Fool's Eye View

[ July 14, 2000 ]

Turn off the market clock

By Christopher Spink (TMFEagle)

Great Titchfield Street, London -- Does market timing matter? This devilish debate rages periodically around the Motley Fool discussion boards. In some spots timing the market becomes almost a matter a life or death. This happens specifically in the Devil's Den, where day traders hang out trying to make a living from speculating on the future short-term movements of share prices. Read this scary post by sharonkorman if you fancy riding this rollercoaster. (And if you can tell me what on earth she means by "bullish harami on a candlestick chart", a "stochastic buy signal" or an "ominous-looking doji star" then you're a Wiser man than me).

Other individuals, who have a life beyond staring at a screen of flickering stock market movements, also attempt to time the market, but only to a certain extent. These are investors who tend to take a value approach to buying shares. They perform detailed fundamental analysis of a business, trying to come up with a value for the company. If they reckon the market is undervaluing the business they may well buy the shares. The managers of the real money Qualiport try to do this. Their stated intention is "to buy great companies at cheap prices and hold for the long-term".

Investment Strategies

Other seekers of value have shorter-term strategies. TMF Pyad's regular Value investing column, which appears each Friday, covers this area in detail. The Value Shares board also has a lot of regular contributors trying to find undervalued shares that may rise at a quicker pace than the market. Pyad in particular says as soon as he feels the 'value' of such an investment has been realised he will sell those shares and focus on trying to find his next target. This contrarian approach suits some people, probably more than the out-and-out trading style but perhaps less than those attempting to value companies on a fundamental basis à la Qualiport.

The other real money Foolish portfolio, the Rule Shaker, cocks a snook at the market altogether. Portfolio co-managers Alan Oscroft (TMF Alan) and David Berger (TMF FoolUK) are "looking for the leading companies in the great industries of the future." This strategy studiously avoids considering the current market value of a company. The portfolio is unashamedly long-term in its approach and trying to find enterprises that will continue to lead the way in the future. Today's value is therefore almost irrelevant on the wider timescale.

Starting out

Many beginners reckon market timing matters immensely, though. If you have read the Ten Steps, have cleared your high interest debt and are about to make your first move into the market and invest, when exactly should you choose to do it? More importantly what should be your first investment? Here at the Fool, we are incredibly fond of just one type of investment fund: the index tracker. Not only does this humble beast outperform more than three quarters of Wise fund managers by simply tracking the performance of the FTSE 100 or FTSE All-Share indices, it is also one of the cheapest funds you can buy as well, costing around 0.5% annually.

However, index trackers also have one other fantastic property. You can invest a regular amount each month into such funds, sometimes as little as £25 per month. This regular saving can prove better than choosing a particular moment to take the plunge and dive into the market. This year the FTSE 100 index has fallen almost 10%. However, it rose 10% between mid-February and mid-March. And in the month after hitting that peak it dropped 10% as well.

Rather than trying to find the most opportune moment to invest and risk losing 10% of the value of your investment, you can relax and just plough in regular amounts of money monthly. Sometimes you will be lucky and buy before the index rises and sometimes you may be unlucky and buy as the market dips. In the long run though your regular investing will mirror the market's upward trend -- a pattern it has adopted for at least the past 80 years. Regular investing allows you to turn off the market clock.

Where Next?

• Have your say on the Fool's Eye View discussion board, via the resources section below.
• There's lots of great info about safe and simple saving on the Index tracker discussion board FAQ
• It's Great to be Dumb Fool's Eye View discusses the benefits of Index tracking.