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Opinion

Timing the market is a Good Thing

Most investment analysts and advisors tell you, “Don’t try to time the market”. And in the same breath they suggest a systematic investment plan (SIP) – the idea being that you invest the same amount regularly so that you don’t have to time the markets.

Why are they so much against timing the market? Because they don’t believe that you, a lay investor, have anything to gain by timing the markets. Some studies like this one from Fidelity suggest that the difference between timing the market accurately, and not timing it at all provides very little difference. It actually says that if you invested in the market at the ABSOLUTE top versus at the ABSOLUTE bottom of every year, continuously for 22 years, and compare the two investments, you will get: 8.6% p.a. for investing only at the tops (meaning you got it at the worst possible time) and 11.5% if you invested at the yearly bottoms (best possible time). This is a “small” difference, says the Fidelity paper.

But is it really a small difference?

If you invested Rs. 50,000 per year for those 22 years, investing at 8.6% would give you Rs. 29.9 lakhs. And investing at 11.5%: Rs. 43.3 lakhs. A difference of 13.4 lakhs is a lot of money (considering that 50,000 over 22 years is only 11 lakhs!)

Also this is a UK based research. Let me show you this research using Indian data over the past 11 years (I think after 1992 is when the real story happened, and the first few years were just finding our feet). If I consider the nifty as a benchmark and think of it as the NAV of a mutual fund, my investment every year will be based on the Nifty value and I will get so many “units”. These units then added up and multiplied by the current value of the nifty gives me my current value and thus, I can track my growth. Here’s what I have found.


In India, timing the market at the absolute highs versus the absolute lows yields a return of 15% versus 23%. This is a HUGE difference of 8% and as you can see above, the yield of an investment of just Rs. 12,000 per year can be 2.96 lakhs (bad timing) or 4.57 lakhs (good timing). A difference of Rs. 1.6 lakhs, for a total investment of Rs. 12,000 x 11 years = Rs. 1.32 lakhs.

Now you might think this is silly because no one can accurately predict the highs, no? Right now your advisor will probably be smiling if he’s next to you and saying, “Okay boss, but how will you know the market is at a top or bottom? What if you miss them?”.

I agree that most people will not be able to predict tops or bottoms, but you, the smart investor, will know when the market is severely overvalued or undervalued in a year. So let me assume that you will miss the TOP 10 days of a year and the bottom 10 – that means instead of investing at the yearly high you invest at the 11th highest value instead. Versus, instead of investing at the yearly low, you invest at the 11th lowest value instead. what happens?


As you can see, the difference is still 6% – 22% for good timing, 16% for bad timing. This translates to a difference of Rs. 1.32 lakhs for 11 years of 12K per year – which is exactly the amount you invest in those years put together. Meaning: timing the market can yield you 100% of your investment back!!!

I have mentioned earlier that SIPs have a problem: that you can’t time the market by investing more when you think the market is down. It is demonstrated here with data – if you were able to invest at the lows or even somewhere near the lows over the last 10 years, you would perhaps be a much richer investor.

Timing is not a bad thing – in fact, timing can make the difference between a mediocre investor and a smart one. When you understand that, you will want to learn more about how to determine when the market is low or high. But that is another day, another blog post. (In short, look at the P/E movements, and compare it to last 4Q earnings growth – at the highs versus the lows in the past)

And yes, please send me your comments!

  • JR says:

    >That’s a really nice use of Google spreadsheets on this post to show embedded tables of data … not to mention a nice analysis 😉
    Try also the googleFinance() function if you want to pull in data on specific tickers or indicies…
    Have fun!

  • Alien says:

    >Very Nice… Can you do a post on how does one time the market, especially in such volatile times!

  • arul says:

    >I follow the following stategy to time the market :

    For every 10 points of sensex lost, I invest 1000 ruppees. For example, if the market is going down 400 points, I invest Rs 40,000.

    Next is to select the scrip. I browse the moneycontrol.com and invest in the top losers.

    I invest for long term gains and am ready to wait years to see the gains.

