Enterprising Investor Forum

Bottom Fisher Time? Thursday, July 26, 2007

Firstly, for those of you who may not be familiar with the term:

• Bottom Fisher: An investor who looks for bargains among stocks whose prices have recently dropped dramatically. The investor believes that the recent price drop is temporary and a recovery is soon to follow.

Today, we just wanted to post a small reminder to those investors that may be mulling the idea of buying on the downside or trying to time the market. Despite the fact that we are advocates of always being on the lookout for bargains and companies that the market might be overlooking, we recommend caution when the whole market is correcting and urge investors not to try and move in and out of positions in a pure speculative manner.

Naturally, if you have been following a company for some time and have determined an ideal entry price and are looking to buy for the long-term, then you should definitely take advantage of any opportunities whilst making sure you are not too quick to pull the trigger. However, don’t try to liquidate all your holdings just to buy everything back on the cheap …. it is not advisable to try and catch a falling knife! Furthermore, numerous studies have proved time and time again that it is virtually impossible to time the market consistently (it could happen on a single occasion due to luck) and assuming you could do so, commissions will eat up a big portion – if not all -of your gains.

Some research to back-up the above:

• Burton G. Malkiel, after extensive research, concludes that you would have to have a 70% success rate every time you made a call to beat the market. He also offers a lot more statistics in his book, A Random Walk Down Wall Street*.
• Hulbert’s conclusion after studying market timing newsletters: ‘None of the newsletter timers beat the market. For the 10 years that ended Dec. 31, the timers’ annual average total returns ranged from 16.9% to 5.84%. The average return was 11.06%. During the same period, the Standard & Poor’s 500-stock index earned 18.06% annually, and the Wilshire 5000 Value-Weighted Total Return Index, a broader measure of market performance, 17.57%.’
• Benjamin Graham, in The Intelligent Investor, reports that after having analyzed accounts held at brokerage firms, there was a clear trend showing that the more the account was active, the less returns it made.

* Stay tuned for more on Malkiel and our review of A Random Walk Down Wall Street.