“We do not have, never have had, and never will have an opinion about where the stock market, interest rates or business activity will be a year from now.”
—Warren E. Buffett, the world’s most admired, least imitated investor, in his annual letter to shareholders, February 28, 1989
This is the biggest debate in the investment field nowadays going on, “what is the correct method for investing Time in the market or Timing the market?”.
The following chart is always discussed to prove that Time in the Market is better than Timing the Market
according to this chart, if you miss 10 best days, your returns will be reduced by almost 40%, if you miss 20 days, your returns will be reduced by almost 67%, and if you miss 40 days, your entire profit will have vanished, and returns will be -ve.
All this calculation remind me of my childhood quiz.
Where is the ₹1/- gone?
Once three friends met and went to the hotel and had tea and snacks. After having snacks, the waiter gave a bill of ₹100/- which was paid, but at the cash counter, the cashier found a mistake totalling ₹5/- so corrected the bill and returned it to the waiter.
The waiter thought about how three friends will share ₹5/-, so he kept ₹2/- with him and returned ₹3/- to them.
Now the quiz begins.
Friends have paid 100-3=₹97/-, and the waiter had kept ₹2, so their total is now 97+2=₹99/-, but they have paid ₹100/-
Where is the ₹1/- gone?
The one, who can solve the quiz, will understand my post easily.
All the calculations done in the above chart are based on daily returns and assumed that we are buying and selling daily. Used Timing the market to prove Time in the market is better.
First of all, we will see the different definition of timing the market by different people depending on the theory adopted
“Timing the market is an investment strategy where investors buy and sell stocks based on expected Price Fluctuations.“
This is a very old fashioned and less effective strategy. There is a big risk involved in this theory we can see in the definition itself.
High Risks of Timing the Market.
As you can see, there are big risks in attempting to time the market. In some cases, as with some events, seeing there is a clear path to profits. In other situations, as happened with the investors looking to profit from an overreaction are left with a loss. Because there is a lot of risk in attempting to time the markets based on assumptions, never invest more than you can afford to lose.
If you time it right, you can walk away from a market timed trade with a fat profit, but in some cases, you will end up holding a loss. If you invest well and limit your exposure, earning small profits from ebbs and flows in the market is a possible route to investment success.
Then what to do? Does it mean that Timing the Market is wrong?
No, there is always an alternate way to do the thing a better way. For that, you have to think out of the box and redefine the strategy. The new definition would be like this.
“Timing the market is an investment strategy where investors buy and sell stocks based on Risk Assessment.“
There is a big difference between trading based on Risk Management and Market Fluctuations. When you are doing Risk Management, you might not be a winner at the peak of the Bull Run, but your investment will be safe while disruptions in the Market.
Warren Buffett is also saying the same thing differently:
“In investments, you have to first survive in order to succeed“
– Warren buffet
The investor is always willing to take the risk while talking but, at actual, when the time comes, even though he has not spoken, will prefer to have a safeguard against disruptions in the market.
The investor always wants big returns but never willing to lose a single pi.
One most powerful lesson should be kept in mind that:
“The strategy that chases after returns will always lead to big trouble.”
SAFETY = RETURNS ; RETURNS = RISK
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