    Do you think the stategy is good ?

  • Deepak Shenoy says:

    >JR: Thanks for that, will check it out. Hope it works with Indian data!

    Alien: Will do. It’s going to be a long post, that one!

    Arul: Sorry for my words, but that is a terrible strategy. Why are you investing in the top losers? You should thoroughly investigate a company before you invest – investing in losers blindly is like burning your money.

    And why invest when the sensex is going down? You should check if there is a fundamental reason for it to go down. If not, only then invest, otherwise it may be a serious issue you are overlooking!

  • arul says:

    >Thanks for cautioning me.

    I mised a small point. I don’t invest blindly. I invest in the top loser of the day out of the sensex / NIFTY stocks only. I usually look at P/E ratio and book value. But, don’t get time to do much research. If you can provide tips (which companies to select), may be people can use it.

    How to time the market ? When the sesex moves up or down, there is usually no reason. Can you tell me the reason why sensex has dropped more than 10 % in the last 4 weeks? Has any fundamentals changed?

    Is it wise to invest with mutual funds when the sensex is going down ? Probably, their selection of scrips will be better.

    I have 5 SIP’s running with the best 5 schemes (Sundaram BNP – midcap, SBI Magnum Global, Reliance Vision etc). All growth funds. A fixed sum is going out once in every 6 days. For example on every 18 th I buy BNP Paribas Midcap. On every 24 th Magnum Global etc. This is running for the last 4 months and my portfolio is now at minus 10 %. But, I’m continuing. All my transactions are thro ICICI Direct.com and I have full control of the SIP’s. Do you advice any change in the stategy ?

  • Deepak Shenoy says:

    >hi Arul: I think even investing in the top losers in teh Sensex and Nifty is not good. Look at Ultratech cement – it was at 1200 a few months back and it’s at 750 now. But it’s still not a good buy because cement sector is being attacked by the govt. And SBI fell from 1200 to 910 – the reason was that it admitted major downtrend in retail loan growth. IF you buy a nifty/sensex loser, you should buy only if there is no fundamental change.

    Certain fundamentals have changed – for cement and real estate there is a big problem in terms of rising interest rates and price control. In banks, there is a higher interest rate risk of default.

    Most other industries remain the same. There are some stock level fundamental changes like Tata steel paying too much for Corus, Hindalco making a pricey acquisition, Ranbaxy dropping off the Merck Generics buy etc. These will change the fundamentals of the company and teh way you look at them.

    What you should do is hit overbeaten stocks. P/E ratio is a good indicator but you must compare with two things: Earnings growth (much be higher than the P/E) and sectoral P/E (company should be getting a discount or on par to the sector)

    The way I look at things is – I research a stock for a week or so before I buy it. I might buy small quantities but my real buys will be based on research.

    Do you also know that the Sundaram Select Midcap – the mutual fund – fundamentals have changed? Anoop Bhaskar, the fund manager, has quit and is no longer managing the fund (from march 15). L. Prasad is now taking the fund over and you have to wait to se if he’s good.

    Good point about the Sensex moving down 10% – obviously nothing will make such a huge difference that 10% is justified.

    Mutual funds are no better than the average investor, honestly. I think we lay investors can do a better job with our money!

  • arul says:

    >Hi Deepak,

    Good to hear your points, all with sound logic.

    I’m giving below the top losers on 5 th March – Sensex and Nifty (sensex down 465 points on that day). I saved the page from moneycontrol.com

    I bought Maruti Udyog, BHEL and WIPRO for Rs 45,000 as per my logic (without any research). What fundamentals have changed to warrant 7 % fall in one day? I’m sure I have gained by the transaction. Had the Sensex fallen another 500 points the next day, I would have bought another Rs 50,000 worth of top losers.

    As you rightly said, a mutual fund is no better than a lay invester. The proof: my mutual fund portfolio has declined more than my equity portfolio : same amount – both invested in the same period. Equity – selective and mutual fund – SIP.

    Thanks for pointing out about BNP Midcap, which I was not knowing.

