Every stock market aspirant must have heard that time in the market is more important than timing the market. Time is important but equally important is your timing in the market. If you’re a mutual fund investor or a long-term investor who is not looking to generate regular income from stock trading, then it may be fine for you to focus more on time in the market. But if you’re looking to generate income through positional trading, then timing plays a crucial role.
Let us consider a scenario where Mr. A bought a stock at INR 100 thinking that he will sell it at INR 150, and he anticipated this up move in 6-8 months. However, the stock turned downward or started ranging, and the anticipated up move never came in that duration. Eventually, the trader thought of holding this particular stock for a longer time and eventually became a long-term investor, and this is a familiar story. We buy a stock with a trader’s mentality, and when it does not move in our expected direction, we immediately become investors. And, because of this, we are not able to generate regular income.
Think about someone who would have invested in a stock at the wrong time and then had to wait for a good 10 years to break even. I don’t think it is a good use of both time and money. Okay, enough logic and reasoning. Let us look at some real examples. Although there are 1000s of examples, we will discuss 2-3 stock scenarios. These are only for educational purposes.
IndusInd Bank: If someone would have bought IndusInd Bank during the months of July-Aug 2018, the price was ranging between INR 1900 and INR 2030. Fast forward 4+ years (Dec 2022) and the stock is trading close to INR 1200. Now that’s a huge negative return; however, the same stock has generated around 6X returns from March 2020.
Cipla: Let’s take Cipla now. It was hovering around INR 700 in March 2015. It went to approximately INR 400 till Jan 2020. So, the trader/investor got stuck for 5 years with a negative return, and that too of such a high magnitude. The best part – Cipla has generated roughly 2.7X return since Jan 2020.
These are just a few stocks we have shown here, but this happens in every stock. But I think you will see the pattern here. Every stock goes through these up/down cycles.
So, what should a positional trader/investor do?
- Decide whether you want to generate income from the stock market or you want to generate wealth. This will help you frame the right psychology and trading/investing approach. If you are looking to create regular income, then timing is absolutely essential.
- Pay attention to valuation and market sentiment for the stock, in addition to fundamentals.
- Study the market cycle of the stock. In my opinion, this is the key. You wouldn’t want to buy the right stock at the wrong time.
Whether you do fundamental analysis or technical analysis or a mix of both approaches, the goal should always be to not overpay for the stock. After all, no one wants dead money.