Time: The Investor's Best Friend

The notion of “time in the market beats timing the market” is often repeated but not always fully appreciated. Many investors feel the urge to predict market movements and jump in and out of positions based on short-term events or macroeconomic data.?

However, as seasoned value investors, we know that trying to time the market can often do more harm than good. It's not just about knowing when to buy or sell—it's about staying invested and allowing the compounding effects of time to work in your favor.

Recent studies and experiments provide fresh perspectives on why staying the course and focusing on long-term value is a more reliable strategy than trying to play the short-term guessing game.

The Illusion of Predictability

Let’s start by considering an experiment conducted by researchers Victor Haghani (former Long-Term Capital Management partner) and James White (CEO of Elm Partners), which tested whether having access to tomorrow's headlines would give traders an advantage.?

Participants in their study were given advance knowledge of the following day’s news. In this experiment, 118 finance-trained individuals were given $50 to trade on major market events, like Federal Reserve announcements or employment reports. Despite having what many would consider a significant edge, the average return was just 3.2%. Even more surprisingly, almost half of the participants lost money, and 16% went bust.

You’d think that knowing tomorrow’s big news would all but guarantee success, but the reality is far different. Nassim Taleb’s conjecture, which this study aimed to validate, suggests that even if investors had access to a crystal ball, they’d still face significant challenges due to issues like poor position sizing and leverage mismanagement. While having more information can help, it’s clear that no amount of data can make an unpredictable market completely predictable.

The Cost of Missing the Best Days

The temptation to time the market often arises when things seem uncertain, or when you feel a correction might be around the corner. But consider the data on the importance of staying invested. Over the past decade, missing just the five best-performing days in the market each year could have cost investors dearly. If you’re out of the market during those critical days, your returns will suffer significantly, leaving you worse off than if you had simply stayed put.

For example, imagine someone who tries to “sit out” volatile periods, waiting for the perfect time to jump back in. By doing so, they risk missing those few key days that account for a large portion of annual gains.?

A study conducted by JP Morgan Asset Management revealed that missing the best 10 days in the market over the past 20 years would have reduced total returns by more than 50%. While market corrections and volatility are inevitable, they are often followed by strong recovery days that make up for those downturns.

Short-Term Noise vs. Long-Term Value

Markets are influenced by a multitude of factors that are impossible to anticipate with precision, including investor sentiment, global events, and complex interdependencies across industries and economies.

As value investors, our focus should be on the intrinsic value of the businesses we own rather than the day-to-day fluctuations in stock prices. Trying to time the market can be akin to betting on the latest rumor—exciting in theory but risky in practice. In contrast, staying invested in quality companies with strong fundamentals is a time-tested strategy that pays off in the long run.

When you buy shares in a company, you are essentially buying part of that business. Just as you wouldn’t want to flip ownership of a business every few months, constantly moving in and out of stocks can erode your returns and limit the benefits of compound growth.

Time is Your Best Friend

At the end of the day, the greatest ally for any investor, particularly those with a value-focused philosophy, is time. Rather than trying to anticipate every twist and turn, focus on finding high-quality investments and allow the compounding process to do its work. The market will experience volatility, but by holding through these periods, you position yourself to benefit from recovery days and long-term growth.

Ultimately, investing is a marathon, not a sprint, and time spent in the market is the key to building long-term wealth.