Does It Make Sense To Try And Buy And Sell Your Shares Frequently?
In the stock market, there are many different types of participants. On one extreme, there are the speculators cum traders, who seek to profit from small fluctuations in the share prices of various companies. On the other extreme, there are the patient long-term investors, who sit on their shares for years or even decades with hardly any activity to speak of. So, which technique would make more sense, and why?
First, let us define what is meant by “timing the market” and “time in the market.”
All about timing
Timing the market means that an investor tries to determine when prices are about to rise or fall, and positions his portfolio accordingly. For instance, he may decide that the current trade war between the US and China is going to cause a major crash, and so he sells his entire portfolio and goes into cash.
The idea is that when a crash occurs, he is able to deploy all his cash to buy shares cheaply and then sell them for a profit when there is a rebound. In essence, the investor who is timing the market is confident of being able to predict where market prices are heading over the short-term.
All about time-in
For investors who practice time in the market, they stay vested throughout all kinds of market conditions, be it booms or busts. Their basic premise is to own shares in great businesses run by capable management, and to allow the businesses to compound their wealth over years or decades.
Hence, this technique is the opposite of timing the market, as these investors do not need to predict how the market is going to move. Instead, they simply have to focus on ensuring they buy good, stable, growing businesses which are able to continue to generate copious amounts of free cash flow over time.
From the above, I would conclude that time in the market is a more superior strategy. No one can consistently time the market correctly, and you either end up with huge opportunity costs by staying out of the market when it continues moving up, or you incur losses when you use technical indicators to decide to enter and exit. Moreover, brokerage and commission fees stack up over time, and the active trader incurs much more of these fees than the passive long-term investor.
Time in the market ensures that one does not need to fret over the market’s day-to-day gyrations, and he can enjoy growth in the underlying businesses he owns plus any dividends that they periodically pay out.