Right time to Buy

Yesterday was a pretty lucky day for me. Some kind soul had triggered my stop loss on Wednesday and while I had cursed him that day and the next day as well, man, was I happy to be neutral in markets as it tumbled on the opening bell in response to the Britain Referendum results.

Too many (and I am Guilty of being one of them) use Buffet quotes when it suits us best. Many a fund manager harp on value buying like Buffet while loading their portfolio up with momentum stocks at premiums. Its one thing to say that I can wait for eternity for buying good stocks at right price and yet another thing to twiddle one’s thumb even as market rockets one way.

With plenty of time on my hands, I created a poll on Twitter asking what people (those who follow me) were doing. The question itself was bit slanted to suggest this as being a opportunity. Here are the final results of the same.

While majority of folks seem to be waiting, folks outside seem to be rushing to use the opportunity to buy. Manoj Nagpal tweeted that yesterday saw equity mutual fund purchases being three times the normal.

For the record I did not buy since I am a systematic trader and no system had triggered a buy signal. On the other hand, Juicy volatility attracted me to sell some options in the belief that with the event being over and small time frame to expiry, Implied Volatility is sure to crash.

But is this or was this a opportunity to Buy? While markets at one point of time were down by nearly 4%, they recovered some of the losses to close the day with a loss of 2.20%. While I strongly believe “Prediction is Impossible”, that has not stopped me from trying to predict where the markets could be headed (once in a while).

Initially I had thought of having the header as “Blood on the Streets. What Next”. But a casual search revealed that I had already used that heading twice.

In 2014, I wrote suggesting that the fall wasn’t much and it maybe prudent to wait. Markets though had their own agenda as they shot up another 9.75% in the coming months before finally topping out.

In 2015, I once again tried to predict and thanks to a bit more experience I suggested that at best you could increase your allocation to equity slightly since one can never time the bottom. This time around, markets continued to see downward pressure for months to come with the final bottom being around 12% from where I wrote.

The reason most advisers recommend SIP is because they believe timing the market is tough if not impossible. At the same time though, they some how seem to believe that they can select the right fund manager (who will time the market correctly). One of the biggest funds has had a horrendous few years because the fund manager bet on the right set of stocks at the wrong time.

As much as people hate timing and think that it shouldn’t be done, your results are all based on the timing of when you decide to enter and when you decide to exit unless of course you are investing for the sake of investing alone and have no requirement of the money forever.

A fund claims that it tries to steer investors from trying to invest when markets are hot by closing fresh investments. While the PE Ratio at time of when it closed and when it re-opened did not suggest it being a big game changer, fact remains that the fund is trying to time the market using historical Price Earnings Ratio. Once again, they are trying to time the market using historical PE Ratio as the reference for their actions.

Will we once again see a PE ratio of Nifty at 10.68 (low of 2008)? I don’t have a clue but if there is no time frame for such prediction, of course, it could happen – decades later if not now. But I am digressing.

How do you come up with right time to Buy or Sell? In my opinion, the only way is by way of some kind of timing algorithm. If you are from the Technical side, it may be as simple as a 200 day Moving Average and if you are from the Fundamental arena, a simple PE ratio could be your tool.

Was yesterday a good time to Buy? The narrative depends on how the markets move in the coming days. If we strongly bounce back and start testing new highs, this was a opportunity. On the other hand, if the fall continues, this was a time to Sell (and one which only 9% voted). But since we don’t know how the future will unfold, only some kind of timing system would help you take that call (as long as the logic is validated and tested).

To conclude, if you are averse to timing but yet want to get market returns, ETF is the best route given that regardless of changes in fund manager or even the house, returns will be close to market it tracks.