We have heard this phrase many times that time in the market is more important than timing the market. Time and again we hear this from many in the investment industry. Instead of blindly following the saying without putting much thought, let’s delve deeper into its wisdom and understand how relevant it is in the current scenario.
In the last two decades, rising income levels has provided resources, education provided skill-sets and rapid advancement in technology has democratized information to many people which was earlier available to very select few. This has resulted in severe competition in the investment market to generate decent returns. It has also made the business environment very competitive where we are seeing significant disruptions. And if the businesses aren’t innovating, they are losing out to innovative start-ups.
Two decades ago, investment in real estate or equity mutual funds resulted in superior returns if anyone had continued to hold on to it during different market cycles. However, with rising competition and fast-changing world, wealth creation is not easy anymore and requires constant vigilance to spot opportunities and take advantage quickly before it becomes mainstream resulting in fast vanishing delta.
Let’s evaluate a few examples to understand how time in the market would have worked for you in the following cases.
Example 1: How would have your investment looked like if you had invested in top world class banks 12 years ago on the philosophy of buy & hold for the long term?
Time of 12 years in the market destroyed the wealth by up to 99% for those continued to stay invested.
Example 2: Your investments in GOIs’ Maharatnas and Navratnas would have fared like this in Aug 2019:
Example 3: Investments in top US companies in 1972. The investment year is important. Do take notice of the PE ratios.
How could you go wrong in the companies which have dominated the global business space? Especially, at the time when the US GDP growth rate was high. (During 1970-1980, US nominal GDP grew by 10% CAGR)
Example 4: How about top quality fundamentally strong businesses in India? Investments must fare well if we buy and hold for long, right? Not always. Below is the price chart of HUL from Jan 2000 to Jan 2009. Investors just earned dividends while capital appreciation was zero.
Example 5: What if you just buy Sensex ETF or a good performing large cap fund and stay put for the long term?
Had you invested in Sensex in Dec 2007, the next 10 years returns have been ~6.5-7% CAGR? Even many good performing large cap funds produced a return of around 8% or less during that time period. Of course, this is not the return you expected from an equity investment with high risk when a low risk debt mutual fund would have given a higher return over the same period.
This establishes the fact that time in the market is not the only criteria to get good returns.
What about timing the market to create better returns? Of course, one must never look to time the market which is a speculative proposition and is fraught with significant risk. Not just it is impossible to time the market or accurately determine the movement of stock prices in the short term but can also lead to heavy losses or missed opportunities while taking away the peace of your mind.
For a time in the market to work for you, three investment aspects are essential which should never be missed. It is the combination of all the three aspects which would ensure good long term results.
1. Buying Strong & Quality Businesses: By investing in fundamentally good businesses with competent and honest management, you ensure that your investments are in businesses that are managed well in the best interest of shareholders. However, it is also important that the businesses you invest in are placed in a rising sector with good future prospects. We are all aware of significant wealth destruction caused by a few big corporate groups in India over the last decade due to mismanagement, sectoral issues, and poor corporate governance. Time in the market with investments in poor businesses surely doesn’t work.
If you do not have the time and skill set to identify good futuristic businesses, you can let your investments be managed by fund managers with a decent track record and time-tested investment process in place.
Time in the market didn’t work in Example 1 & 2 because of the selection of wrong industry or businesses with poor fundamentals and in some cases poor management.
2. Investing at Right Prices: The most important aspect of successful investment is buying at the prices which are close to fair value or lower than that. There is no business in the world irrespective of how good it is that doesn’t have a justifiable fair value.
In Example 3, the ten year returns were poor despite investing in great business because the investments made at the prices (as indicated by their PE ratios) which were much higher than their worth.
Similarly, in Example 5, Sensex was trading at a PE of 28x in Dec 2007, much higher than its long term average of 18x-19x. Consequently the next 10 years returns were disappointing.
To understand more about price vs. value, read the blog here.
Finding the fair value, however, is not an easy exercise that requires experience and deliberation on various factors.
3. Regular Review and Rebalancing: In a fast changing competitive world, one shouldn’t take any business or any investment for granted. No business is immune to market vagaries in constantly changing regulatory and competitive landscape.
Also, equity market cycles result in the movement of prices to extremes – high or low. If there is a right price to buy, there is a right price to sell. Continuing holding on to your investments when markets are extremely expensive would yield lower returns over the subsequent years.
Therefore, regular review and tactical rebalancing are important activities to generate above average returns over the long term.
So if someone tells you that you should hold your investments for the long term to generate good returns, ensure that all the above three aspects are also in place.
If you do not have requisite skill-set or don’t have time, then you should hire an investment adviser who has the expertise to evaluate fair investment valuation and has the experience, temperament and skill-set to alter asset allocation with changing market dynamics and cycles.