Ellen’s FA study note 3: time and timing
Jul 28th, 2008 by ellen
Disclaimer: the main purpose of this note is to help myself distill and internalize the information from the investment books, mags and websites I read. If you feel it’s informative, I’d be very glad. But please do not take it as your investment guide. People have different personalities, what appears very right to me, might be totally wrong to you. Please do your own research for your investment.
- Ellen’s FA study note 0: travel towards a wonderful world on trains
- Ellen’s FA study note 1: institutional investors and individual investors
- Ellen’s FA study note 2: emerging markets
Nobody and no expert system can always get in at the lowest of the market low and get out at the highest of the market high. Smartest people in the world have developed all kinds of mathematical models for timing the market as accurate as possible. It might work for institutional investors but you, as an individual small investor, cannot rely on timing too much. First of all, you are not as resourceful as the institutions. It’s overly demanding for you to
- develop a reasonably intelligent timing system,
- have the access of the insider information as the partners of institutions do
As a result, you might have to be a trend-follower of super institutions. Trend-following does not always work out well. You may often react too late and lose big.
Analysts of BNP Paribas recently say that this year is not the best time to get into the equity market, the bottom will appear next year. They may have a point or two. But for German people, the capital gain tax starts from Jan. 1st 2009 makes a big difference. German investors have to get in this year to avoid the tax. They are even forced to accept a bad timing.
Time is individual small investors’ best friend. Work hard on fundamental analysis, find out some good businesses, and hold for a long time, until the fundamentals of the companies change - the earning growth start to slow down. Let’s have a look at HSBC for an example. From year 1977 to 1997, its net profit margin grew at a rate of 19.3% per year. If you invested 10k euro on HSBC in 1977 and sit tight until 1997, you get 10k * 1.193^20 = 341k euro. During these 20 years, at least five bears had attacked Hong Kong, countless surges came and went. HSBC had always found a way out. HSBC’s strength, the 20-year epic and your EQ together created the 341k for you. So, your job for securing the next 341 k:
- find next HSBC
- befriend time
- train your EQ