    Nifty top losers on 5 Mar 07
    Company Name High Low Last Price Prv Close Change % Loss
    Jet Airways 599 538.05 542.1 600.3 -58.2 -9.7
    SAIL 103.9 94.4 97.4 106.4 -9 -8.46
    Mah and Mah 764.7 700 709.2 770.5 -61.3 -7.96
    Oriental Bank 171.7 159.05 160.35 174.05 -13.7 -7.87
    GAIL 278 251.05 255.25 276.95 -21.7 -7.84
    Ranbaxy Labs 345.5 317.6 320.7 347.3 -26.6 -7.66
    Siemens 1,077.55 1,000.00 1,009.25 1,092.15 -82.9 -7.59
    IPCL 258.9 235.1 237.35 256.6 -19.25 -7.5
    Maruti Udyog 825 762 772.9 833.1 -60.2 -7.23
    Wipro 570 527.15 536.95 574.2 -37.25 -6.49
    Dr Reddys Labs 662.5 601 617.5 660.1 -42.6 -6.45
    Suzlon Energy 1,042.70 962.5 985.6 1,052.40 -66.8 -6.35
    HPCL 262.95 242.1 246.4 262.85 -16.45 -6.26
    Larsen 1,462.35 1,375.00 1,383.30 1,462.35 -79.05 -5.41
    ABB 3,519.70 3,308.00 3,351.40 3,542.25 -190.85 -5.39
    Dabur India 95.05 90.45 92.25 97.3 -5.05 -5.19
    Tata Steel 441.3 415.25 420.75 443.45 -22.7 -5.12
    ACC 859 801 811.4 854.45 -43.05 -5.04
    Tata Motors 779 728 739.9 775.4 -35.5 -4.58
    TCS 1,199.00 1,150.00 1,155.55 1,208.55 -53 -4.39
    BHEL 2,075.50 1,970.00 2,007.55 2,098.30 -90.75 -4.32
    Reliance 1,301.00 1,248.20 1,259.35 1,316.20 -56.85 -4.32
    SBI 1,003.00 955 962.55 1,004.90 -42.35 -4.21
    Infosys 2,077.90 2,000.00 2,007.15 2,093.50 -86.35 -4.12
    Tata Power 515 492 508.55 529.55 -21 -3.97
    Reliance Comm 411 385.3 398.75 414.7 -15.95 -3.85
    HCL Tech 625.7 529.8 608.2 631.95 -23.75 -3.76
    Bajaj Auto 2,503.00 2,416.85 2,453.75 2,544.05 -90.3 -3.55
    Cipla 223.95 215 217.2 225.2 -8 -3.55
    PNB 420 380.35 412.65 427.25 -14.6 -3.42
    ONGC 789.45 758.5 773.05 798.9 -25.85 -3.24
    Satyam 423.8 410 414.15 427.3 -13.15 -3.08
    BPCL 299.8 285 291 300.05 -9.05 -3.02
    Bharti Airtel 701.95 672.15 686.7 706.65 -19.95 -2.82
    HLL 178.4 171.65 174.05 179.05 -5 -2.79
    Sun Pharma 953.9 914 942 969.05 -27.05 -2.79
    ITC 166.5 157.25 162.15 166.7 -4.55 -2.73
    ICICI Bank 855.5 793.25 821.55 842.9 -21.35 -2.53

