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Respect the ‘time’ factor in investment

This article was published in Live mint on Tue, 3 Oct 2017

In any investment, the aim is to reach a goal, and not the speed at which one reaches it.


“All I want to know is where I am going to die and I will never go there.” 
—Charlie Munger

About 92% of new businesses started, die early, within 3 years. Established, profit-making businesses find it difficult to survive for even one decade. Rare are the businesses that last more than 20, 30 or 50 years. Businesses and companies that survive in changing times, changing customer preferences, and the onslaught of new technology, should therefore deserve respect. The same is true for investors.

Investors must first survive (avoid ruin) and not lose their capital. No matter how clever or savvy the investor is or how great the market is, there will be a time when your investment is down 40-50%. This will happen and can happen in any market—property, stock market, or commodity. To come out of that alive, without ruin, is an accomplishment.

Many people think it is about the right investment at the right time. “Timing” means you catch the market at a really low price so you can make a bonanza when prices go up. “Time” means the period for which you hold and survive ruin. Both can make you money. Timing indicates luck and skill. Time indicates quality and character.

I hold respect for longevity (time) and skepticism for people who claim to know when it is the right time to buy. Time is a factor for investments: for strategy, performance tracking and process.

Time factor for strategy

The mathematical formula for compound growth has two variables—“r” (rate of return) and “n” (time period over which the investment is held). Let us take the exmaple of a brilliant investor, Einstein, and an average one, Mr A. Both invest Rs1 lakh. Einstein beats the average market return by 30%, which is tough to do; it takes skill, time and effort. Einstein holds his investment for 10 years. Mr A earns the average market return 10% but holds it for 30% longer, i.e., for 13 years. The average guy will take home slightly more money in the end than the brilliant investor.

Most of us are average investors. Instead of vying for that extra 1% on returns, we are mostly more suited to add time to get what we want. Therefore, time factor should be given due weightage before selecting an investment vehicle. Of course, that does not mean choosing the lowest “r” and being totally risk averse.

Time factor for performance and process

Another way in which the time factor is to be respected is longevity. In other words, the track record of the investor or the investment. This is important but often neglected by investors. Anyone can show a track record of a few months or even 1-2 years of impressive growth. I often get SMSs asking me to buy a stock or plot of land that has grown 50% in the past 6 months. This data holds little meaning as it does not indicate whether it will grow 50% in the next 6 months. In fact, I can say with reasonable confidence that the probability of this stock growing at such a fantastic rate is extremely low.

Let us take another example. Ms Z has to choose a mutual fund. In the same class of funds, fund A has given 15% return in the past 12 months, with a total 3-year track of the fund manager. Fund B has given 13.5% returns in the past 12 months but its fund manager has been in charge for over 10 years and delivered consistent performance. Ms Z wants to choose Fund A because of better returns. Which one will you choose?

Track record is precious because it highlights consistency of performance. The longer the track record, the less the role of luck and special events. Highs and lows are cancelled out of the performance.

It is statistically difficult to outperform the market year after year. In layman’s terms, one can come first in class one year, but to top year after year takes blood, sweat, tears and a method. This method is the process used to select a particular investment, the period in which it is held and the right time to buy and sell. This process is called the investment philosophy or investment process. Only a very few investors in history have achieved success for more than 20 years, consistently. They all have particular processes and methods.

All the above reasons combined should make you appreciate the importance of time factor. A person’s investment life starts in age 20s and goes on till age 70s. That is more than 50 years. Avoiding ruin in those 50 years of your life should be everyone’s first goal. The next goal is to be careful in setting expectations of return “r” and then play for the longest time horizon “n”. The higher the number “n”, the wealthier you will be. In this long period of managing your money, over 50 years, what matters is reaching the destination, and not who ran how fast.


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