When it comes to equity investing, the golden rule is that time spent in the markets is far more important than timing the markets.
Lucky, Unlucky, and Discipline completed their MBA degree in 1990 from a reputed business school. Their professor of wealth management course once said, “Equity is a growth capital and not a risk capital for those who invest small sums for a long period of time to build a corpus for very important goals such as retirement.” He added, “Stock picking and timing are the most overrated skills and you can create wealth by following a disciplined approach for a long period of time without having them.” He also underlined, “If you can persist with it, you will be able to beat at least 75% of professional money managers and most other asset classes.”
Learning into practice
Each one of them got a good job and they decided to put classroom learning into practice by investing `10,000 every year for the next 35 years towards building their retirement corpus. All three were convinced about investing in a passive ETF tracking Sensex to mimic market returns without relying on stock picking skills. Before start investing, Lucky went to seek the blessings of her astrologer guru ‘Predictor’, and shared with him, her plan to invest in equities. Her guru looked at her horoscope and said, “My child, your horoscope is so promising, that whenever you invest into equity during the year; it would be the lowest level for Sensex for that year.” Buoyed by the prediction of her astrologer guru, she started investing without worrying about market levels. Unlucky also decided to seek blessings from his astrologer guru, ‘Foresight’, and shared with him, his plan to invest in equities. His guru looked at his horoscope and said, “Son, going by your horoscope, you should stay miles away from equity investing. In fact, it is so bad that whenever you invest, it would be the highest level of Sensex for that year.” Disappointed by the prediction, for a moment, he thought not to invest in equity. But finally, he decided to follow his professor’s advice and started investing. He tried his personal best to choose a day in the year that did not turn out to be the worst.But, Discipline decided to invest without consulting anyone, and he chose, January 1, as the date for his annual equity investments in Sensex ETF.
Reaping the harvest
Twenty-seven years later, the trio met on the final weekend of 2017 and reviewed their equity investments. Of course, Lucky earned the highest CAGR of 17.2% and Unlucky earned the lowest CAGR of 12.75% in line with their astrologer gurus’ predictions. However, our Discipline earned CAGR of 15.78%. All three were happy as they all were sitting on the high tax-free returns that outperformed all other asset classes and enjoyed 1.5% more in form of dividend yields. Yet, on a relative basis, Lucky was disappointed. She said, “Despite investing at the lowest level every year, I could earn only 1.42% higher than Discipline. Just 1.42% of my luck! This is unfair. Unlucky looked disappointed but for a different reason. He said, “Instead of working hard, to avoid my curse of investing at the worst market levels every year, if I had invested like Discipline, I would have earned better returns.” Discipline said, “I am happy that without any stock picking, timing skills and luck on my side; I could earn returns that could be the envy of most investors.” I am sure you as an investor know that it is not possible to replicate Lucky or Unlucky in real life. The only thing you can do is to replicate what Discipline did to create wealth for yourself. The message from this story is clear: “When it comes to equity investing, time in the markets is far more important than timing the markets.”
The writer is professor & chairperson (Finance), School of Business Management, NMIMS, Mumbai