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Can we time the market? - Views on News from Equitymaster
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  • Nov 23, 2010

    Can we time the market?

    Should we wait for the stock to fall before buying? Shall we wait before we sell? If you are an investor in the stock market you would have also asked these questions at some point. Naturally these are relevant questions as one would like to maximise one's money. If one could buy the stock at it's lowest and sell at its highest one would maximise one's returns.

    However, the question arises how does one know which is the lowest point for a stock and which is the highest. While it is easy to know in hindsight, it is practically impossible to know which would be the lowest a stock could go to and the highest it could climb to. Peter Lynch, the great stock market investor has said the following on the subject of timing the market, "I can't recall ever once having seen the name of a market timer on Forbes'annual list of the richest people in the world. If it were truly possible to predict corrections, you'd think somebody would have made billions by doing it."

    However, we at Equitymaster for the benefit of our readers decided to analyse what would have happened had we been blessed with the gift of knowing exactly when the market would be at its lowest and at its highest in the last 10 years. For this purpose we decided to look at the broad market index and selected the NSE-Nifty for our analysis. As it can be seen from the graph, the NIFTY was at its lowest on 21st September 2001 while it was at its highest on 5th November 2010.

    Had we invested on 21st September 2001, and exited the market on 5th November 2010, we would have made a point to point return of 639% or 22.1% annually over this period. This is a very decent return considering that the NIFTY over the 10 year period had a point to point return of 270% or 14.0% annually.

    But let us consider a second scenario. This approach is one of buying when we believe the market is cheap and selling when it is expensive. For our study we have considered the market cheap at 15 times TTM (trailing twelve months) earnings and expensive when the market is trading at 21 times its TTM earnings. We have also considered that when we re-enter the market we will reinvest the entire sum that we received when we had exited on the previous occasion. From the graph below we can see that there were four opportunities to enter and exit the market at our decided parameters.

    Our portfolio is illustrated in the table here under.
    Date Investment Investment PE
      Call Amount  
    12-Apr-01 Buy 100 14.7
    1-Jan-04 Sell 187 21.1
    14-May-04 Buy 187 14.7
    20-Apr-06 Sell 421 21.0
    14-Jun-06 Buy 421 14.9
    12-Oct-06 Sell 580 21.0
    10-Oct-08 Buy 580 14.1
    10-Jun-09 Sell 822 21.2

    By simply ignoring the market noises and taking a disciplined approach we have could have made a point to point return of 722% or 23.5% annually.

    Clearly an investor can expect higher returns by just having a disciplined approach and simply buying when the market is cheap and selling when it turns expensive. One does not have to wait for the deep correction or the big rally to make money. When the possible upside potential for a stock is clear, investors should take their own decisions depending on the expected gains. It is better to exit when they believe that the stock is trading expensive rather than holding on. While it is not necessary that the stock prices will not keep going north even after selling the stock, but it is better to be cautious than to be sorry later on.



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    4 Responses to "Can we time the market?"

    A Vaidya

    Nov 30, 2010

    can someone let me know where would i find the PE (TTM)ratio of the market?. sensex/nifty ?



    Nov 24, 2010

    The problem with all such articles is that they are all written in hindsight and on past 5 years data. And unfortunately it appears that first views are formed and then laboured over the data to "prove" ones piont based on past data which "suits" the proponent.
    No meaningful comparison is made with alternatives. Similarly when you want to push SIP, similar "study" will be dished out. For examle in the given case what is the basis of 15 and 22 times range. Why not 13 and 18? Why data from April'01 and why not from 1995 etc. And why Index and not particular Scrip/Co since few invetors invest in Nifty. Also basic data like EPS for various periods etc is conveniently missed out to avoid coming under scrutiny. Even the source of data and the methodology of its computation (e.g. PE ratio used in the graph) is not mentioned.



    Nov 23, 2010

    Every time market is correcting, the index would go below 200 DMA but that can happen even with high PE. Hence, it does not seem to be an assured way of making money.
    Formula of entering when index PE is under 15 and exiting when PE over 21, on the other hand is certain to leave an investor with sizable profits.
    Incidentally, the present PE is well above the exit limit. How many of us are exiting and how many are greedily waiting in the hope that it will go up further? I must admit that I belong to the 'greedy' category. I think I must become more disciplined.



    Nov 23, 2010

    i would like to share another strategy which i am following is when stocks are coming down enter at or below 200 day moving average and go on increasing your investment at every deep of 20 % and than exit when it is overpriced (P/E ration of over 25). this strategy has worked very nicely for mme but only thing an invetor is lacking several times is lack cool ness required.

    Equitymaster requests your view! Post a comment on "Can we time the market?". Click here!

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