Like comedy, in investing timing is everything. However, timing the market is no laughing matter
Like comedy, in investing timing is everything. However, timing the market is no laughing matter. A big stock may go up and down by as much as 3 per cent in a day. If you could spot the top and the bottom you could extract percentages from the price swings and get rich quickly.
If you made 1 per cent on your money every day you could turn $1,000 (Dh3.678) into a billion in five years and still take a holiday. It takes 71 days to double your money at 1 per cent compounded. That's 233 trading days to grow it tenfold.
At 1 per cent profit a day, it takes 464 trading days to grow your money 100-fold; 1,390 days to take your $1,000 to a billion. It would take another 690 days to turn that billion into a trillion and another 280 days to have enough to pay off US national debt.
This is not an exhortation to turn into a trader, however — it's the opposite. In truth, capturing the daily, weekly or monthly swings of stocks isn't possible. Else the world would be full of zillionaire equity traders.
The theory of efficient markets says you cannot time the market. You cannot get the bottom of a stock's fall to buy in cheap; conversely, you can't capture the top to sell at the best price for a fat profit.
A purist would say you cannot pick a good or bad time to buy or sell in any event, ever. Like most theories, it's hard to stomach. It's also good to bear in mind as you try to break the rules, buying cheaply and selling expensively.
You won't go far wrong if you keep in mind there is no right time to buy or sell. This is not to say there is no right price.
Price is another dimension altogether. The theory goes that the price is always right, too. However more people lose money from trying to time the market than guessing the price. This is a key idea to hold in mind.
Why can timing the market be so bad? It's the cost of buying and selling freq-uently that does most damage. Following this market theory you will make a profit half the time and a loss the other half.
Like any gambler you may string a long run of wins together concluding you are skilful. You may suffer a long run of losses and believe super traders are defeating you with clever tricks. However that's how trading at random feels; like playing roulette.
Just like roulette the player loses in the end — purely because the house is always taking its cut whilst the odds of winning and losing are equal. In trying to time the market your result is no net trading gain or loss, minus the costs of trying. So trying to time the market loses the trader money.
Remember, the same laws of compounding that turn $1,000 into a billion will turn a portfolio from small sums into large sums over ten to 20 years. It might not make you a Lear Jet owner, but investing sensibly can make sure you are wealthy in time for your retirement.
Sensible investment doesn't power the world's stock markets. It isn't a game played by high risk traders or banks on the road to Lehman-style bankruptcy. This is probably why it works so well. It's a boring niche — perfect for those who want to play the rare game of conscientious investing.
The writer is CEO of ADVFN, a European and South American financial information website, and author of 101 Ways To Pick Stock Market Winners. The opinions expressed are his own and do not necessarily reflect those of Gulf News.
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