timing the game

The year behind

A good year has ended for the markets, that is, for the Dow (up 26%) and S&P-500 (up 31%).

And not so good for the Sensex and Nifty:

The hindsight game

It would have been better if we had invested in the US markets at the start of 2013. It was that easy; Was it? 

Hindsight plays a dominant role when it comes to giving advice; that is one more reason not to fall prey to investment advisers. They are as weak or as strong as we all are. If they had special abilities, they would be rich and too knave to offer help anyway. 

The timing game

It will be interesting to see if one can ever time the markets, that is, pick the right time to buy or sell investments. The game is too complicated to do that simply because there is too much of emotions of both individuals and firms involved out there to make a perfect timing.

I set out below some indicators to find out if we can make better investment decisions. At the beginning of Jan-1994, the Nifty was 1083.74; it ended at 6304 on 31 Dec 2013. Over 20-year period it returned 6.76% p.a. You can call it after-tax return since long-term capital gains on stocks are tax exempt in India. Still, not that great considering government bonds, AAA bonds and inflation.

It would be different if Nifty was bought and sold at different time intervals.

The annual game

The year-on-year change highlights changes in market values from one year to another:

The return for the year 2008, for instance, was negative (52)% compared to 76% for 2009. Over 6-year period from 31 Dec 2007 to 31 Dec 2013, Nifty has not moved much. The haphazard annual movement is not surprising given short-term reactions to events. We can then conclude that timing the right year for buy or sell decisions is difficult if one year is the investment horizon. A monkey can yield results not significantly different from any individual on average.

The 3-year game

The 3-year change highlights changes in market values over the 3-year investment period:

The return for 2007 (i.e. buy on 31 Dec 2004 and sell on 31 Dec 2007), for instance, was 43%. However, for 2013 it was close to 1%. It is evident that there are some good years and some bad years. Yet, not good enough for investment decisions.

The 5-year game

The 5-year change highlights changes in market values over the 5-year investment period:

The return for 2007 (i.e. buy on 31 Dec 2002 and sell on 31 Dec 2007), for instance, was 41%. For 2009 it was 20% and for 2012 it was almost negative; and for 2013 it was 16%. Although, not fully conclusive, I view this game as the better one. 

The 10-year game

The 10-year change highlights changes in market values over the 10-year investment period:

The return for 2007 (i.e. buy on 31 Dec 1997 and sell on 31 Dec 2007), for instance, was 19%. We can see that the returns are quite steady each year. For 2013 it was close to 13%. 

The hindsight again
We know that these are based on past years data, and with the power of hindsight we can argue that the 10-year game is the best game to play. The longer the duration, the lower the risk, and hence it is safer to play the game. This is true at least for those investors who are not skilled to invest based on business analysis. Index-buying is their best ally.

For those who are skilled or interested in learning I would argue that selective stock picking over 3-to-5-year period should yield decent results. This is because for the markets to be efficient (i.e. for the price to catch up with value) it takes time. If the business is of high quality, longer timeline should yield much superior returns. I am ever ready to play this game.

The long-term game 

Just if you are interested here are the returns for each year on a to-date basis, that is, buy in Jan-1994 and sell each year.

The return for 2007 (i.e. buy in Jan-1994 and sell on 31 Dec 2007), for instance, was 13%. For 2013 it was 9%. Buy-and-hold is always a good strategy; the caveat is, you have to either buy the market itself (i.e. the broader index) or a good business. 

If you ever bought a bad business and held on, the results will be disastrous, and hardly surprising. A bad business is the one which not only dissipates capital, but also needs more capital periodically just to continue as a going concern; in short, the more you pour in, the more it leaks out. Stay away from it.

The story so far on the markets

Market inefficiencies

How attractive is the market
What moves market
Implied market rates
Falling prey to markets
The dancing Dow
The 1000-6000 market
The drunken steps
Future to the back
Nifty and the players
Need for a broader index
Reflections of the market
Markets on to something

Concluding thoughts

It is futile to time the markets; it wastes energy, and takes a toll on health; it defies any reasoning. It is far better to think and act like a rational business owner; or at least we can try.