Timing the Markets (vs) Time in the Market

The ability of Mr. Market to contradict perception held by market participants, who themselves constitute it, continues to be a great mystery. Ever since the emergence of financial markets, this elusive trait of Mr. Market has continuously caught investors on the wrong foot and, in the process, cost them billions.

This has been made possible by the fact that crowd, which is much influenced by fear and greed, continues to make the same mistake again and again. Also, the fact that the brunt dealt by such blows to one generation is lost on the younger generation, does not help the cause.

As an investor, our goal is to try to ensure that we do not end up committing the same mistake. Following the advice of Santayana, who observed, ‘those who do not learn history are condemned to repeat it,’ let us reflect on what successful investors have done to deal with this problem.

Benjamin Graham answered it best when he said, ‘in the short run, stock market is a voting machines and in the long run, it is a weighing machine.’ There is much wisdom in this one stanza than in many a book on the subject of investing.

It is like you concede defeat to Mr. Market in the short run, yet emerge as a surprise winner in the long run. It requires a sound temperament to accomplish this task but it is well rewarded.

A natural consequence of this lesson is to not succumb to ‘timing the market’ syndrome and follow the ‘time in the market’ rule towards investing.

In a nutshell, ‘time in the market’ rule says that if you appreciate the fact that predicting market movements is not a rational course of action then it becomes much easier to stay invested for longer periods of time, which is the cornerstone on which wealth is created in the stock markets.

Any investor following this rule would have reaped the benefits of this rule immensely during the last few months as Mr. Market caught the investor community on the wrong foot once again. It will happen again but you need not worry much, if you can remain equanimous.

Let me end the write-up with Rothschild’s Law. The legend goes like this:

‘When asked if there was a technique for making money in the stock exchange, Nathan Rothschild said, ‘there certainly is. I never try to buy at the bottom and sell at the top.’

Is this a new bull market or should we sell everything and stay liquid?

I have been harassed by market timing clients lately. All of them want to invest in equities but they want to do it at the market bottom when the economy starts to revive. One of the clients was incredulous (20 to 25 days back) when I said that I was fully invested. He said “Come on don’t be ridiculous, everyone knows that the economy will be in a bad shape for some time to come and markets will come down”. Now he is in a dilemma. Markets have run up 25% and he has been selling all this while. His question now is should he sell more or should he buy so as to not miss out. I wish I had an answer.

Warren Buffett wrote the following in his 2008 letter to Berkshire shareholders.

“Neither Charlie Munger, my partner in running Berkshire, nor I can predict the winning and losing years in advance. (In our usual opinionated view, we don’t think anyone else can either.) We’re certain, for example, that the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell us whether the stock market will rise or fall.”

That got me to look at some past recessions (as usual, the US data is more readily available than Indian data). Here is a link to an excellent post on how long recessions have lasted and how markets have done in those recessions. 


In 8 out of the 14 recessions in the US a new bull market started well before the recession ended. 

Let us look at India and a financial crisis that India was facing in 1991. India had to sell 20 tonnes of gold in May 1991 and to pledge another 47 tonnes in July 1991 to raise foreign exchange to meet its import needs. (Please bear in mind that Dr. Manmohan Singh had not yet achieved the rock star status. There were questions regarding the survival of the government and of the country itself). So what did the stock markets do during this time? Crash? Hardly. The BSE Sensex rose from just under 1,000 on January 1, 1991 (999.26 to be precise) to 1275.23 on July 1, 1991, a gain of 27.5% !!!

This is not to say that we are definitely in a bull market or that share prices can only go up. If I could predict the weekly and monthly market movements, why would I work at all? I would be owning an island somewhere and chilling out, just buying when an upmove was about to begin and selling out when the downward trend was about to start.

As individual investors and as investment managers all that we can do is to select good businesses at attractive valuations to invest in and then let the businesses prosper over the long run. In the interim if Mr. Market overvalues those businesses significantly, we use the opportunity to sell. There is no exercise as futile as trying to predict the markets, economy or election outcomes.

(PS – BSE Sensex was at 1957.33 on January 1, 1992, an increase of more than 95% over the level of January 1, 1991. So much for predictability)

Let January be over …….

I have had interactions with a lot of investors for whom I have very high regards over the last month. One interesting thing that came out in these interactions is the very strong urge for market timing. Arpit has mentioned this in the previous post and I am just adding a couple of points here. One refrain last month was that the December quarter results are expected to be very bad and hence January will provide a good opportunity to buy after the bad results.

Well January is over now and the market has not exactly collapsed from December. What now? The market timers will always have events on the horizon. Vote on account, March quarter numbers, elections etc.

The most surprising case was of an investor who says he is finding stocks that can be 4 baggers in 4 years and he is holding on to 55% cash in his portfolio !!!!