828% annualized gain. Zoom has zoomed 150% from where we bought it at that same time for a 1411% gain since we bought it. And how about Dynavax , which has more than doubled since we bought it just two months ago, meaning that if the stock will simply keep moving at the pace it has been since we bought it, a year from now we’ll be up 6267% on that one.

These kinds of moves are not sustainable. These stocks were not terribly “cheap” when we bought them and they’re quite wildly valued at this point. And while I don’t think these stocks are going back to where they were when we bought them, I do think we are going to see lower prices in most all of stocks in the stock market at some point in the next three to six months or so.

I don’t know why people keep saying that this market rally is thin. There are still so many hundreds of crappy small stocks that have gone up 500-1,000% that have only barely started falling from their new bubbled highs. And most every big cap stock’s one year chart is some variation of a V or in the case of most of our biggest investments like Apple (AAPL), Google (GOOG), Facebook (FB), and Nvidia (NVDA), and especially for our largest long Tesla (TSLA), the one year chart is some variation of a √.

And as noted in the above excerpts, it’s clear that I’ve been doing a lot more trimming and selling for the last few weeks than I’ve been doing buying.

Put all this together and it would make sense that a good Revolution Investor is in some sense a bit of a market timer. Indeed, the great Warren Buffett has repeatedly reduced his stock exposure in great bubbled up markets such as in 1969 when he sold everything and also the late 1990s when he went into a virtual moratorium on buying stocks and again lately as stocks have gone parabolic during what I’ve taken to calling Bubble Blowing Bull Market Blow-Off Toppish Action™.

You’ll also recall that I think that now, while everybody is being greedy and/or complacent about stock prices, is a great time to hone up on our value investing principles like those taught by Warren Buffett’s mentor Benjamin Graham. In the Intelligent Investor book I mentioned a few weeks ago, he literally writes this when it comes to the idea of trying to time the market:

Sound procedure would call for reducing the common-stock component below 50% when in the judgment of the investor the market level has become dangerously high.

Graham wrote that because human nature makes people get greedy at the top of bull markets and get scared at the bottoms in bear markets, “we favor some kind of mechanical method for varying the proportion of bonds [Cody’s note: Or, in this day of record low rates when the risk/reward scenario of bonds is unfavorable too, for outright cash] to stocks in the investor’s portfolio.”

To further delineate the point about bonds these days, I just don’t see how anybody can justify taking the risks of 30-50% sell offs like bonds saw in March to get 5% or so yield and little other upside potential. Cash is the best defense. Gold and bitcoin can be considered to be a form of defensive but they’re still obviously risky and can be correlated with stocks for long periods of time. Hedging the portfolio by buying a few puts here and there and adding a few shorts can also be considered a bit defensive though quite risky too.

My point in this article isn’t to debate what besides stocks to invest in, but to simply to drive the point home that it might turn out to have been a great time to reduce some of your stock exposure when valuations are stretched, stock charts are parabolic even if you’re not trying to time the market per se.

Ever wanted a ringside seat as a professional hedge fund manager invests and trades his firm’s capital? Join former CNBC and Fox News anchor, Wall Street Correspondent for The Tonight Show as he outlines his analysis, trades and investments on Trading With Cody. 

Disclosure: I am/we are long AAPL, GOOG, FB, NVDA, TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Positions can change at any time and without notice.

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