Why don't we call value investing "timing the market"?

Question

This question's been at the back of my mind for some time. The phrase "timing the market" usually comes with some negative connotations, or at least people say it is extremely difficult to do consistently, e.g. in this question. However, it's also widely suggested that value investing (aka "buy great companies at fair prices") works.

Considering that we only buy great companies at fair prices, why don't we call value investing timing the market? It looks highly similar. Suppose I value BigNameCompany and conclude that its stock is worth $50. The price is currently $60, so I don't buy. If the price drops to $40 in the future, then (assuming unchanged circumstances), I buy. I've timed the market, haven't I? Similarly, if the price is currently $40 and it rises to $60, because I value the stock at $50, it seems sensible to sell, therefore timing the market.

I am wondering what the fundamental difference is, if there is one, between value investing* and timing the market.

*I define 'value investing' as attaching an intrinsic value to a stock and buying it only if the current price is below that.

Answer 1

Suppose I value BigNameCompany and conclude that its stock is worth $50. The price is currently $60, so I don't buy. If the price drops to $50 in the future, then (assuming unchanged circumstances), I buy. I've timed the market, haven't I?

What you're describing is the opposite of value investing. Value investing is valuing a stock at $50, seeing that it's selling for $40 in the market, and buying it at $40. If it rises to $50 and you think it's still worth $50, you would sell and look for better opportunities to profit - you have no fundamental reason to think that the stock will rise to $60.

"Timing the market" is wanting to buy a stock (or even to invest in general), but deciding to wait until it goes down in price to buy (because stocks naturally go up and down) hoping to catch a little extra profit. The risk is that stock tend to go up more than they go down, so the odds are against you. It's more likely that you'll buy at a higher price if you wait.

Answer 2

It is true that there is often caution against "timing the market". The general phrase conveyed is often "Time in the market beats timing the market". That suggests it is better to just invest, now, and as part of an ongoing routine, instead of sitting on a pile of cash and waiting for "the perfect moment" to invest.

This advice is quite practical. In a simplest sense, it promotes enforcement of savings, to the benefit of building a good habit and starting the compounding of earnings as soon as possible. It suggests that over time, the market as a whole trends upward, and without a crystal ball to know what will happen in the future, investing sooner is likely to be better than investing 'at the perfect moment'. This advice is directed to individuals who are not 'actively trading', and for such people, standard advice would also typically be to just invest in diversified ETF's.

Picking individual stocks is not generally advised for those without sufficient understanding. At best, it takes significant skill, and at worst, it is a fool's errand to 'beat the market'. What you are suggesting is both things - picking individual stocks, only at a particular price (eg. time, as you point out).

It is not necessarily true that it is a 'bad' thing to do what you are suggesting - but at bare minimum, consider it higher risk, and requiring more advanced knowledge.

Answer 3

This is not the definition of value-investing that is used by mutual funds, investors, stock analysts, or Warren Buffet. I think Buffet was the original "value investor", or perhaps Benjamin Graham.

Value investments are common stock of companies whose worth, based on fundamentals, is generally not recognized by the market. Examples of fundamentals are price-to-book and price-to-earnings ratios.

The price on any given day shouldn't be part of your criteria for buying (and holding!) a value stock. As others said, value investing isn't about shorter-term (e.g. inter-week or even inter-month) market timing. It is the VERY opposite of market timing.

According to this Wall Street Journal article, What is Value Investing?

...value investing requires plenty of research and patience... while value stocks have tended to outperform more-expensive, faster-growing growth stocks, they often lag for years at a time... if you aren’t interested in picking stocks yourself, there are plenty of mutual funds and ETFs that can help follow the strategy for you.

The two broad categories of stocks are value and growth. Growth stocks are the exciting ones: They are expected to be profitable faster than others in the same industry, or even the overall market. Tesla is a growth stock.

Value stocks are different. They are usually companies in mature industries like specialty steel or chemicals, i.e. their products or services are practical. They might have high dividends and stable prices. In other cases, their stock price is lower than it should be, and there are specific reasons to expect the price to increase. This description, from the same WSJ article, is good:

Value investing is more focused on companies that are well established and are delivering stable revenues and consistent profits.

Answer 4

Let's use the Wikipedia definition of market timing:

Market timing is the strategy of making buying or selling decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from technical or fundamental analysis.

This is your definition of value investing:

attaching an intrinsic value to a stock and buying it only if the current price is below that.

Yes, I think so, this value investing is a kind of market timing. It fits squarely into the definition.

Maybe it helps a bit if you can explain in your question why you think value investing as you have defined is not market timing.