Investing Value of Time & Space

by | Sep 22, 2015 | Archives

We have three dimensions of time and space.  That’s really all we have.  At least, that’s all we know.  The time space macro view doesn’t help investors much.   But specific measures of an investor’s time and space can help select good value shares.  Being well timed is the essence of good value investing.  Knowing your time horizons (time) can help you decide how far (space) your investments can go.   Value investing requires knowing your time, not timing and in setting your investment’s space.

Take for example shares of TFC Corp, an Australian company that grows and process rare sandalwood.

TFS Corp chart

Chart from au.finance.yahoo.com

The Lunacy of Timing

TFC Corp. shares a thinly traded, highly volatile shares.

On February 04, 2014, a message posted at this site entitled “A Most Valuable Investment” recommended an investment in TFC Corp. (symbol TFS), the soil to oil sandalwood growing, processing and retailing company.  I liked this company’s ten year prospects so much that I wrote a report with my friend Candace Newman, an essential oil expert, on why the investment made sense.  We published the report at Amazon.com.

Screen shot 2014-01-28 at 5.28.13 PM

Sandalwood Investment Report

The price of a TFC Corp. shares when that report was issued was $1.13.   Although I recommended a ten year time frame, just six months later the share price had reached (10 September 2014)  $2.22.  That’s a  95% gain in half a year!  95% gain would not be all that bad in ten years.

However by November 20, 2014 the price had dropped to $1.21 per share.  That’s a 45% loss in just over a month!

Wait a minute….actually it’s a 7% gain in nine months.

The only difference between the loss and the gain is time.

Time rolled on and by May 18, 2015 the TFC Corp. share price was $1.95.  That’s a 61% gain in just 6 months, or a loss if you look at it from the September 2014 frame of time.

Then the price dropped again to $1.42 by July 2015.

Now in September 2015 the price per share is $1.53.  That’s a 31% loss from the high of a year ago or a 35% profit from the February 04, message.

The only difference in any of these profits and losses is time.

Imagine the fortune we could have reaped if we could really control timing.  An investment of $10,000 in February  2014 bought 8,849 shares.  Selling in September 2014 at $2.22 brought $19,644.  Those funds, reinvested a month later at $1.21,  bought 16,235 shares which sold six months later (May 2015 at $1.95 per share) for a gross of $31,658.  Buying again in July at $1.41 bought 22,295 shares that are worth $34,111 at the $1.53 per share price.

Of course anyone that good at timing would have also sold the shares short on the way down and made even more.

The problem is, no one can really do that.  No one is that good at timing.  We are mere mortals locked in the NOW time and space.  History shows that market timing simply does not work because the future (and share prices) are fogged by the mists of  time.  In fact my experience from working with thousands of investors suggests that most investors would not buy at the $1.13 price and sell at $2.22.  The frailties of human nature mean that most investors are more likely to  have jumped in around $2.00 a share and then bailed out as the share price slammed back to $1.21.

Trying to time price movements of shares simply does not work for most of us as investors.

Using trailing stops on shares as volatile as TFS  isn’t very effective either.  I asked Dr. Richard Smith of Tradestops.com.

He is the authority on how to use trailing stops.  His reply was:  I took a quick look at TFS Corp. for February  2014 when you recommended the shares.  At the time the Volatility Quotient was 35%.  Currently the volatility quotient is about 41%.  It does look like the Smart Trailing Stop triggered on the drop from $2.22 to $1.21 from Sep to Dec. That was a drop of about 45%, which exceeded the VQ of about 40% by early December.  So while the TradeStops system would have helped folks understand the risk in this case, I’m afraid that it would have stopped folks out around break-even if they had gotten in at $1.19.  I do think that once you start to see VQ’s in the 40% and above range that it’s good to think of the investment as likely being an all or nothing bet.

Richard agrees with my experiences that investors who try to time investments generally do so backwards, they get in and out exactly the wrong way.  They buy high and sell low.

He said:  The reality I would also add is that a big part of using a semi-algorithmic approach to investing is addressing the “behavior gap”.  One of the key questions is COULD an investor have lived through the moves or might he/she has thrown in the towel at the bottom of the violent down move… not made any profit whatsoever (maybe even taken a loss) and then missed the ensuing up move.  Much of my work is based in how investors REALLY behave and offering them alternatives to the bad ideas of their own that they too often succumb.

My general advice to readers is forget about investment timing.

Spend your time understanding your time horizons instead and then select good value shares that fit into that logic.

Ask yourself.  How long before I need this money?  Will I need this money to produce income? If so when?

Finally, after you understand your time, control your investing space.   Set your targets of space.  The first space target is, how far can a share price fall before we sell?  The second space target is how far will we let the share rise before we set a stop loss?

Investors who focus their time on answerable questions about their investing time and space have greater safety, increased profit and less stress than those who engage in market timing.

Gary

Learn more about Dr. Richard Smith and how to use smart trailing stops here.

Or hear from Dr. Smith about Smart Trailing Stops at our October 17-18 Value Investing Seminar.

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