Consider this: Nifty was at 1480.45 on 30 December 1999. It was trading at a PE multiple of 24.09 and PB multiple of 4.30. The market was yielding dividends of 1.02%. Of course, it was trading at a very high price compared to value. In fact, it was looking at a bubble which was about to break; the market was at such a peak price that the implied equity risk premium was the lowest. Any sensible investor would not buy into these levels.
And bubble break it was. By July 2001, Nifty was trading at 1053.40 with a PE multiple of 14.92 and PB multiple of 2.33. Frankly, for an investor there was value everywhere until 2003. The opportunity to make money was clearly visible.
In October 2003, Nifty was trading back at December 1999 levels. That means, for someone who bought at the beginning of 2000 and held through until 2003, there was zilch. Just why would anyone buy the market at such high prices? It does not make any sense, does it?
Well, it turns out that considering the opportunity costs it did make sense to buy the market at that time provided the investor held it through today. On 12 June 2015, Nifty closed at 7982.90. The annual return for the investor would have been close to 12%. This return is actually post-tax since long term capital gains are not taxed in India. I don't think any other alternative investment would have returned better than this.
The moral of this story is that time in the market is more important than timing the market. Equity investment is actually a low risk, high return game, as opposed to the more conventional high risk, high return.
Even buying in a high-priced market would have yielded superior returns if the buyer had the qualities to admit first and then correct the mistake by letting the time take its course.
If the investor does not understand or has no interest in the game, it is much better to keep buying the index over a long period of time, rather than believing that he can beat the market. If he had done just that, i.e. bought the index every month from January 2000, the annual return by now would have been close to 15%, rather than 12%. This return should be more than adequate for the time and effort put in.
If the investor does not understand or has no interest in the game, it is much better to keep buying the index over a long period of time, rather than believing that he can beat the market. If he had done just that, i.e. bought the index every month from January 2000, the annual return by now would have been close to 15%, rather than 12%. This return should be more than adequate for the time and effort put in.
If the investor wanted better returns there was another way: A more sensible investor could have, and should have, bought the market in 2003 and earned close to 19% after-tax returns. That's the way this game should actually be played.
Just imagine, how easy it is to make money provided one behaves in a manner that is required; emotions have no place in this game. The markets supply enough opportunities for us to act, but these are not available on a routine basis. We should have the patience to wait for the right time before we strike. Alas, not many are equipped to do this simple, yet powerful act.
Eventually, market prices follow fundamentals of the business:
Of course, nothing like picking stocks: Individual stocks give much better returns if the investor is ready to put in efforts in analyzing the business, its price and value. Equities are actually low risk, high return investments. Unfortunately, not many understand this, and more evidently, not many have the right behavior that is required to play this game.
Just imagine, how easy it is to make money provided one behaves in a manner that is required; emotions have no place in this game. The markets supply enough opportunities for us to act, but these are not available on a routine basis. We should have the patience to wait for the right time before we strike. Alas, not many are equipped to do this simple, yet powerful act.
Eventually, market prices follow fundamentals of the business:
Of course, nothing like picking stocks: Individual stocks give much better returns if the investor is ready to put in efforts in analyzing the business, its price and value. Equities are actually low risk, high return investments. Unfortunately, not many understand this, and more evidently, not many have the right behavior that is required to play this game.
If investing was high risk, I would avoid it. Thank heavens, it is not, but speculating is.
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