If you were invested in a share before the company announced their buyout or had a short position in a share before a disaster was announced, you could have made a significant profit in a very short time. These kinds of events cause much excitement in the market, but the average investor has better luck with being consistently invested in a diversified portfolio than trying to pick the lows and highs in an ever-changing market. The way to make a profit is to buy low and sell high, a simple enough concept. Sell a share for more than you paid for it and take home a profit, just time the purchase and sale correctly.
If timing the market exactly were possible there would be a lot more yachts in the world. To consistently get the calls right takes resources unavailable to the average investor. All day to monitor the market for one. This rules out most people and that’s without considering the knowledge and skill, costs and opportunity costs of consistent trading. Even professional traders don’t always get it right.
A study compiled by J.P. Morgan Asset Management using data of the S&P 500's largest moves between 1 January 1999 and 29 December 2018 showed that staying invested for the full 20 years would have netted a 198.5% return for investors. Missing just the 10 biggest moves up in that timespan would have quartered your return to just 48.9%. Missing the 20 best days in this 20-year period resulted in returns being negative. 20 days in 20 years is not much to miss.
Interestingly, six of the top ten days happened within two weeks of the ten worst days.
It is natural for people to want to make as much money as possible and lose as little as possible but in every trade there are two parties who think they are making the best decision with that share, yet only one of them is right.
In mathematics, as in finance, we look for trends; the shorter the term the less reliable the trend. This is because short-term volatility creates noise and knowing when the dip is actually a bottom or the uptick is actually a peak becomes a far more difficult exercise. The more data you have, the more accurate the trend, and the long-term trend is up. Looking at the JSE All Share Index, even the crash of 2008 had little effect over the long-term. It appears relatively small on the graph, but investors lost billions in a matter of months.
The above graph shows that holding for the long-term is the most effective strategy to garner returns. R100 invested in the JSE All Share Index in 2003 would be worth more than ten times that today. Short-term moves are often just that, short term, and riding them out is commonly the best policy. The trend is shown in red, and regardless of the moves in between the investment of that R100 and the R1 000+ that it became, the trend is distinctly upward. Market cycles are 5 to 7 years long and if you are not looking to be invested for at least that long, you probably should not be invested in equities.
The argument of passive vs active management is an age old one, if time is the main factor, why bother with an active manager? What an active manager should be able to do is enhance the long-term trends by avoiding stocks and sectors that underperform and investing in those that outperform. For instance, the 36ONE BCI Equity Fund has returned 10.45% pa for the last 7 years, the JSE All Share index has returned 7.14% pa. While that may not sound like much of a variance, combining time with active management resulted in a 62% better return than a passive instrument over the same period. Time, together with an outperforming manager, is the winning formula.
Instead of waiting for a low to time your entry into the market, investing consistently over time can reap the rewards of the long-term trend. The earlier you start the better - when it comes to investments, time is your ally.