Is Timing the Market in Vain?

"Forming macro opinions or listening to the macro or market predictions of others is a waste of time," said Buffett as he bulleted the fundamentals of investing in his new letter. I believe Buffett is right in general, because no one, even the best economist, can predict the timing of an economic crisis. Secondary, if you chose the right company to invest, it really doesn’t matter when you invest as long as you pay the right price. In long term, a good company will prosper.

However, everyone knows that cash is the king when an economic crisis happens. No body wants to get into the market right before the market crash. That’s why most of people always try to form opinions on the macro economy in the investment community and believes that they can take advantage of it, even the Oracle of Omaha said otherwise long time ago.

I think the answer is a big “NO” and a small “yes”. For most of people and in most of occasions making a right market prediction is almost a mission impossible. Therefore, it’s a big “NO” in this sense.

Nevertheless, for a few people and in a few occasions, it’s possible to make a prediction. Remember Buffett also said “Be fearful when others are greedy and greedy only when others are fearful.”? This saying shows a way to timing the market, especially, when most of people are too greedy or too fearful. Remember the Internet bubble in 2000 and the subprime mortgage crisis in 2008? Looking back, it’s actually not difficult to predict these two crises, so long one has common sense. There were a few people who kept their common sense among the craziness and made a lot of money.

The bottom line is the common sense. Prices will not go all the way up to the sky. People or institutions should not borrow money beyond their means. When prices do seem going up to the sky and people do live beyond their means, it’s time to leave the market. Well, not much people can keep their common sense when the market goes crazy.

Is there a similar scenario now? YES, it’s happening in China. The property prices have grown five times in the past 10 years. Until end of last year people still believed that it would still go up. The return on investment in real estate was about 2%, while the rate for one year fix deposit was more than 3% in 2013. Many young couples paid their down payment with their parents’ money. If you traveled around in China, you would see a lot of empty apartments either just finished or still under later stage of construction like ghost towns. You don’t need to have a high IQ to realize that the price for properties in China will not go up much further and the risk of going down is very high.

The prices started to drop in second and third tier cities at the beginning of this year. However, people are still debating whether the same thing will happen in the first tier city. Meanwhile, the prices still are going up slowly in the first tier cities, indicating people still buying. Although there are not much ghost towns in the first tier cities, the rest of the scenario is still the same.

Who left this market last year? Mr. Li Ka-shing, the richest man in Asia, sold most of properties hold by his companies in China last year. I did the same. Many Chinese people bought properties in US cities instead of Chinese cities last year.

All said, someone may say this is about valuation, not about timing the market. Well, when valuation in a broad scope of assets shows that everything seems irrationally too expensive, it shows that a crash in the market in general is ticking. Valuation and timing is actually related when the micro view of certain assets reflects the macro view of the market.


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