February 19, 2009

Timing the market

Timing the market is a very enticing proposition. It is seductive to think that if one can find the tops and the bottoms of the market, then one can make supernormal returns. There are charting approaches, wave theories and a bunch of other stuff to predict the market. However most of the academic research on such 'publicly' known theories indicates that the returns after costs is lower than passive investing.

Note the word public. There maybe investors out there who have systems to predict the market and make a killing. Well, they are not going to disclose that anytime soon.

So for the common investor, we have the option to either use publicly known systems knowing that the academics may very well be correct and use it till we can prove them wrong. The other option is to develop your own systems, which yield excess returns.

The same argument can be applied to value investing. Academic say it is not possible as the market is efficient.

My own journey has been of a skeptic, to a tentative believer to a firm believer. I read about value investing almost 10-12 years back. It made a lot of sense, but I am not one to have blind faith. I was not ready to invest money in any approach till it worked for me. As a result I read books on value investing and on the efficient market hypothesis too. At the same time I started applying the principles with my own money, but on a very small scale. As my returns have outpaced the market, my confidence has grown to a point where this is the only approach for me and a majority of my funds are invested via this philosophy.

So value investing is not some religion to which I got converted one fine day. I started as a tentative believer and have got convinced as I saw my own results.

9 comments:

Anonymous said...

same is happening with me also..
I am slowly being converted to Value Investing Religion
.

Ani

Vic said...

Rohit,

For me, I spent last few years reading more on Asset allocation and Efficient markets.

Your blog has given me some hope on Value investing, it is a natural step after reading on all different methodologies. I'm sure it works, very keen on learning and experimenting with it.

Thanks,

Vikas

Rohit Chauhan said...

Hi ani
i know you are not using the term religion in a sense of blind faith ..but it is precisely the point i am making.
dont believe anything on blind faith ..no matter how convincing the argument.
i am convinced of the value investing approach because i have seen it work for myself over a long time and for others too. however i was not a full convert the first day and have taken time and started small initially to hedge myself

regards
rohit

Rohit Chauhan said...

hi vikas
as you read and learn more, you will get comfortable. we all practise value investing in all our buying and selling ..except stocks ofcourse. who buys a car for more than its value ?
i think you and others should continue to be sckeptical till you see it work for yourself

regards
rohit

Anonymous said...

Rohit,

I started investing in stocks in beginning of March, 08 – thinking market crash is good opportunity. Most of my buys were based on information on web sites (Economic times / Money Control / ICICIDirect). After seeing market price of stocks gone down substantially – I started looking for valuation methods. Found fandoo professor through Google and got your blog details in Sanjay Bakshi’s blog.

Since then (I think May, 08) I have read all your blogs and lot of stuff on Sanjay Bakshi’s web site. I have read about 10 books on value investing / Buffett including Intelligent Investor, Warren Buffet way, little books that beats the market, etc and your money and your brain. I am planning to read more books on value investing and behavioral aspects of investing. I am also planning to read annual reports of companies not covered by analysts.

I firmly believe in value investing now – even though it is not proved yet – particularly more comfortable with Graham type of investing. Main reason to follow value investing – because it make sense to me.

Thanks for your wonderful blog.

Prashant

Investors times said...

The concept of value investing must be taught to each investors. However most investors just want to get rich quick and as a result invest recklessly. I ahve been reading this and other blog since i started investing last year.

Keep the good work. It would be a good idea if you give us tips on how to research companies.

Rohit Chauhan said...

Hi prashant
your journey is similar to mine, although mine was slower and took longer and also i was a skeptic for quite a few years

hi investor times
i have written various post on how to analyse the companies. however i need to consolidate it properly for easy reference

regards
rohit

Vic said...

Rohit,

My guess is that your consolidated thoughts will be in form of an eBook..:-)

Vikas

Rohit Chauhan said...

vic
you got it :) lets see when i get around to doing it

regards
rohit