Timeframe Matters

A couple of months back, I bought a stock not because it came in one of my models but because it was recommended by a very good friend of mine who is also pretty successful. The trigger came because of 2 reasons, One the guidance he claimed the company had provided to a friend (who is another excellent investor) and secondly it was cheap, massively cheap and looked like a fine turnaround story. 

The stock promptly fell right after my purchase. I asked my friend who said, nothing to worry, stock will recover in time. With IT returns date fast approaching, the same friend approached me with help on dates for stocks he had purchased but misplaced the contract notes. While helping him, I realized that most of the stocks he held were for anywhere between 5 to 10+ years and here I was trying to coattail him while also checking the stock price every day.

During 2020 / 2021, there was  a lot of interest in Momentum based Portfolios. Even Asset Management Companies chased the flame launching their versions of Momentum Fund. A year of no real returns and the interest has waned, another year or more and very few will stick with the strategy. Same goes for Value / Quality, you name it.

Thanks to easy availability of tech, its possible to backtest 100 years in just a few minutes and come up with an answer as to whether the strategy is worthwhile or not based on the end results. But what about the interims? How long are the down periods and what if we encounter one in the near future.

In 2002, Sensex was at the same level as it was in 1992. Yes, we had ups and downs, but if you were an investor in the Index (which wasn’t possible at those times), you basically earned nothing in a period when fixed interest by NBFCs breached 20% p.a for a short period of time. 

We have seen this even in International markets. Markets that are going nowhere for a very long time. Even today, many European Stock Market Indexes are in sideways ranges for a decade and more. 

All those investors who invested in the IPO of say Infosys or Wipro and still hold today, the amount they invested were not really important in their scheme of things and this allowed them to be invested for a really long time. Of course not to forget, Survivor Bias.

When financial planners talk about long term growth numbers, most of them are based on historical insights. But what if history doesn’t hold true. Australia for example has had continuous GDP growth – from 1992 onwards. 

All Ordinaries, the oldest Index in  Australia, went up from 1400 in 1992 to 6800 in 2008. Today it’s around 7200. This even when the economy was expanding. Measured in Dollar Terms, even our own Sensex from 2008 to 2020 while in local currency it had doubled. 

A model might show you some risks, but not the risks of using it. Moreover, models are built on a finite set of parameters, while reality affords us infinite sources of risks.

Nassim Taleb

Much of the behavior gap we talk about in Investing happens in my opinion because of time frame mismatch. Its easy to talk about long term investing, but how do we react to short term blips and how do we react to long term blips matters.

Investment drawdowns are normalized these days as something you should not worry about. Markets always go up. While they do have gone up, time that has gone by (where little or no returns have been achieved) are of importance too.

Fund Managers say that one has to give at least 3 to 5 years before deciding on whether an investment is worth holding or not. Given the high career risk for fund managers underperforming for long, the probability is that an underperforming fund shall either see a change in managers or if the situation is too bad, simply merge the offending fund into a fund that is doing well.

As an investor in such funds, does that require a reset of expectations. How long a rope to give the new fund or fund manager before calling it a day. Goals can be reached via two ways – high savings that require no need for risk or moderate savings where some part of the goal can be met with adequate returns. Time frame of our investments need to be inline with our requirements as also our ability to go through painful periods when all seems lost.

Coming back to the stock I bought based on my friends recommendation, I think it deserves a lot more time. One I wasn’t ready when I started but one I need to be if it has to work out as a good investment.