Markets

Timing market risk

“Is this the right time to invest?” “Where should I invest in current times?” These are common questions people ask. Basically, they are asking questions related to timing the market. Firstly, let me be honest, no one knows the real answer. If anyone knew the real answer, he would be the richest person.

Role of emotions

The risk of timing the market comes from the fact that there are too many parameters plying in the market simultaneously. Some of these could be genuine facts, say, for example, an announcement by the government on demonetisation.

Invariably, markets over or under react to such announcements. Emotions play in the minds of investors and reactions are based on those emotions. Investments should never be undertaken based on emotions. Let us look at our own self. When an announcement about demonetisation was made, what was our state of mind then? How has it changed over a period of time? And, what is it today?

Leave aside our mind, in the market, emotions of a large number of people are plying simultaneously. Not only that, there are emotions and reactions over many known, unknown and assumed parameters. If we keep making and modifying our investments based on these emotions, what will happen?

Guesswork

Market timing is like guesswork. Secondly, our own requirements are not necessarily in congruence with the situation within the market. Suppose there is a marriage coming up in the family of an investor. If seven or ten days before the marriage, there is a crash in the stock or gold market because of some harsh policy announcement by the government, then how many of us will cancel the marriage?

Causing havoc

A few years ago, a middle-aged investor consulted me. He had invested a large amount of money in the stock market; this money was earmarked for his daughter’s higher education abroad. He was hoping that the market would pick up and at an appropriate time, he would be able to liquidate his investment and fund the expenses. Unfortunately, he never got the opportunity. He was very wealthy and could easily manage to arrange for the money from some other investments. But all of us may not have that luxury.

Logically, we should time our requirements, not time the market.

Guessing it right

Last year, I was addressing a gathering of management students. One of the girls from the audience asked me, “Gaurav, I am always able to make investments at the right time but not able to exit at the right time. What should I do?” She further continued, “I purchase at a very good price but after that, the market falls.” What she did not realize was that success in market timing required the investor’s predictions to be right twice - once at the time of purchase and once again at the time of sale.

Guessing right once is difficult enough; doing it twice is virtually impossible. Some people may be able to do that once in a while but to keep doing it always is impossible. Also, being successful in timing the market once in a while is more likely to be a fluke then any actual skill. While timing the market, we end up misinterpreting a fluke as skill and then repenting.

In reality, actual returns are dependent on how long we stay invested. What matters is ‘time in’ the market and not ‘timing’ the market.

HDFC Bank IPO took place in March 1995. The face value of each share was ₹10. Today, after two stock splits, the face value is ₹1. We can check the market value today. Many argue “how many of the IPO investors are still holding on to the original shares. Personally, I know many of them. However, that may be rare but let us accept the reality, only few generate immense wealth by investing in equity investing.

Experience does not stay

Late Parag Parikh, renowned and respected intermediary in equity market and establisher of PPFAS Mutual Fund, often used to say “unfortunately in equity market, experience does not stay”. According to him, every time there is a rally in the market, new set of investors enter. They feel they are investing, actually they are punting. They say they are long-term investors but in reality they are not. Often in downturn, they exit and never return back. In next upswing, a new set of investors come and the same story gets repeated.

Only those who continue to stay invested learn from the cycle and capitalise on their experience over very long term. Equity investing, or for that matter any form of investing, is mind game and not money.

(The writer is a financial planner and author of Yogic Wealth)


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Printable version | Jul 3, 2022 11:12:25 pm | https://www.thehindu.com/business/markets/timing-market-risk/article65595889.ece