Introduction

I believe that two of the most important investing principles that prudent investors should embrace are valuation and time in the market. Consequently, the title of this article is mildly misleading, because both concepts are extremely important towards achieving long-term investing success. In other words, I believe attempting to argue the importance of one over the other is a waste of time and energy. What is truly important is to understand the significance of both concepts, and then embrace them both intellectually and practically while implementing your investing strategies. Together, these two strategies are powerful.

Additionally, this article was inspired by comments made in my previous article suggesting that time in the market is more important than valuation.  Consequently, I took the role of devil’s advocate with my title.   However, to properly debate these issues, we must evaluate what the word “important” means and how it applies. My interpretation would suggest that importance is determined by identifying which principle leads to the highest long-term rates of return. In simpler terms, which will make you more money: time in the market or being disciplined to only purchase when valuation is attractive? Furthermore, importance would also relate to which principle controls risk better.

Time In The Market -Versus- Market Timing

One of the primary aspects that distinguish investors from speculators is the amount of time they are willing or considering committing to. Investors tend to take a long-term view, while speculators are shorter run-oriented. Consequently, for clarity, it would be useful to attempt to define long-term versus short-term. To me, the long run when investing in equities implies owning them for at the minimum over a complete business cycle. A business cycle typically runs between a minimum of 3 to 5 years or longer.

This is important because it relates to how and over what timeframe a business generates returns for its owners/shareholders. Businesses make money for their shareholders by profitably selling products and/or services to customers. Moreover, businesses tend to report their progress over quarterly and annual timeframes. In other words, it takes time for businesses to make the money from which to reward their owners.   Even though a growing business is constantly becoming more valuable, it takes time for that value to manifest in a meaningful way.

With this concept in mind, consider the reality that short-term stock price movements might not be truly indicative of the true value of a publicly traded company at any specific point in time. This is true because the actual cash flows, profits and business opportunities, etc.  are usually not publicly available except when companies file their quarterly or annual reports. Consequently, short-term price volatility is by its nature speculative.

The above applies to both public and private operating businesses. However, with publicly traded businesses there are minute-by-minute and hour-by-hour daily trading activities occurring when the markets are open. This provides a very important liquidity advantage, but it also provides enticements that can be financially dangerous. More simply stated, a rising price can tweak people’s greed whereas a falling price can elicit fear. In either case, irrational decisions are prone to be made. Emotions can and often do cause people to buy when they should sell – and vice versa. Additionally, short-term price volatility is highly unpredictable in great part simply because it is often emotionally charged.

Nevertheless, people have historically – and will in the future – continue to try and time the market, always have, always will. This behavior continues notwithstanding the reality that a preponderance of evidence suggests that market timing cannot be accomplished except by chance. Stated differently, short-term market timing tends to work until it doesn’t. Sure, market timing occasionally does produce enticing results, but those results are typically followed by disastrous ones.   Consequently, market timing is speculation and a very close cousin to gambling.