Spend Time with Mr Market (aka Volatility) - Views on News from Equitymaster

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Spend Time with Mr Market (aka Volatility)

Apr 27, 2016

In the first part of this series, I introduced you to the famous Mr Market (aka Volatility). He wasn't thrilled that I revealed his fickle nature to you. But I promised to help you benefit from his maniacal ways.

Today, let us turn our attention to investment timeframes.

We know that stock market returns aren't linear or consistent. They come in lumps. In fact, a large part of returns come in very short timeframes. The returns seem to follow the Pareto principle: Over 80% of the stock price movements (in either direction) happen in only 20% of the time.

A few weeks back, my colleague Rahul Shah recommended subscribers book profits in a company that was part of the Microcap Millionaires portfolio. The recommendation was up 106% in little over a year, but the stock didn't actually do anything for most of that year. It was the last 45 days that provided these stellar returns.

This is just one example across our various services, and it's why we don't even try to time the markets. As Sir John Templeton puts it, 'The best time to invest is when you have money. This is because history suggests it is not timing which matters, but time.'

Why does spending time in the market work?

Think about a good business. Good businesses generate profits every year, and some of them get distributed as dividends. Reinvested earnings along with long-term earnings growth translate to a steady appreciation in the value of the business. Over time, compounding sets in and shareholders build wealth.

Why are you not making any money then?

You need to change your perspective.

Consider this... You are playing test cricket. This is a five-day test match. You don't have to score the fastest century. No fancy shots are required. The run rate is irrelevant. What matters is your final score.

Long-term investing is analogous to test cricket: The focus should not be on the monthly, or even the yearly, rate of return, but the final returns.

Now, you know that the longer you stay in the crease unbeaten, the better your chances of notching a big score. Even if batting seems like a struggle. You stay put with your defenses. You dig deep. You take singles.

Similarly, whenever you have some investable surplus, regardless of market conditions, keep adding money to your portfolio. Stay disciplined for the long term. Build your portfolio.

If you bat long enough, you will end up with a big score. Similarly, A long investment time horizon will ensure that you reach your goal.

Focus on the right things.

Often our focus is on stock returns rather than on the underlying business. This is akin to watching the scoreboard rather than the ball when batting.

Playing tests might not be as glamorous as playing a T20 game, but it is the format that provides you with better odds for success.

Happy Investing!

PS: This is second of a three-part series on volatility. Stay tuned...

Devanshu Sampat

Devanshu Sampat (Research Analyst) has a degree in commerce and nearly 5 years of experience in equity research. He draws inspiration from successful value investors across the globe and constantly endeavours to refine his own unique stock picking approach. While a firm advocate of the principles of value investing, he believes in adapting a versatile investing strategy in response to varying market conditions. Devanshu contributes to our Megatrend investing service The India Letter.


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