With the rapid rise in value of the crypto market to more US$500 billion as of December 2017, many are calling cryptocurrencies a bubble simply by looking at the chart that shows prices rising substantially. However, it is important to understand that a bubble cannot be determined with reference to a steep rise in price. Rather, there is a bubble if the price is greater than the intrinsic value of the asset, and cryptos, I will argue, do have very high potential intrinsic value.
I am mostly a dividend investor who invests in ETFs that pay high dividends. However, lately I have been setting aside a portion of money to try time the market. I see the main benefit of market timing to be capital protection. If the markets go down, you want to deleverage and derisk your portfolio as fast as possible.
Basically I can detect a lot of euphoria in the market right now, and it looks like there is a bubble (in my opinion). All this reminds me of a quote from the great George Soros:
“When I see a bubble forming, I rush in to buy, adding fuel to the fire.” ~ George Soros
When a bubble forms, it is best to stay invested because this is when demand is strong, and if you are invested and highly leveraged, you will make a lot of money. The key is to monitor the markets carefully so you sell just before the market crashes. In my opinion, this is why direct property is the worst investment.
If the 2009 property crash happens again, it may takes months to sell a property, which is too late when the market is dropping. Liquidity is very important. The benefit of using shares and ETFs is that they can be sold instantly with your smartphone. You can get out quickly and cleanly.
For me market timing is about downside protection. When there is a bull market, it is best to be able to capture all the gains, so being leveraged is best. However, markets go up and down, and given all the money printing and stimulus, I feel we are highly likely to hit a massive market crash soon. I have been looking at the PE ratio of the S&P 500 throughout history and how it goes in cycles. We are reaching a stage now when the PE ratio for the S&P 500 is at historic highs.
However, you don’t know when a bubble will pop, if ever, so it’s best to be long and leveraged to capture all the profit while everyone is exuberant, but when the market goes down significantly, you need to get out before others who are leveraged start to get their margin calls, and then the losses will be transferred to the buy and holders and permabulls. It may be the case that, rather than a crash, there is massive money printing, which will lead to inflation, which may prop up the bubble but hurt the average man through higher cost of living. Because of this, it is a good idea to be invested in stocks, including gold mining and commodity stocks.
In my opinion, there is nothing wrong with market timing. Even if you make less money because you are not fully invested when the market rallies, I see market timing as an insurance policy against a massive crash that could wipe out everything. Imagine working your whole life to amass a massive portfolio of stocks and property and then when you’re old and about to retire suddenly the stock and property markets crash and you lose 70% of your wealth. Simply monitoring the markets and selling when things start to go down can prevent all that. The markets may rally right after you sell, but the opportunity cost of that, I think, is nothing compared to what you could have lost.