Is Warren Buffett attempting to ‘time the market’ by holding over $300bn in cash?

In a word, no.

I have written regularly about the folly of attempting to skilfully predict and time the movements of financial markets. It is an incredibly difficult, probably impossible, activity to perform consistently well and most investors should avoid it. One challenge I often receive when expressing this view, however, is that as all active positions require us to take on some form of market risk, most of us are market timers – whether we like it or not. We either engage in market timing or do nothing.

I don’t buy this argument – I think it falls into the trap of confusing process and outcome.  

Market timing is a very distinct investment activity that has two characteristic features – it is a decision that specifies both why something will happen and when it will occur.

It includes both the identification of a catalyst (or catalysts) and a moment. Let’s take a simple example:

‘I believe that US equities will outperform over the next 3 months as tariff concerns abate.’

This is clearly an attempt at market timing. We are predicting the cause of a price movement in an asset and when it will occur.

Let’s contrast this with another scenario. A value-orientated equity fund manager is holding 20% in cash because, after applying their investment process, they are unable to identify enough attractive opportunities.

This is not market timing. The fund manager is saying nothing about what will cause prices to move nor when that may happen. It is perfectly reasonable to be uncomfortable with an equity fund holding a high cash weighting and the risks that stem from it (outcome), but it doesn’t mean that the decision that led to it is an effort to time the market (process).

Although the fund manager is not seeking to time the market, they are exposing themselves to the same risks as if they were. We can have two identical investment positions where one is the result of market timing and the other is not – investors can carry equivalent risks but for entirely different reasons.

Take two multi-asset portfolios:

– Investor A is 5% underweight US equities because they believe the next jobs report will cause an equity market sell-off.

– Investor B is 5% underweight US equities because they believe that, on the balance of probabilities, rich valuations are likely to lead to lower future returns.

The critical point is that intent matters. We don’t simply need to be comfortable with the risk being taken, we need to be comfortable with the reason that the risk is being taken. Investor A is attempting to time the market by forecasting its movements; Investor B is taking the same position but is agnostic on when and why something might occur.

Just because something isn’t market timing (as I would define it), does not mean that it is a good idea. We might be uncomfortable being subject to significant market risk, or we might believe that a process being adopted is weak or unconvincing. There are lots of ways to make bad investment decisions – market timing is just one of them.   

All active investment views are subject to the chaotic fluctuations of financial markets, but only in some are we explicitly trying to predict them. Given how hard it is to get right, it is important to know market timing when we see it.

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My first book has been published. The Intelligent Fund Investor explores the beliefs and behaviours that lead investors astray, and shows how we can make better decisions. You can get a copy here (UK) or here (US).