Stop Worrying About Market Timing

Charts provide great insights into what has already taken place. Benefiting from them, though, requires true understanding of the messages they deliver. The one-year New York Stock Exchange cumulative advance decline line shown below showed a strong, wide rally from September of 2020 right through early June of 2021. After that, though, most stocks have been in downtrends even as the mega-caps in the S&P 500 and Nasdaq Composite keep those cap-weighted indices heading higher. The divergence is much more noticeable when comparing the S&P 500 to the Russell 2000. On that basis the more average stock peaked in mid-March of 2021 and has sold off noticeably ever since. The S&P 500 and Nasdaq Composite (not shown below) continued rising, masking plenty of damage beneath the surface. Even so, the wide outperformance of the small-caps still shows a substantial advantage over larger-cap stocks when measured from exactly a year ago. My own portfolio showed exactly that experience. I had the best percentage gains of my 43-year career trading stocks from October through March. Since then, while still way, way ahead year to date, my gains have been diminished. The chart below illustrates how a dozen of my larger holdings have fared since June 4 vs. the S&P 500. The ugly retracements came despite almost universally good news on the earnings front. Ten of the 12 names far outperformed analyst expectations in their latest quarterly reports. Caleres , Children's Place , Sally Beauty and Designer Brands blew way past estimates, while aggressively raising guidance. Most of the stocks on my list now sell for single-digit P/Es. American Woodmark missed badly due to surging lumber costs, which dinged margins ahead of price increases which are now taking effect. Management indicates the second half of fiscal 2021 (ends April 30, 2022) will see huge benefits from those price hikes and the subsequent reversal of lumber price spikes. I am adding to AMWD almost every day. It hit a new 52-week low on Tuesday. Vera Bradley posted a small earnings miss yet still looks for its best full year in a long time. I bought more VRA in the middle $9s on that earnings report. It rebounded to the middle $10s before selling off again along with the broad market this week. Most people have been focusing on the major averages and wonder whether we're due for a correction. The reality is that for most typical portfolios, the correction/bear market has already happened. As of Tuesday, my 12 illustrated stocks were down exactly 20% as a group, meeting the common definition of a bear market. If I've learned anything in more than four decades of investing it is that it pays to buy, or add to, positions in healthy companies after large selloffs. The math of asymmetric returns is immutable. Recovery to previous share price levels more than makes up for the percentage declines. The COVID-panic plunge was incredibly painful while it was happening. In the end, though, aggressive buying after prices collapsed ultimately made me much richer than if the market had never broken down. What's the real message from all this? Stop worrying about market timing and whether the major indexes will finally see a long overdue 5% pullback. Most stocks suffered that drawdown long ago. Many fine companies are now available at huge discounts to both their true values and where they sat just a few months ago. Don't waste the chance to buy while they are on sale. Over the longer-term everything gets back to its proper valuation. Making the best gains means getting into them before the crowd gets wise. Once you own bargain stocks, simply have the patience to wait for things to get back to normal. Your portfolio will thank you later with much higher account values.

Stop Worrying About Market Timing

Many fine companies are now available at huge discounts to both their true values and where they sat just a few months ago. Let's take a look.

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