Time the market Or Spend time in the market?
Major events, significant changes, disturbing disruptions more often come unannounced, yet human desire always has been to know, to capture, to postulate the Unknown, the unforeseen, the forthcoming.
Seldom Humanity, human spirit, human behavior learns to let go of things, which are uncontrollable, which are unpredictable, which are inestimable. This unknown, thus have always captured the fancy of mortals whether scientist, whether capital market participants or even an average Joe, who is interested in knowing what lies ahead for him in life.
As Lao Tzu, the famous Philosopher of the 6th Century once said, “Those who have the knowledge, don’t predict. Those who predict don’t have knowledge.”
Knowledge also means knowing what can’t be known, what can’t be foretold, what can’t be seen.
The advent of the internet or commercialization of the World Wide Web in the 21st century has made things even worse, where the distinction between real and unreal, genuine and fake, truth versus lies has diminished. Humans, who created robots and algorithms, react first and research later to assess the legitimacy of the information on which one (individual) or the entire marketplace reacts.
Not now but since humanity evolved thousands of years ago from apes, suspicion, fear Pessimism sells better. It was a good mechanism to assess threats and build a protective ecosystem to survive. The world has advanced, however, instincts haven’t. Also, destruction, setbacks, decay happens rather rapidly as compared to growth which is slow and gradual.
All that is articulated above not only holds good for mankind but its subset as well — The Capital Markets and its participants.
It’s a rather established fact that amongst all asset classes (Debt, Gold, Real Estate, Equities) which largely legitimately available for saving and investing surplus fund; equities, high-quality equities, large-cap equities have the potential of generating 3X of inflation on an ongoing basis over long periods of time. However, in short term, equities behave erratically and thus remain risky, remain volatile, and remain unpredictable as any piece of news, information, even estimation by a public figure can trigger bulls and bears to come loggerheads.
Then what’s the simplest way to create Wealth in a Simple, yet Sustainable manner?
Age-old adage — Spend time in the market, rather than timing the market.
With no gimmicks, no data management, looking in the rearview, one can observe that in longer-term the returns generated by large-cap, mid-cap or small caps more or less equalizes. Then why take the excess risk if patience is by your side?
The table shows, investing in Sensex would have given one ~ 9.8% compounding over a 10 year period, mid-cap would have given an ~ 11% CAGR whilst small-cap investing would have given an investor a ~ 9.5% compounding growth.
This growth is lesser as compared to the previous decade as India has rather grown at a moderate pace in the last decade (2011 -2021) as compared to 2001–2011. Also, increased regulation, higher transparency, electronic systems have curbed or rather reduced the information asymmetries.
Technology has enabled free and easy access of Information to every market participant irrespective of the pocket size, one has while investing, irrespective of the net worth, irrespective of the connections with closed corridors. Information, the flow of information, and nuances of information are the same for everyone thus a powerful few now may not be able to manipulate or use the information to one’s advantage.
The market regulator also brought transformative changes in the last decade which ensured the safety of interest of small investors is maintained at all points in time.
In a nutshell, what has changed from the first decade of the 21st century to the second decade of the 21st century are
1. Regulatory Reforms
2. Technology platform enabling ease of transaction
3. Reduced transaction costs
4. Level playing field for Small & big investors
5. Streamlining of Information Asymmetries.
What it brings is a Promise of a Massive Bull run in the Third Decade of the 21st Century, led not by FPIs, not by Institutions, not by large Investors but by commoners, the RETAIL Investor directly learning and earning from the markets.
Unfortunately, most people will continue to remain perturbed, uneasy, and underinvested in the market.
Investors don’t lose Wealth by market correction, they lose Wealth by remaining Underinvested in the markets.
The Curious case of Equity Investor: Equity allocation is done, the intent is there but fear of entry acts as the biggest roadblock to embark & conquer the Journey of a Millionaire to a Billionaire.
It’s Interesting that in the last 10 years (nearly 2520 days, 252 trading days on an average in a financial year) if one had missed only 1% of the days (25 days) in the market which all were unpredictable, the Sensex returns for 10 years would have reduced from 255% to 155%.
In other words, one misses 1% of the day being in the market and one will lose 100% absolute returns. An Analysis of the top 10 days shows, almost none of them could have been predicted.
Investment in Equities is all about Emotional Intelligence and very little about mere Intelligence.
And if you have no control over your emotions, then you have no right to benefit from the Investment Process and be part of the Mother of all Bull runs, roaring to encapsulate the attention of the biggest Investors around the Globe.
Are you ready to take the Plunge?
