Other day I saw a chart which really got me thinking. It highlighted the stark differences between the outcome for two retirees starting with the same investment, but with small difference in terms of when they started (within a span of few months during 1969-70). I strongly believe that timing the market is impossible and one should not spend any energy in figuring out the short-term direction of markets or macro-factors, but I also believe that one should be aware of the market conditions and have some opinions on the macro in terms of its long-term trajectory. As always Howard Marks has put it quite clearly: We may not know where we’re going, but we sure as heck ought to know where we stand.
I see lots of of smart/value investor claiming that they are looking at individual companies only and don’t want to time the market, but at the same time many of these say that they are waiting for a correction. Now this can be explained up to some extent by their bottom-up analysis concluding that nothing is available at the prices they want. But this also sounds somewhat like they are trying to time the market as if they believe that market is overpriced and due to fall. Furthermore I have few more observations on this:
- Many of these investors have been saying this for few years now. So even if market corrects by 20-30%, if one missed out the gains from last couple of years, you will be still behind the market if you invested after such a correction.
- I agree that one should not invest on the basis of interest rates prediction for next 1-2 years or other macro variables but I think one needs to be acutely aware of the variables and need to have some opinion on this. Companies don’t operate in vacuum and their fate is highly dependent on the external environment.
So why I am having all these thoughts…few reasons:
1) People ask me this a lot in my job and this is kind of unavoidable for me till I change my job 🙂
2) I also used to think like that I am waiting for a correction but then over last 5 years this has cost me quite a lot of money…not sure if correction will make me that.
3) Timing is impossible…and looking at history I doubt if we have a big correction soon…it is very much possible that a big correction is still many years away…like it took almost 13 years from 1987 to 2000 before we got a >20% correction.
So how should one deal with all this? I have no clue where interest rates will be next year but I do think one needs to be aware of long-term macro view/trends into finding great investments. It would not have helped if a Greek investor bought even the best managed Greek bank after financial crisis as even that would have gone to 0 few time over next years. And some very good value investors actually tried this and failed.
Focusing on companies with good economics, strong balance sheet and great management certainly helps. Good companies generally come out stronger from the crisis. JPM, WFC are few good examples for this, though like everything else in the market this is not a rule (think of Lloyds). I think taking a long-term view also helps and this includes taking a long-term view on external conditions. For example one could have looked at US housing market few years ago and made a macro/industry call that housing market is likely to do better over next years as supply catches up with the demand.
Overall I think even if you are investing in a company on the basis of its fundamentals, macro dynamics will be relevant for the total return and therefore one needs to have some framework to think about these especially in the long-term. For example equity markets are likely to do better in the countries which have right conditions for companies to deliver good shareholder returns (think of properties law, society’s attitude toward capital and capitalism, economic growth potential). A good example of this is US banks versus European banks. Though US was the epicentre of 2008 crisis, US banks have been a better investment than European banks over last 10 years. Even the highest quality Spanish or Greek bank delivered lower return than US banks ETF. So yes it is important to do investing based on bottom-up analysis, but macro context and timing matters a lot in the outcome and one should at least be aware of it!!