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Charts & Analysis

Small numbers are not really small

This Seekingalpha post by Abhilash Kushwaha seems to counter my view that market timing could make sense in India. Using data going back from 1991, the author submits that:

…at random it [your investment] would have grown to 1.5 times to approx 4.5 times and at market highs it would grown to almost double to 5 times. Importantly, there would not have been a huge difference between investing at market lows and at random.

The actual figures quote: Investing at random yields 9.73% and investing at lows yields 10.8%.

Now these figures look really small – 10.8% versus 9.73%? Is that at all significant? Let us see: If you invested Rs. 100,000 in 1991, you would have had Rs. 38.5 lakhs @10.8%, and 35.1 lakhs @9.73%. The difference is Rs. 3.4 lakhs, which is more than three times your initial investment!

Let’s consider a more realistic scenario. Let us say you had only Rs. 2000 per month to invest in 1991, but that amount increased by 20% each year. What would the difference be?

After 16 years, you’d have 31.5 lakhs at 10.8%, and 29.5 lakhs at 9.73%. The difference, Rs. 2 lakhs, is pretty big considering you started off investing just Rs. 2000 per month.

Looking at it either ways – the “small” difference in numbers makes a huge difference when considered over an extremely large period. Numbers look small on paper. All return percentages look small, and we don’t really appreciate the difference between them unless you take data and consider the difference in real money. In both cases above, the 2-3 lakhs extra is significant, considering the profile of the person involved?

Does this mean you should really try to time the market?

Well, consider his own data for 10 years, which I think is a more valid term than the 15 taken because of the specific early immaturity of the Indian market. NOte: the data does not match my own research which says the return difference for timing is about 23% versus 15% otherwise.

His data says random investments yield 12.7%, and timing the lows, 14.9%. Even with his data, investing Rs. 10,000 per month over 10 years, results in Rs. 24 lakhs versus Rs. 27.35 lakhs. That is not a big difference?

My data shows a difference of 22% even if you missed the bottom 10 lows. That would significantly improve your returns if you timed the market. My point is not to say that you must attempt to time the market – but that there are significant upsides to timing it. It is not in the best interests of mutual funds and market authorities for us retail investors to learn timing techniques – most of which are very simple – because it does them no good to see us outperform them, the experts. Yet, as time has proven it, individuals can be far better managers of money if they learn about managing it.

  • hari says:

    >Hi Deepak,

    I agree to your views of timing the market. Although retail investors like us may to exactly be able to invest at the lows we can invest in and around them and refrain investing when the market is highly overvalued. Last year if we take the case,we could have invested completely in and around 9000 -10000 pts.The only problem is that investing the entire corpus at hand at 8900 level would have been difficult.

    Numbers Effect- I was going through a SIP ready reckoner,where it shows a person(25 years ) investing 2000 per month 2000 till he retires(60).The total investment is 8.4 lakhs. I was startled to find the difference what even 2% can make.
    The compounded value at
    12% is –>1.3 crores
    14% is –>2.25 crores. Thats almost 1 crore extra.Not bad for a person who has invested just 2000 pm.

    Regards
    Hari

  • Alien says:

    >Hi..

    I’m a regular visitor tou your blog nowadays and I’m very thankful for the wonderful pieces that you write!!

    I requested this last time as well, can you please do a post on how to time the market?? Simple strategies at the least…

    Also a post on housing loans and factors one needs to consider.. especially if one is looking at it from the point of view of investment and not as a house to stay in..

    Are you ok if I mail in some specific queries once in a while?

  • Sivaprakasam says:

    >Deepak,
    I hope, you dont mind, my answering to Alien.

    Alien,
    1. You can watch select good stocks or sectors(say, Cements or banks) over a period, say 3 months.
    So, you will come to know at what price you can buy/sell.

    2. While watching the market regularly you will come to know whether it is moving UP steadily or volatile
    (At present, it is volatile). Rumours that it may go down upto 9000/10000.Or it may cross 13000

    3. Any news about the particular industry will affect.

    The bank CRR hike on Mar 31 pulled down not only Bankex, but sensex as a whole by more than 600 points on 02-APR-2007

    Due to tax on Cement and subsequent fight between Finance Ministry and Cement Cos, Cements stocks are down.

    4. Whenver such huge down in SENSEX, you can buy stocks which is in your WISH LIST
    On 26th March, ABN AMRO bought 10 lakhs shares of India Cements
    at R.170
    5. You can watch news in CNBC TV or read websites such as http://www.moneycontrol.com,www.sify.com/finance regularly.

    It depends your time availablility. Otherwise, u can go for Mutual FUnds.