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Timing of an expected future event is not consistently possible because nobody knows the future for sure and it’s random.
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Why is it random?
Let’s illustrate it using an example. Your kid is playing jenga blocks. He is stacking them and making a tower. You know that when it’s getting higher, it will fall eventually. But you don’t know exactly at what height it will collapse, i.e. timing.
The same is forecasting events. The height of the jenga blocks is like leverage. When the leverage is getting higher, it’ll collapse but you don’t know when. Let’s say you are looking at a company leverage such as the ratio of debts and equity (how much owners put their own money into the business). You observe that this ratio trend is getting higher. You think that if the trend continues, the company will have trouble and its stock price will fall. You decide to short the stock (profit in shorting when price is expected to fall) because you think this debt level is too high. However, contrary to your belief, the stock price not only falls but rises. Why? Because investors are still believing in the business so they haven’t pulled money out yet. You are losing money everyday. After 3 months, you can’t take it anymore and decide to take the loss and close the position. To your surprise, 1 week later, all of sudden, the stock price collapses and after 6 months, the company goes bankrupt because investors, suppliers, banks and employees finally lose hope of the company viability and pull out. You are right eventually but you still lose money because your timing is inaccurate.
There are 2 ways to make money in the market and extremely skilled investors/traders have demonstrated that they can consistently make money:
Method 1: Ignore timing: This is a long term investor’s way, like how Warren Buffett invests. His record is about 20% per year return over a 50-60 year period. This is how you do it. Develop expectations of future events by fundamental analysis and take advantage when the stock price collapses. He doesn’t care or try to anticipate market crashes. Instead, he expects a market crash from time to time and whenever a crash happens, he jumps in and buys fire sale stocks at extremely low prices. He makes money when these discounted assets return to normal prices.
Method 2: Timing. This is the trader's way. A prime example is legendary trader Druckenmiller whose track record is 30% annualized return over a 30-year period. This is his method. He develops an expectation of the future events by fundamental analysis. He doesn’t really try to time the market by guessing. Instead, he times the market by monitoring liquidity. In other words, he is the first one in the market observing the turn of the events (e.g. crash) and frontrunning others. When everyone realizes it, it’s too late to make money because the opportunity has already gone.
What does it mean for investors and business owners?
Pick one of the 2 ways described above to make money.
Method 1, long term investor:
Have a sizeable cash reserves
Do fundamental analysis and have a deep understanding of the industry/sector you are in. That means, you are able to differentiate good long term prospects from real bad assets, especially when everyone is pessimistic.
Whenever there’s a recession, economic crisis or industry crisis, quickly go shopping for fire sale and high quality assets.
Method 2, trader:
Do fundamental analysis and have a deep understanding of the industry/sector you are in.
Have a view of the future events from the fundamental analysis above
Monitor closely liquidity, i.e. market interest in that particular asset. When you see that everyone is rushing in, you know that your thesis starts working and it’s at an early stage. Now you move in and “ride the wave” and make money.
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