Timing the Bottom: Two Perspectives

I have always been a contrarian investor and close follower of Warren Buffet. Some of my favorite quotes by him (often known as Buffetisms) include “If you like a stock at $8, then you should love it at $6” and “When others are fearful, be greedy; when others are greedy, be fearful.” Such logic and wisdom has led me to love turnaround stocks, or for the purposes of this blog post, commodities. After the Great Recession, commodities experienced a tremendous rise in prices like many other assets and enjoyed years of gains. Recently, however, commodities across the board have sold off. Many commodities are even hitting fresh 5 year lows trading around the same prices of 2009. Each commodity has its own story for its decline such as the major oversupply of oil and OPEC refusing to cut production – sending crude from $100 a barrel to $45 a barrel real quick. But what all commodities have in common is that their prices are in terms of U.S. dollars. Therefore, the recent rise in the U.S. dollar has put downward pressure on commodity prices in general. But with prices so low, is it time for a rebound or is there further selling to go? Moreover, should individual investors even be concerned with such a question?

An article by Leslie Josephs of the Wall Street Journal discusses how the recent plunge in commodity prices serves as a buying signal to many investors. The article cites many investor sentiments, that I share, such as crude being an attractive buy at current levels as half of the world’s production is not profitable at current levels. So my long term views are that many commodities are oversold, and I believe in attempting to enter the market at the proper timing. For example, although I view the broader market commodity indexes to rise long-term, I have also been short gold at $1,300 per ounce via calls expiring in February. I believe that if you do you due diligence and invest without emotion, you can be a successful investor. Furthermore, although timing the market may not be plausible, being familiar with general price ranges and entering at the right moment is feasible.

Many, however, will disagree with my thesis. In Burton Malkiel’s A Random Walk Down Wall Street, which can be purchased here, he discusses how Wall Street behaves more like a random walk (or stochastic variable for those familiar with stochastic calculus) than following patterns or what not. Malkiel does cite that the market does experience momentum, as positive (or negative) earnings are not reflected in the share price immediately, but rather gradually over a period of time. Furthermore, he believes that one cannot time the market, denoting poor performance of fund managers relative to the benchmark index. Malkiel actually suggests a buy-and-hold method of an index fund as the best way to grow and protect capital. While I do not disagree with Malkiel, I also believe that if an investor is confident and closely follows the market, they may be select times when he can outperform. Definitely not all the time, but on a few occasions this can occur. Which is why I agree with the buy-and-hold index fund mentality for a large portion of personal investing, but some powder such remain dry for speculative play. Furthermore, since that small portion of your portfolio would be speculative, I would recommend buying options, which has a leverage factor and added timing component due to the option’s expiry.

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