    Sensex top losers on 5 Mar 05
    SENSEX 3/5/2007 17:46
    Company Name High Low Last Price Prv Close Change % Loss
    Ranbaxy Labs 345.5 317.6 320.7 347.3 -26.6 -7.66
    Maruti Udyog 825 762 772.9 833.1 -60.2 -7.23
    Wipro 570 527.15 536.95 574.2 -37.25 -6.49
    Dr Reddys Labs 662.5 601 617.5 660.1 -42.6 -6.45
    Larsen 1,462.35 1,375.00 1,383.30 1,462.35 -79.05 -5.41
    Tata Steel 441.3 415.25 420.75 443.45 -22.7 -5.12
    ACC 859 801 811.4 854.45 -43.05 -5.04
    Tata Motors 779 728 739.9 775.4 -35.5 -4.58
    TCS 1,199.00 1,150.00 1,155.55 1,208.55 -53 -4.39
    BHEL 2,075.50 1,970.00 2,007.55 2,098.30 -90.75 -4.32
    Reliance 1,301.00 1,248.20 1,259.35 1,316.20 -56.85 -4.32
    SBI 1,003.00 955 962.55 1,004.90 -42.35 -4.21
    Infosys 2,077.90 2,000.00 2,007.15 2,093.50 -86.35 -4.12
    Reliance Comm 411 385.3 398.75 414.7 -15.95 -3.85
    Bajaj Auto 2,503.00 2,416.85 2,453.75 2,544.05 -90.3 -3.55
    Cipla 223.95 215 217.2 225.2 -8 -3.55
    NTPC 139.95 129 136.8 141.45 -4.65 -3.29
    ONGC 789.45 758.5 773.05 798.9 -25.85 -3.24

  • hari says:

    >Hi Deepak,

    I have some queries about investmensts. I have been seraching your mail id for about an hour now. I am not able to find it. Could you please please post your email id. I am unable to post some quetions reg investments here.I will be grateful if you could oblige with your email id.
    Mine is hariharan666@yahoo.com.Thamks

    Regards
    Hari

  • Anonymous says:

    >Hi Deepak,

    You told about hitting overbeaten stocks.
    I have few queries.
    How to find whether a stock is expensive or cheap?.
    What parameters to consider when researching a stock?
    Where can i get the data on sector P/E and other financials ?
    My picks are Bharati Airtel,TCS,Infosys,BHEL & Reliance.

    Thanks.

    Regards,
    Durga

  • Deepak Shenoy says:

    >Hari: Use deepakshenoy at gmail.

    Durga: That’s a good point, I will make a blog post about how to identify expensive versus cheap stocks. Also, there are no sites I know that show sectoral P/E but financials you can get by going to http://www.moneycontrol.com, http://www.myiris.com or such. Also look at http://www.stockhive.com – this has some excellent data shown.

    Your picks are good, except Bharti which I think is too expensive. their last 4Q P/E is about 43 right now, I would call it value if it fell below 35 only, preferably 30 or so.

  • Vinayaka C A says:

    >Hi Deepak,
    I think Bharti may still be a good choice because they are into so many new businesses (Insurance, Retail etc) The returns from these may not be immediately visible in the financials so the PE ratio may not be a very accurate measure.

    Even if we go by PE, reliance communications is about 50 i think, so comparatively it is better than rel-com

    BTW can we trust the PEs calculated by moneycontrol blindly ? i remember reading in one of your previous posts where the NTPC numbers were wrong in moneycontrol

    Cheers
    Vinayaka CA

  • Deepak Shenoy says:

    >Vinayaka: I’m not sure about insurance – usually that is loss making over the first fiveyears (of any insurance co)

    About retail: Mittal has made it clear that the investment in retail will be on his own (i.e. not part of Bharti Airtel) so the airtel stock will have no impact.

    P/E – use stockhive.com, it’s a much better site as an indicator.

    Rel comm is overvalued much more than Bharti, but it’s growing at a faster rate than Bharti and eventually will be a much bigger entity. It owns FLAG as well which is a big asset, and owns a massive amount of ILD traffic which Bharti has little access to. Still, it’s overvalued (I sold before it hit 400 long back)

  • Sivaprakasam says:

    >< ---
    Timing is not a bad thing – in fact, timing can make the difference –>
    100% true and I experienced same.

    I bought Reliance Cap shares at 570 and sold for around Rs.630
    Again 2 weeks back, I bought at 577 and it stands at 655 today – 12% increase. Handsome gain.

