Timing the market …

Who says timing the market is impossible? Look at the behavior of most of the investors and you will be amazed to see their impeccable sense of timing: Consistently, they buy high and sell low.

Read the excerpt below from the book, “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”

If the market valuations are high, an investor would be better off having a lower allocation to equity and vice versa. Let us check this with the reality. Do investors at large follow this rule? Some of the data points are presented here for a quick check on the above.

During the quarter of December-2007 to February-2008, the Sensex was at around 19,000 points. It was in the same range in the quarter of July-2013 to September-2013. However, in the first period, investors across the country invested close to Rs. 25,000 crores in equity mutual funds, net of redemptions. In the second period, mutual funds saw an exodus of Rs. 3,600 crores after adjusting for purchases. Subsequent to the huge inflows, the Sensex went down from 19,000 to 9,000; whereas after the huge redemptions, the same went up from 19,000 to 28,000. If the investors were right as a group, the reverse should have happened. (These numbers and periods have been taken randomly. To put things into perspective, compare the Sensex level with the net flows in equity mutual funds).

Buy high, sell low seems like the mantra that people follow on average. However, as logic would suggest that mantra would be the surest road to disappointment, if not ruins.

#RidingTheRollerCoaster – 181

Buy high sell low … or is there another way of making money?

Success in the stock market is based on the principle of buying low and selling high. Granted, one can make money by reversing the order – selling high and then buying low.” – Said Sir John Templeton.

Sir John, a bargain hunter as he was, found a bargain in the internet stocks – well, the bargain was not in buying, but in selling. However, since he did not own any stocks, he had to short-sell the stock by borrowing the same from the market and later reverse his trade, i.e. buy back the stock.

Sir John Templeton took out the list of DotCom (or Internet) companies that raised money through IPOs and then further filtered on when the lock-in period was getting over. He started short-selling the shares a few days ahead of expiry of the lock-in period anticipating large amount of stock being off-loaded once the lock-in was over. He was right on target and in a falling market reaped huge profits.

What did the other great investors do in that time? Read it in “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget”

@RidingTheRollerCoaster –  164