Can you time the market?

This is the million dollar question; sorry, I meant the billion dollar question (have to adjust for the quantitative easing effect). Many believe it can be done and many believe it cannot. I think that timing the market is a matter of perspective. I’m not going to debate whether timing the market is doable or not. Instead, I’ll just tell you how I “time” my investments. I do believe that there are investment seasons.

A Time for Everything (Ecclesiastes 3:1 to 3:8)

1 There is a time for everything,

and a season for every activity under the heavens:

2 a time to be born and a time to die,

a time to plant and a time to uproot,

3 a time to kill and a time to heal,

a time to tear down and a time to build,

4 a time to weep and a time to laugh,

a time to mourn and a time to dance,

5 a time to scatter stones and a time to gather them,

a time to embrace and a time to refrain from embracing,

6 a time to search and a time to give up,

a time to keep and a time to throw away,

7 a time to tear and a time to mend,

a time to be silent and a time to speak,

8 a time to love and a time to hate,

a time for war and a time for peace.

When I’m investing, I try to identify conditions of the different markets that I’m looking at. Every investment will be in an environment that favors it and others that do not. There are times when certain investments can be better than others.

I begin by identifying the market conditions. It’s like identifying the differences in seasons. There are obvious differences between summer and winter. Winter is cold and summer hot. Using the temperature alone will only get you so far because if you are in spring or fall and the temperature is 65 degrees, you won’t be able to tell which season it is. You will need to add other variables, such as, whether trees leaves are growing or falling. So, I compile the set of conditions I need to follow in order to figure out where in the cycle an investment is.

Let’s say I’m looking at the real estate market: single family home builders specifically. I’d look at mortgage interest rates, unemployment rates, available inventory (supply), and financial health of the companies as indicators of market conditions. These variables will help me determine whether the real estate business is a good investment or not at this time. If interest rates are high and unemployment is high it is a no-brainer, it is “winter” in this market. Not a good environment for investing in real estate. However, if interest rates are low, unemployment is low, and inventory is low, it is definitely “summer” in this market. The real estate builders should be doing very well. The best opportunities come when seasons change, the “spring” and “falls”. When real estate is in “winter” mode, i.e. interest rates are high and unemployment is high; and you see that unemployment is starting to go down, that’s when you tell the season is changing. That is when you should consider buying the home builders. Same thing happens on the other side, when real estate is booming, but unemployment is starting to rise then real estate will start slowing down. You should consider leaving this market and moving to something else.

The exercise of figuring out in which “season” of a market is in, is something I do for all the investments I follow. If you want to time the markets, I suggest you to do so too; whether it is real estate or equities or commodities. Each has its own set of variables that tell the story of which investment season they are in. As the book of Ecclesiastes say, there is a time for everything.

Thanks for reading the Eclectic Investor. Happy investing!

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