  • hari says:

    >Hi Deepak ,

    For 2007 – 08, for investing in ELSS what shall we do. Is it ok to wait for now.In other words will there be a small correction like we had in June last year. What do you think is proper so that we can time the market.(Your views with respect to saving taxes by ELSS please)

    Regards
    Hari

  • Deepak Shenoy says:

    >hari: ELSS for 2007-08 wise, I think if the market stays at todays levels it’s a good buy. I would suggst you wait till May, see the results announcements, calculate the new Nifty P/E and then decide…

  • Sandeep says:

    >Hi Deepak,
    Interesting article on market timing. I don’t know for how many years you have been in to the markets. Theoratically what you mentioned sounds good, may be practically also you may have succeded in timing (near)perfectly few times (may be intution, experience, luck, coincidence) but if you have been in the market for at least the period of your study, frankly how many times you were able to time it that well?

    I have been in to this business professionally for twenty years and I have yet to come across any theory/strategy for this sort of timing. Leave aside the lowest or even the 11th lowest level of the year it is next to impossible to put all the money that you have allocated for equity for a particular year or your additional savings/inflow for the year or the inflows that you have received as a fund manager near the lowest 10 or 20 days of the year.

    Even smart fund managers like Anoop Bhaskar (also an IIM alumni) whom you have mentioned in another topic have fallen prey to this timing gimmic.

    He was right on target when he was 30% in cash (in Sundaram Midcap) in April 2006 just befor the crash so was amongst the lowest to fall (28%) in May/June 2006 (index fall 12612 to 8929) but continued thinking that market will keep falling – may be to 6000 🙂 and kept the cash level of 25 to 35 % throught the rise from 8929 to 14652 and was amongst the worst peformers (up only 49% much lower than other midcaps like Reliance Growth 66%, Pru Emerging Star 74%).

    My point, timing the market is definitey what one would ideally hope for and most certainly is the ideal and most profitable goal BUT human research has still not reached that far to figure out ways to do it.
    Practical/Psychological Issues:
    When markets are falling: investors think that it will fall more and postpone buying
    When markets are recovering from lows: investors think that its simply a technical rebound/pullback, markets are basically in a bearish mode.

    Infact Suundaram Midcap did much better when Anoop left Sundaram in 2005 for few months to work for the promoters of Lotus Mutual Fund in Singapore.

    Deepak, probably you succeded in timing the market few times, but I can tell you one thing that if any body would have figured out the theory of market timing he could have bought the WHOLE WORLD by now, such is the power of timing

    I am open to any thoughts/suggestions you may have on tricks to help time the market

    Regards
    Sandeep

  • Deepak Shenoy says:

    >Sandeep: Thanks for a detailed comment. I think timing the market is definitely possible from an investor angle. I’ve been investing (my own money) for the last four years, and I’ve seen my father investing since 20 years ago.

    To Investors, Timing is not as much important in selling as it is in buying. (for traders both are important – the best traders are those that use effective timing indicators along with strength and momentum) THere’s a saying “This may be a good stock to buy, but it may not be the best time to buy it”.

    Let me be honest, Sandeep: I don’t intend this article to be for fund managers of mutual funds. This is for an investor. Fund managers time individual stocks, not markets as a whole. Anoop bought Unitech when ther market was at a relative high, and it has outperformed everything that you can imagine!

    At every point, even at the sensex value of 14500 there have been stocks which are undervalued. I have seen this over the last 15 years since I’ve had the propensity to track markets, and I’m seeing it now also.

    The problem with Anoop as you correctly identified was the fact that they remained in cash. He got one timing right (though that wasn’t really timing I think) in terms of staying in cash, but he didn’t identify a buying opportunity well. And in investing, buying is more important than selling.

    My own example – I was out of options to invest in May 06 (in April I bought the Opto IPO which has already given me 100%) In June I was running slow – I added only 10% of what I should have added. In the next two months I added 200% of what I would normally invest, because the July results were indicating serious growth. Timing is not rocket science, it is just seeing what’s on the table.

    And such strategies take time to reveal, because you may buy a stock that can take two-three years for the market to recognise. That’s fine for an individual investor, but perhaps not for a fund manager.

