We all want to earn from the stock market but we fear its volatility and the loss associated with it. In order to avoid the loss from it, we generally start predicting and timing the stock market. We ourselves devise a number of parameters and predict the movement of the market on that basis.
Sometimes we get success while on other times we experience loss or to be very frank, the losses are more than our profits. There are group of people who believe that the predicting or timing the stock market is actually a futile exercise. Well, there are various reasons which authenticate that timing the market is actually a futile exercise.
These reasons are as follows:
(1) Changing values of the economic parameters
There are numbers of economic parameters which are associated with the market movement and the market reflects all these parameters in its price. The important parameters in any economy are as follows:
(2) Economies are interlinked
Every economy in this world is inter-linked; any development in one country will have an effect on the economy of the other country and vice versa. Especially if you are a developing country then the inter-economy impacts are significant as developing economies like India is very much associated developed nations like US and any developments in the American economy will have similar effects, although not to that extent, on the Indian economy. For example, India imports 80% of its energy needs from outside countries and any irregularity in supply, because of any of the reasons like supply is less or the demand is more or there is a political imbalance in the country, will have a direct impact in our stock market.
(3) Political uncertainties
Political uncertainty exists when the future outcome related to the present government and its policies is uncertain, like there is uncertainty during elections as which party is going to form the new government. Political uncertainty exists when there is uncertainty over government policies like fiscal or monetary policies. These uncertainties have direct impact on the market which creates huge volatility when anything is announced. One cannot know these outcomes in advance and hence cannot predict the market movement and its volatility.
(4) What about natural calamities, terrorists attacks and other calamities
Any natural calamities like tsunami, earthquakes have a negative impact on the stock markets because these are associated with destruction and loss which are harmful to any economy. A terrorist attack is always a threat to the economy and you will see a fall in the market after a terrorist attack. You can guess the aftermath of the situation but you cannot predict these calamities and disasters beforehand and cannot quantify the effect on the market movement.
(5) The changes are every moment and the market opens for the short duration
Stock market opens in the morning and closes in the afternoon but the economic developments and other effects take place around the world every moment. Say something happens in the night when the stock market is closed; you cannot take any action like selling or buying, till it opens in the morning. And the next morning, it already has incorporated the effect of the night’s development in its price and then settles down and you could not take advantage of this price movement.
(6) Market is run by emotions
The emotions of greed and fear prevail in the market. Some may be buying the stock due to greed in expectation of more returns in short duration while others may be selling the same stock due of fear of fall in its price. The fundamentals of the stock are same but the outlook towards it is different by the different group of people. The fear and the greed increase the volatility of the market. You cannot quantify the emotions and hence cannot predict the market movement.
Then what is the investing strategy of these people?
(i) Winning requires Patience:
The movement and the price of the market reflect countless parameters which are very difficult to analyse, correlate and then predict. The sudden changes in any of the important parameters result in high market volatility, therefore, it is useless to expect a return in a short-term. Yes, sometimes you may get good returns but the chances of negative returns are brighter. The market volatility settles down with time and the fundamentally good stocks emerge out as a winner, giving a good return on your investments. Keeping your investments intact and sailing through huge volatility requires patience and this virtue actually enable you to reap benefits of your investments.
(ii) Selecting right and fundamentally strong stocks:
It is not about timing the stock market but choosing a fundamentally good business at a right valuation. It is not that a strong stock will not fall with the market but it will eventually rise in future, surpassing all volatility and market irregularities.
(iii) Investing is a regular exercise:
When you make investing a regular exercise, you start beating the volatility of the market through price averaging. Finally, when volatility settles with time, your investments starts growing providing a good return on the investment.
(iv) Investing in the stocks when the market is down:
Selecting strong stocks when the market is down is the mantra of maximising your investment returns. I ask you a question would like to purchase a good company at Rs. 100/ share or Rs. 200/share. Obviously, each one you want it at Rs. 100/- per share. Do you know when this is available at the cheaper price? Obviously, when the market is down.
But, most of us avoid investing in the down market because of fear of loss on their investment. Remember, fear and the greed are the two dangerous enemies which prevent you taking the right decision.
In fact, there are infinite numbers of parameters which decide the market movement and are very difficult to quantify them. The quest of timing the market often results in wastage of time and money. The right strategy is to choose the fundamentally good company with healthy cash flows at the right valuation. The high volatility is the main risk for the investor but this risk is subsidized with time so it is always better to invest in the stock market with long-term horizon say at least for 3 to 5 years.