Don't even try to time the market

The year 2009 will be remembered as the year of revival. The Sensex, which had plunged to a low of 8,160 in March, bounced back and recouped most of the losses incurred after the fall from its all-time high of 21,200 in January 2008. Markets had plunged in reaction to the aftermath of the US credit crisis, which resulted in the freezing of global financial markets and outflow of liquidity from riskier asset classes. However, the liquidity flows soon reversed as coordinated efforts by governments and central banks across the globe started yielding results. This ensured the return of investors’ risk appetite and the confidence returned to equities—especially in the emerging markets—which witnessed a sharp run-up.

Emerging markets, which are at the forefront of the uptick in the global economic activity and are the main drivers for the global economic output, witnessed significant capital inflows. India was no different. Looking back at the markets in 2009, everything appears to be a natural progression, though many of us would have missed the initial part of the rally. This rally holds lessons for each one of us.

The biggest learning for an investor is not to spend effort on timing the market. Instead, he should focus on valuations while making investments. Looking back at the valuations of the market at its trough in 2009—9.6 times the 2009-10 estimated earnings—they provided an earnings yield of 10% (much higher than the bond yield), and made it a compelling case for investing in equities.

However, investors found it difficult to overcome the fear of markets drifting downwards, thus losing a great opportunity for investing at very attractive valuations. Further, the crux of investing lies in the fact that if you have the asset class right, half the job of achieving your longterm financial goals is done as the asset class will ensure wealth creation for you.

If wealth maximisation is what you want, it is worth noting that equities as an asset class has outperformed all others over the long term. As Warren Buffett once said, “If you are an investor, you are looking at what the asset is going to do. If you are a speculator, you are focusing on what the price of the object is going to do…”

Hitesh Agrawal is Head of Research, Angel Broking