    The deal with timing is to not be ultra accurate. Sure, you will pick some bad ideas (I did too!) but overall the good ideas will account for a much larger growth!

    My funda is: pick up stocks when they look undervalued. During the ambani brother fights, do you think reliance was undervalued? I did. I was absolutely broke but invested what I could into the stock at the 500 levels. And I must say I sold it at the 1200 levels, and recently have bought back (1280 levels) because the timing looks good again.

    Let’s talk about timing in detail – I will write a post about my thoughts on timing.

  • Sandeep says:

    >Deepak, I agree with lot of your points. There is a lot I can share with you plainly from my experience (not so much from skills 🙂 Last four years (28th April 2003 to 8th Feb 2007) have been more or less a one way ride. There have been some corrections/pullback but market has managed to make new high every time, hence all the so called good companies (?) share prices have climbed back hence giving us a feeling of invincibility or (over)confidence ( I have suffered from this disease quite a few times in my 18 years career)One of the market saying is “Don’t confuse bull market with brains”.

    The real test of skills/fundas comes when market is in prolonged bull phase like Feb 2000 to March 2003, that’s the real test of nerves. However good our timing is in selecting and buying a stock, a period of 36 months is long enough to unnerve even the most patient of the “value” investors. What we have seen in last four years is market bouncing back after a fall of one or two months. Therefore what we thought of as Christmas sale doesn’t turn out to be a Company closure sale. Hence the fundas developed over last four years will have to be suitably refined to meet the challenges of a bear cycle also.

    I am eagerly waiting for your post on timing. (sorry if i am digging too deep as sometimes I tend to become very research oriented)

    Bye for now !
    Sandeep

  • Deepak Shenoy says:

    >Sandeep: I think we have never even faced a deep bear market. The US has histories of 18 year bearish markets and so on. If you read a book called “the new market wizards” you will see this illustrated with Data. In fact, even Peter Lynch’s “One up on wall street” says the same thing.

    Bear markets have as many money making opportunities as bull markets. Not on the short sellign side too. Bear markets are characterised by a lack of buying, not by too much selling. And there, some stocks shine. The idea is to identify and time the buying of those stocks.

    One of the things you must consider when buying is : Will you buy more of this stock if the price goes down? If the answer is yes, that’s a buy. Timing will help you answer that question.

    I will post some of my thoughts on timing. I am trying to get market data right now.

    Cheers!

  • sandeep says:

    >To quote John Bogle, the founder of Vanguard, “I don’t know anyone who’s ever got market timing right. In fact, I don’t know anyone who knows anyone who’s ever got it right.”

    Or as mentioned by the legendary investor Benjamin Graham, “There is no basis either in logic or in experience for assuming that any typical or average investor can anticipate market movements more successfully than the general public, of which he himself is a part.”

    Regds
    Sandeep

  • Deepak Shenoy says:

    >Graham also said “When a company is available on the market at a price which is at a discount to its intrinsic value, a “margin of safety” exists, which makes it suitable for investment.”

    He also said “On that subject [of market timing] let me say that the only principle of timing that has ever worked well consistently is to buy common stocks at such times as they are cheap by analysis, and to sell them at such times as they are dear, or at least no longer cheap, by analysis.”

    He goes on to say this is not timing, but valuation. But in the context of this article, it would be timing.

    Bogle on the other hand had, in 2002, suggested that “Now is a time to stay where you are or reduce. The odds are, we are in for a period of modest returns.” This is quite contrary to what he maintains on timing – the statement is a timing statement.

    Read this.

    You shouldn’t follow heroes directly. I suggest you make your own conclusions based on data. Find out if there is a pattern that works, and test forward continuity for a few years.

    I’ve just taken a UK based article, which we may take as greatly researched, and used data to disprove it. There are hundreds of statements famous people have made that are no longer valid – we should be validating them with relevant data. Counter-check with Indian data. Counter-check with recent data.

    Otherwise we are just hero worshipping, and being superstitious.