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

Cody Willard

Cody Willard

— 3 min read

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:

Here’s what I’ve been writing for the last month or so:

Meanwhile, 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 500-1000% 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 AAPL, GOOG, FB, NVDA and especially for our largest long, TSLA, the one year chart is some variation of a ✓.

And as noted in the above headlines from my articles, 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.

Let’s do this week’s Live Q&A Chat today at 2:30pm ET Wednesday (tomorrow). Come directly to the TWC Chat Room or just email us your question to support@tradingwithcody.com.

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