Last year saw ‘Andhadhun’ starring Ayushman, Tabbu at PVR cinema. Movie was Indian black comedy crime thriller. Every moment of the movie was intriguing but I was receiving frequent calls from my office so two times have to miss the film for 5-10 minutes each and after the film was over everybody was going gaga over the film, though I also liked the film but still was not able to correlate with the enthusiasm of the people.
Last week saw the film again on Television and this time I didn’t missed even a single minute of the movie and then I understood that the part of the movie which I missed were the most crucial parts of the movie and was the main reason over people enthusiasm.
So how the above story is related to Stock Market?
When I tried to connect the dots between the movie and investing I found a great similarity between the two .When I first time watched the movie I liked the film but I was not able to have full enjoyment due to missing some important moments in the film.
Similarly when it comes to stock market if we frequently moves in and out of the market we may miss some crucial time in the market with big rallies which ultimately effect our returns in big way .
A study was done in UK markets which covered a period of 30 years from 1986 to 2016 on FTSE index . The study denote that If you have invested the money in 1986 in the index and left it at that ,an investment of 1,00,000 GBP would have grown to 18,28,115 GBP that is an appreciation of 18.28 times in a span of 30 years . This shows how vulnerable returns are to whether you capitalize or miss out handful of days, something which is almost impossible to do even assuming that you are not an astrologer and have an uncanny sense of timing the market.
The above chart captures the forecast for the S& P index returns over the last 17 years along with actual return generated by the index .The result signifies huge disparity between the return forecasted and actual returns. In the year 2000,2001,2002 and 2008 the consensus forecast for the index was positive and actual returns were negative .Only on 2 or 3 occasions ,the actual returns were close to consensus return.
It shows that the entire effort of timing the market using the opinions and consensus estimates of experts is hardly likely to improve your performance.
Another angle of looking at the power of time in the market over timing the market is to look at what would happen to your returns if you had missed out on handful of real high return days.Consider the chart below:-
If you had chosen to time the market and missed out just the best 10 days during these 30 years, your accumulation would have actually halved i.e instead of 18 times the appreciation would have been 9 times.
The above chart captures the forecast for the S& P index returns over the last 17 years along with actual return generated by the index .The result signifies huge disparity between the return forecasted and actual returns. In the year 2000,2001,2002 and 2008 the consensus forecast for the index was positive and actual returns were negative .Only on 2 or 3 occasions ,the actual returns were close to consensus return.
It shows that the entire effort of timing the market using the opinions and consensus estimates of experts is hardly likely to improve your performance.
Another angle of looking at the power of time in the market over timing the market is to look at what would happen to your returns if you had missed out on handful of real high return days.Consider the chart below:-If you had chosen to time the market and missed out just the best 10 days during these 30 years, your accumulation would have actually halved i.e instead of 18 times the appreciation would have been 9 times.
The above chart is quite revealing. Over the 20 years between 1996 and 2016, the S&P 500 index has returned 7.68 % annualized compounder returns. If you wanted to time the market and missed 10 best days of index in these 20 years the annualized returns would have been lesser by 350 basis points and if you have missed the 40 best days the returns would have been negative.
So what is important, time in the market or timing the market
I would like to explain it through cricketing analogy also, In India we love and worship cricket and cricketers are god to us. Sachin Tendulkar was out 34 times on zero in his international cricket but his average in test and one day was 54 and 44 respectively.
Some days he made it very big, some days he was good and some days he was poor also in his performance but important is to stay on the pitch with proper technique which made him the greatest batsman of all time.
So if you want to become Sachin Tendulkar of investing important is to stay on the pitch of stock market
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