Fenil's Library

On March 5, 2009, the Sensex closed at 8197 points. Cut to two-and-a-half months later. On Tuesday, the index closed at 14875, up a whopping 6678 points or 81%. Who could have thought this was possible?

This is precisely the reason I have repeatedly observed that the market is like a classroom where we are taught lessons. The same lesson is taught to you time and again till you learn it properly. Once you have finished your learning, you move on to the next classroom where you are taught another lesson. Successful investors are those who learn the most lessons along their investing life.

With the market in a free fall over the past few months, many investors had started questioning their conviction and wondering whether they would be better off selling lock stock and barrel, even at a loss sometimes, rather than having to bear this choppy volatile market. All ambitions and aspirations of being a long-term investor had fallen by the wayside. However, the events that have unfolded over the past few days are once again teaching us some lessons and hopefully some of us will learn these this time.

The first lesson repeatedly taught is that it is pointless, even impossible, to predict the market. But, we refuse to imbibe it. Investors tend to look towards experts, market gurus and other story tellers to give them a direction or even a prediction about the expected Sensex level. Currently, there are various predictions going around that the market will rise to a level of 19000 by December or that we will see a level of 17500 by Diwali 2009 and so on —- the actual number doesn't matter, the amusing thing is that none of these people were able to predict the 'fall' beforehand. However, once the market started falling, dire 'predictions' of doomsday started coming out thick and fast. And on the flip side, now that the fall has abated and the market has started its upward move, these very same people have started envisioning all-time highs and great achievements for the time to come.

Herein emerges another lesson that we can all learn. And this lesson is best summarised by the following quote by Bernstein William in the book The Intelligent Asset Allocator, "There are two kinds of investors —- those who don't know where the market is headed, and those who don't know that they don't know. Then again, there is a third type —- the investment professional, who indeed knows that he or she doesn't know, but whose livelihood depends upon appearing to

know." Truer words were never spoken.

History has repeatedly proven that it is impossible to time the market. National, international, political, geo-political, economic —- there are far too many factors which simultaneously affect the stock market and it is humanly impossible for anyone to forecast the index level.

Like I said, on Tuesday, the Sensex closed at 14875. But no human being is capable of knowing for sure where the market will close this evening, or the next week, or next month. So, if you invest or disinvest based on market movements or expected market movements, it amounts to speculation. And know this much —- you can either speculate or accumulate, but never both.

The second lesson flows from an interesting piece of analysis that has already been mentioned in a past column. I came across this study in The Wise Investor, the monthly newsletter from Sundaram BNP Paribas Asset Management. Take a look at the chart. It shows the value of Re 1 remaining invested at all times in the Sensex and what it would be worth if you missed the best days in the market. The numbers tell the tale. If you had stayed invested in the Sensex since launch, Re 1 would be worth Rs 161. If you had missed the best ten days, the value would be Rs 62 and this number declines significantly to Rs 10 if you had missed the best 40 days.

The key as we can see is to stay invested - for the simple reason that we do not know which would be the best days in the market. Of course, if you could sell only during the bad days and remain invested only during the good days, you would make more money. But that would mean predicting the future which is impossible. So the next logical thing to do would be to stay invested such that the good days are automatically taken care of.

The most relevant example of the above is the 17% rise from 12173 points to 14284 points on May 18, 2009 when the UPA won its overwhelming victory. Those who had stayed invested benefited; those who hadn't and thought they could outguess the market, lost out on an opportunity of a lifetime.

If there is any more evidence that you require about the benefits of long-term investing, see the table, which has a selection of a clutch of mutual funds that have stood the test of time. The market has fallen and risen multiple times since they were launched. However, had an investor held steadfast through it all, this is the kind of money that could have been made. Not for a minute am I suggesting that we can make similar profits going ahead. The return could be much lesser, or more. The point is, the only way to make a return —- any kind of return —- is to stay invested over the long term. All you need to ensure is that the vehicle (investment instrument) chosen is the correct one.

Despite all the upheavals and turmoil that we go through, at the end of the day, the world at large and India are progressing. And this progress will manifest itself in the stock market in one way or another. Timing is irrelevant —- that it will happen is certain. Whether you can benefit from it is up to you. The question is, are you up to it?