No. of Recommendations: 1
Enough already! I truly appreciate a lot of what the Motley Fool does, and obviously I read the articles, but this mindless clinging to an orthodoxy with respect to market timing is foolish, not Foolish. TMFOtter's article rants about "capitulation" as being an exercise in reading tea leaves. That's just not correct. It is an exercise in bringing external factors to bear on an analysis of a company.

Let me put it this way--if you know the economy is slowing down, and management of a capital-equipment company you are thinking about investing in says that their sales will continue to increase, do you believe them, or do you wait for the business cycle to make its downturn first, knowing that the company's revenues, and therefore its share price, will decrease with the onset of a slowdown/recession? Personally, I'd wait for the better price. That's fundamental analysis, but hey--guess what--it's also TIMING! You have made a rational timing decision based on macro-economic inputs that will affect the company's performance beyond what the management has obviously been factoring into their decisions. So there are some very good reasons to look at factors other than the management's plan, execution, and the current share value.

Similarly, we know that investor psychology has an effect on share prices. Investors often display a herd mentality--how else do you explain Lucent selling for $90 just several months ago, and $16 now? Did the business really change that fundamentally? Or were investors too optimistic then, and possibly too pessimistic now? When investors are pulling their money out and stuffing it under the mattress, that's very likely the best time to invest in good, undervalued companies--if only because there's likely to be a lot of good companies undervalued at that point. The good stuff is getting sold right along with the bad. There are ways to measure investor psychology, including bullish/bearish surveys, put/call ratios, and volatility indicators (calculated from options sales). These indicators measure how scared market participants are, and the options-based indicators do that by measuring how they panic with their dollars. When options traders are panicking, they all run out and buy put options. Naturally, when they are most panicked, they are forking over their dollars based on emotions, not on rational analysis, and therefore they are wrong! At the same time, investor surveys will be registering large bearish percentages. When everybody is convinced that the market is heading lower, then everyone who wants to sell has sold, leaving only buyers, and invariably it will go higher.

At that point, it's a great time to step in and pick up good, undervalued companies.

To sum up, I think that looking for excessive pessimism on the part of market participants is a valid way to increase the effectiveness of your value-driven investing regimen. It's not going to work as a stand-alone method, but it takes some additional external factors into account when making value decisions about a company's shares, factors that the company's management has little or no control over.

And there's nothing wrong with that.

myownself--sitting under the market with a bushel basket, waiting for good companies to fall into it.

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