An Insight to Remember

Amar Pandit , CFA , CFP

Warren Buffett said, “I have never met a man who could forecast the market.” Making it gender-neutral, I would interpret this as, “I have never met anyone who could forecast the market consistently.” Despite no evidence of consistent successful forecasting, many still believe in this bullshit. At the same time, there are bullshitters who claim to do this successfully (consistently). There is simply so much collective valuable time and energy wasted on market forecasting. Should you even spend an ounce of energy thinking/worrying about the right time to invest? Let’s find out the answer to this question in this post (with some hard data).

I have taken Sensex data all the way from 1979 till date (March 14th, 2022) for the purpose of this analysis. We assume that you made one annual investment for 44 years.

Let’s say you were super lucky, and you got to invest at the lowest point every year. That’s quite a feat but let’s say you were the luckiest investor on this planet. What do you think your annual returns would have been for the last 44 years? Let me give it away. It would have been 14.72% compounded annually.

Now let’s say you were damn unlucky, and you invested at the highest point every year. This means you invested at the highest level of the Sensex every year. What do you think your returns would have been? Take a wild guess. I asked this question to many people and the answers ranged from 1% to 4%. Some even gave a negative number. With this in context, can you take a guess again. I bet you won’t get this right.

Your returns in this case would have been 13.73% p.a.

Did you really guess that? Come on, be honest.

Still don’t believe what you read. You read that right. You would have earned 13.73% p.a. even after investing at the highest level of the Sensex every year.

What is the difference between the super lucky and damn unlucky performance?

14.72% – 13.73% = 0.99 % p.a.

Is this even something to lose sleep over? All of this timing is done for an extra 0.99% p.a. Really!!

Well, we are not yet done.

Now, it’s simply not possible to be lucky or for that matter even unlucky all the 44 years. It’s not possible that you invested at the highest level each of the 44 years. At the same time, it’s not even possible to invest at the lowest level every year for 44 years. No one is that lucky in the stock market or will ever be. No one is that unlucky either. Thus, you are likely to have some lucky years and some unlucky ones. You don’t have to be an analyst to figure out that, your performance in that case is likely to fall between 13.73 % p.a. and 14.72 % p.a.

Let’s then assume that you picked a date January 1st and invested on that same date every year for 44 years. Any guesses?

In this case, the returns would have been 14.53% p.a.

The difference between investing at the lowest point in a year and picking a consistent random date of January 1st comes down to 14.72 % – 14.53% = 0.19 % p.a.

Isn’t this shocking?

Did you really think the difference would be 0.19% p.a.?

It’s a mere 0.19% per annum if the random date was January 1st every year. This would vary depending on the date you choose. But the point is that this is not something to lose sleep over. This is not something to worry about or obsess about. The key is to invest regularly and let compounding do its job. Yet another Warren Buffett quote comes to mind – “The stock market is a device which transfers money from the impatient to the patient.

So, repeat after me. You Can’t Time The Stock Market.