You’re seated in an exam, and the examiner just announces that the time allocated for completion has been shortened by 1 hour. Sweat sweat, your exam just became more difficult to pass. 5 minutes later, the ruthless examiner again announces that time allocated has been shortened by another hour. Now, making passing grade seems impossible to you. Instead of passing, you pass out.
Shorten the time-frame for almost anything in life, and doing that particular activity properly and well becomes more and more difficult. What if time was taken out of the equation for the above examination? Well, chances of making passing grade just got a huge fillip, because over infinite time, everyone would eventually clear the exam!
Now substitute “examination” with “investment”. Hmmmm, what do we have here? Is it easier to make money from an investment, if time were taken out of the equation?
After the great depression, those businesses that actually recovered, took 20 years or more to do so. Many never recovered. In investing, a 20 year time-frame is definitely taking time out of the equation. So here we have an example where the answer to the question asked is a most definite no. But, that was then. I mean, pre computer-age, pre internet, pre everything. What’s the world like now? Information flows at the speed of thought. Business cycles are much, much shorter. The Fed creates bubbles, and after they pop, crises happen. So, now we rephrase the question, pertaining to today’s scenario. Today, is a 20 year investment horizon going to give you better odds of making money?
One thing is clear, if your horizon is long enough, today you are going to see the underlying going through at least a few cycles. A buy low – sell high strategy has the best chances today of rewarding you very much within your lifetime.
But, what is low, and what is high? Is 1226 dollars an ounce too high a price to enter gold? Or, should one wait for Bharati Airtel to fall to Rs. 250 before making a contrarian purchase, or is the current Rs. 300 the bottom for Bharati? Nobody knows the answers to these questions.
With a long enough investment horizon where you’ve taken time out of the equation, you’ve simultaneously removed these questions from the equation too, or have you? Let’s say you go ahead with your contrarian purchase of Bharati at Rs. 300 and the scrip plunges to 150. Business cycle is short, remember? Today, realistically speaking, telecom could take maximum 5 years to hit a high in the cycle, so you could tank up on another load of Bharati at Rs. 150 and wait for the cycle to hit a high before offloading. Needless to say, before making any contrarian purchase, you should be convinced that the company won’t go bust in the current low of the business cycle. That’s one risk that looms while making contrarian purchases, but if you do your research properly, perhaps one in ten of your contrarian picks will be so unlucky, and those are perfectly acceptable odds.
What about the other end of the barrel? Gold is at an all-time high, and nobody knows where it is going from here. The whole world is confused. What if you take the plunge and enter gold at 1226 dollars an ounce? Now, two things can happen. If gold rises further you make money immediately. Let’s say gold peaks at 2000 dollars an ounce, and then the cycle in gold starts going towards the lower side. In this case, one could keep booking profit all the way up, and hopefully one could be out fully before or even at the peak. In the other scenario, gold peaks where it currently is, and starts going down. You start losing money on your investment. Let’s say it bottoms at 800 dollars an ounce in one year’s time. You’ve been sitting it out. What are the chances of you making money on your investment, and that too soon, let’s say within another year? Based on sheer gut feel, I’d say your chances are high. What’s my rationale for saying this?
Over the last 100 years, gold has given returns in spurts, only to fall back to lows again. It’s 100 year return has been pathetic, only just about in the black. It’s the time it begins to spurt that one needs to look out for. That occurs in times of uncertainty, which is now. If one allows gold leeway on the time-axis in uncertain times, one new high could be taken out after the other till stability and certainty return. So, if your entry into gold crashes on your face immediately, just keep sitting it out if uncertainty on the world currency of choice front keeps looming, and eventually, you’ll have recovered your principal and perhaps made a little money. The worst-case scenario for you here could be that the world suddenly discovers a currency of choice other than gold, gold crashes to god knows what level, and remains there for another 20 years. That would be a black swan event which looks unlikely currently, because the world is far away from finding a currency of choice, and till it does, one can keep stretching the time axis of a gold investment.
If your picks are solid, the market will reward you for patience more often than it will not. So couple patience with excellent research, and then sit back and relax!