One of the questions that I often get asked is
- “Should I start investing right now? Or should I wait until the markets are slightly more favourable?”
Or another flavour of the same question,
- “Adi, I think the markets are really high now. Do you recommend that I wait for the next bust, invest all my money then?”
In fact, my friend posed this exact question to me. I had already tackled this with facts and figures on an earlier post: Start investing : where, what and how?
But apparently facts and figures don’t stick well. So, instead of all the boring numbers, I am going to tell you a simple story. A parable of sorts.
We all love a good story. And for us homo sapiens, stories always seem to stick around rather than numbers. Buckle up, its story time.
Story : A tale of two walks
Chapter 1: The beginning
Meet our protagonists :
- Alex: The blue jacket man
- Dobby: An energetic little brown dog
Dobby can a get little too excited at times and run around everywhere, so he is always leashed. And Alex has control of the leash.
After a relaxing time in the park, and they are both now heading back home.
Now, it is when things get really interesting. Especially, the route they both take back to home.
Chapter 2: The way back home
Alex, being the sane and wise one, take the direct path to home. He knows the way, and he is deliberate about it, and it is pretty much a straight line back home.
On the other hand, our little Dobby is mischievous. He gets distracted by all kinds of stuff.
- He runs around everywhere and sniffs things.
- Chases around dogs of opposite gender in hopes of wooing them.
- Runs around, postures, and (empty) barks at other dogs.
He walks around as if he has no plans. And you really cannot say where he is headed at any given point in time.
But since he is leashed, fortunately for us, he cannot get far away from Alex. He starts and ends at the same place. But his path is not so straight forward and does not have any rhyme or reason to it.
Chapter 3: All together
So, if we overlap and visualize the routes they took together, then it will look like the following.
How does this all relate to Markets and investment strategies?
Allow me to remove all the imaginary characters and leave only the paths taken behind.
Now most of you might come across something similar to the brown line in the last figure in the financial news. The typical market movements look like that.
Chapter 4: Moral of the Story
If you have not already deduced the analogy, then here it is :
|Alex||The real intrinsic value of an investment.|
|Dobby||The value assigned to an investment by the market. This is the price that you pay when you buy an investment.|
|Path of Alex||The increase in the intrinsic value of an investment over time.|
|Path of Dobby||The market movements of an investment.|
|The Leash||The difference in the intrinsic value of the investment to what the market values this investment.|
Much like our Dobby in our story, the markets zig, and zag. They both are at times irrational and move in weird ways for weird reasons.
If you follow Dobby, you would not be able to figure out where it is actually going and it will drive you crazy. Similar, following market movements is not a very useful exercise.
You really cannot predict it.
If you want to know where they are headed, focus on the Man. Unless he has lost sense of what he is doing, he will typically know the way back home. It is a straightforward, deliberate, and incremental step forward. One at a time.
And similarly, unless we have a major disaster (nuclear war, zombie apocalypse, and such improbably events) humans will continue to be creative. They will continue to make deliberate and incremental progress. And this will increase the intrinsic values of the entire economic market.
And, for Defensive investors like you and me, the best way is to believe in this human progress and follow the course.
The course is already explained here. I am repeating it here once more :
- Save as much as you can.
- Invest automatically every month a fixed amount (and whatever you can spare) in a low cost broadly diversified index funds.
- Be diligent about this and do not time the market.
Do not get tempted to buy into that new sexy stock. Do not try to keep tampering the portfolio according to new market movements. Make a solemn commitment, that you would stick it for the long-haul and well then stick with it!
Believe in the Man, and not the Dog!
If you have already not started,
The best time to start investing is right now.
Not later, not earlier.
The worst you do with this strategy is overpay by the price of the leash (the difference in the intrinsic value and market value). But, if your time horizon is long :
- which it should be otherwise you are speculating not investing!
- the leash difference will average and nullify itself out.
- Do not follow or get swayed by market movements.
- It is pointless and not a helpful exercise. At times, it’s even stressful.
- Pick a strategy and stick with it.
- The best time to start investing is right now.
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Until the next time, Ciao!
If you like this,
you might also enjoy these other series of related posts.
Disclaimer: Like any good parable, this story is of not my invention. I actually read this years ago in one of the investment books. I don’t remember which book but this story has always stuck with me. Obviously, it doesn’t entirely capture the nature of the market. But I find this analogy immensely helpful in those tempting times. I hope you do too.