Hardcover: 240 pages
Publisher: Wiley; 1st edition (April 4, 2003)
Language: English
ISBN-10: 0471430161
ISBN-13: 978-0471430162 Ben Stein and Phil DeMuth managed to distill 4 crucial factors in order to time the market. Their research is based on many assumptions like taking a long-time frame, S&P 500 index (US-based analysis), 15-year moving average, regression-to-mean, mid to large cap stocks etc. I like their pro-statistical stance on the latter and tend to see the market behaving as such as long there are no major upheavals.
I conclude from reading this book that market-timing is impossible for short-term trading and possible for a long-term view. It was shown using historical data that market-timing using the 4 factors beats dollar-cost averaging, these can be warning indicators of imminent slump in the market. All 4 values are compared with their long-term averages and are as follows:
1. Price
Buy low. We compare this figure to its long-term average. (High if above the average) Relevant using regression-to-mean.
2. P/E ratio
Buy low. Also compare to its long-term average.
3. Dividend yields*
Buy high. This is reasonable when you are looking at large and mid cap stocks. It is an indicator that they have earnings to distribute. For penny or growth stocks, companies usually channel their surplus for growth instead.
4. Fundamental value (using Tobin's Q = market value/asset value here, or alternatively price to book-value)
Buy low. Note that Tobin's Q only account for tangible assets while intangible assets can make the company worth a lot more.
The rest of the book calls for diversification and does some analysis on some of the crucial periods from before the Great Depression till after the Internet Boom. There is some discussion on bonds and technical notes on risks as well. A good read especially when their theories are supported by the charts generated.
Some of the current S&P500 ratios are updated here.
http://www.yesyoucantimethemarket.com/
