Give it time
Minimizing luck in investing
I was going through Morgan Housel’s new book "Same as Ever" and came across a chart that is worth taking a second look at.
This chart shows us how often US stocks made money over varying time periods, such as every day, a year, a decade, etc, spanning from 1871 to 2018.
Basically, if you randomly pick any day between 1871 and 2018, there's a 52% chance that the US market would have ended up with a positive return that day. If you are asked to pick two dates that are 1 year apart between 1871 and 2018, the odds that the US market would have been positive in that time period are 68%. Now, if you choose two dates that are 10 years apart between 1871 and 2018, the odds of the returns being positive in that time are 88%.
Time reduces noise and randomness.
I liked how this chart presented data and so I decided to calculate something similar for the Indian market. Of course, I only have data for the Sensex going back to 1986, so it's not quite as useful as the chart above, but still, here we are.
The message remains the same. You see 52.57% positive days, but that number jumps to 95.90% if we extend the time period to decades.
Here, I raised the bar from 0% to 6%. That’s the hurdle. Basically how often is the market generating more than 6% across different time horizons.
Still, the message is clear. If you wish to minimize luck and increase the odds of generating a positive return or beating the FD return, it just makes sense to invest with a longer time horizon. At least that's what the recent past can tell us.
Two crucial caveats:
Morgan Housel showed us data for the USA, which has had a great century. I looked at India, which has done pretty well in the last 40 years. This is not the case for every country.
Look at the US chart again. 88% of the time over 10 years, you make money. That still leaves us with the remaining 12%. Torrid if you get stuck during that period. Even in India, look at what the Sensex generated from 1992 to 2002. Nothing. We have seen such decades in the past, and it doesn’t hurt being aware that its not impossible to see them in the future. Here’s hoping not in our lifetimes though!
That's all from me. I highly recommend giving "Same as Ever" a read. It's full of wisdom and a very easy read.