The markets are high and they seem overvalued. Many are concerned about the upscale markets. But the bigger questions that investors must ask, are comprehending.
1) 'When' will it befall?
2) What if it does not fall much; i.e., what if it is a time-bound improvement and not a price-bound one?
3) If it falls, then by whence much?
We all know it is tough to acquire good habits. And tougher to ditch bad ones (such as smoking).
Now, let’s implement this logic to the stock market. A lot of investors are in a quandary: ‘should we book profits for now and enter again when the market declines?’ Let’s say you execute this idea and sell all your investments today with the plan of enrolling in the market again when it falls. And let’s consider your decision is determined to right and the market falls drastically in the next some days or weeks.
If that happens, it is not great news. This is because if you are proven right in this determination, you will do it again in the future. That is, you will ‘time the market’ again and repeat. And this is a bad attitude. If you time the market 10 times in the next few years and you are inside just 3-4 times out of 10, you may still lose money overall, forget about making great results.
Check the records of prosperous investors. Do they follow this method? If not, why? If they cannot or do not foretell the market, what are the chances of you being honest? We have to be careful about the variety of actions we take, as they will become a habit. If this habit is a bad one, it will be very hard to leave it.
Now, let's see if we can return the three questions asked earlier.
'When' will markets fall?
I know investors who exchanged their portfolios in July 2020. The market had improved significantly from its March lows and economic activity had hardly commenced.
Logically speaking, it was the right note. Many investors and experts were anticipating the market to fall again. We are in December 2020 now and we all know what has occurred from July onwards. It is not about being ‘logically right,’ but about acquiring the right habit.
I also know a few of these investors who subscribed to the market again in September-October 2020. It was not easy for them to follow the growth of the market continuously when they had sold their investments in anticipation of a fall. Similarly, if you sell today (December 2020) and the demand keeps rising for another few weeks or months, it will convert remarkably difficult for you to take any decision. Each day will present a dilemma.
What if there is only a time-bound improvement?
Correction can be price-bound, the way we held in 2008 and March 2020. And it can be time-bound as a whole. That is, the markets settle in a certain range for a very long period.
1) From December 1993 till February 1999 (for more than five years), the Sensex was range-bound within 3000 and 4000 levels.
2) From July 2009 till December 2011, repeatedly, the Sensex was range-bound.
After moving in a range, the market started climbing up again in both cases. If that appears repeatedly in the next few months or years, your plan to enter at low values may never fertilize.
If it falls, then by whereby many?
Did you invest a huge number in March 2020? No?
Maybe because you were expecting the markets to fall more. We, as humans, have this deep passion to buy at the lowest level. And who tells you where the ground is? Investing in the lowest position and exiting at the top is a thing of luck, not research. Therefore, the best strategy is to spend at every level. Yet at today’s level in December 2020.
In a nutshell, make assured you are conscious about the habits you acquire while investing in the stock market. This is what separates a successful and not-so-successful investor.