The importance of “Timing” the Market

Published in

Coinmonks

7 min readJul 25, 2021

In Market. In Business. In Life.

“Timing” it is of paramount importance

It’s very very important. I can’t stress this enough, hence I’ll try to stress it again here. I believe in fact, it is the most important cause for any success.

I will try to demonstrate the importance of “Timing” in the stock market.

Let’s dig deep into this by understanding only one chart.

Let’s start with a quick fresher of the above chart.

The above chart plots “SENSEX” on the left axis, and rolling 5, 10, 15, 20 year CAGR on the right axis.

Let us take an example to demonstrate exactly what each line shows.

Let us say you bought a single stock of SENSEX costing about 5000 during the 2000 internet craze. This investment of yours would give a return of about 6% CAGR after 5 years depicted by the light yellow line. This investment of yours would give a return of about 11% CAGR after 10 years depicted by the orange line. This investment of yours would give a return of about 11% CAGR after 15 years depicted by the red line. This investment of yours would give a return of about 10% CAGR after 20 years depicted by the green line. All of this happened while you had the option of getting an interest of 11% on a 15 year Government bond. The reward you’re getting for the risk you took is just meaningless. It is so bad. The market doesn’t give returns greater than the risk-free rate automatically, even though you stay put for 20 years. You could’ve invested in the Govt Bond and just relaxed all while, rather than getting consumed by Herd Mentality & Greed. Do realize that this has actually happened with thousands of the brightest stock traders in the market.

Let’s dig deep as we are now comfortable with the above graph.

There are 3 major points we should really understand from the above image,

Every market peak corresponds with low 5-20 year rolling returns

For anyone trading in the stock market for a while understands that there are very less statements that stand true all the time. The above statement is one such example.

The red spots shown in the chart are warning signs of when exactly one shouldn’t add money to the market. The money would have generated greater returns if put in Government bond rather than the pricey market. And, it’s not only in the short term but even 20 year returns fall below the risk-free rate.

Never shop in a pricey market. Always sell.

This golden rule always holds. Always. Nothing escapes this golden rule, no kind of market. Not stocks. Not futures. Not cryptocurrency. Not jobs. Not real estate. Not goods. Not marketing buys. Nothing.

Please don’t understand that this is only true for the overall market, and definitely doesn’t hold to the brilliant stocks that you hold in your portfolio. NO. It holds for every single stock that is overpriced. Everything is costly in a pricey market. If you really want to hold that stock for the long term, sell it now, put the returns in a debt fund and buy it back in a cheap market after 2 years. The returns will be double.

That is the power of “Timing”

For the critic, the definition of a market peak would have already caused some problems. It’s very easy to identify the peak of a market in hindsight, the difficulty lies in finding it prior. Great catch, the answer lies in the correlation of all markets. I’ll dig deeper on this very important topic in my next article.

Every market slump corresponds with high 5-20 year rolling returns

For anyone trading in the stock market for a while understands that there are very less statements that stand true all the time. The above statement is another one such example.

The green spots shown in the chart are welcome signs of when exactly one should add money to the market. The money has generated excessive returns only upwards of 15% going up to 40%. Mind you, this has been achieved only by timing the market with no strategy about investing in the market whatsoever. An insane improvement in any strategy can be easily achieved just by timing the market. And, it’s not only in the long term that we see these huge returns but even in case of 5 year returns in the chart above, and even 1 year returns in the current post covid market.

Always shop in a cheap market. Never sell.

This golden rule too always holds. Always. Nothing escapes this golden rule, no kind of market. Not stocks. Not futures. Not cryptocurrency. Not jobs. Not real estate. Not goods. Not marketing buys. Nothing.

It really doesn’t matter what you buy if you diversify your buys enough. It will give you that promised 15% returns of all Mutual funds without even knowing what any firm actually does.

That is the power of “Timing”

For the critic, the definition of a market slump would have already caused some problems. It’s very easy to identify the slump of a market in hindsight, the difficulty lies in finding it prior. I’ll dig deeper on this very important topic in my next article.

Longer holding periods = Greater returns with lesser risk

For the keen observer, this observation would have been obvious already. It’s amazing how the variation of the returns falls dramatically as the holding period of the position increases.

This means the longer you hold, the returns you generate for the risk you take only increases. But, please note that this holds to a diversified portfolio and not for any single stock.

Adding another very keen observation here is that the marginal fall in variance of returns also decreases as the holding period increases. This can be seen in the above chart from how the variance drop is greater from 5 years to 10 years when compared with 10 years to 15 years, and the prior is greater than 15 years to 20 years. 10 years seems to be the magic number.

Hold longer. Longer the better.

This golden rule always holds. Always. This rule is actually more powerful than the above two. Because this rule trumps the other two. If you hold really long enough, the importance of when you entered the market fades away.

Hold. No matter what. In the long run, it always gives you good returns. Always. It even trumps your bad entry points. As the variance of returns gets lesser and lesser, in the long run it becomes closer and closer to a straight line.

Please note that the above rule applies to a well diversified portfolio and not to any stock

3 points are,

Never shop in a pricey market. Always sell.
Always shop in a cheap market. Never sell.
Hold longer. Longer the better.

Closing thoughts

The importance of “Timing” is not only important when talking about the market but almost anything in life.

Getting the right education needs to be timed with the job market.

Getting the right job needs to be timed with the overall economy.

Getting the business right needs to be timed with customer behavior trends.

So on and on.

It’s like surfing, you’ve to ride the wave right.

It’s very important. But this crucial factor of success never gets mentioned. It’s because this factor is the least controllable of all the factors leading to success. It also means any small control we can achieve over this factor gives great returns.

There are various other factors that get more than their due in success. Some of the usual suspects are,

Ideas / Creativity
Talent / Team / Network
Money / Power / Influence

Yeah. All of the above are important. But any great businessman or entrepreneur never underestimates the importance of being at the right place at the right time. Timing.

Sadly. It is more fate, than effort.

That doesn’t mean effort isn’t important. Without effort, you are not even in the game. However, even with all your effort — the winner is decided by fate.

We overestimate the power of efforts, and underestimate the power of fate.

However, I wouldn’t do it any other way. Because efforts are all we can control anyway. Not fate.

So learn to ride that wave right.

Your fellow investor,

Join Coinmonks Telegram Channel and learn about crypto trading and investing