Why market timing do not work?

Let me tell you about my experience in stock market in India in one sentence.

'I have tried everything there is and lost money every time'.

Still I am in the stock market.

Recently my friend Niranjan and I were having a debate on Facebook. I have updated saying that Indian market is at a historically high PE ratio and that one should be careful about investing in the market now. The Nifty PE is above 28 as I write and this has happened only twice in history. Once in 2003 and the other in 2008 and both times markets crashed. 

Niranjan had an idea. 'Why don't you sell your portfolio lock stock and barrel now and buy it back after the inevitable crash?', he asked me.

I have been there. It never worked. Here is what happened.

You think that market has topped out and sell your shares an immediately it goes up by 20%. I used to own the shares of Bombay Dyeing earlier. I purchased it at about 300 and it was vacillating (they call it 'consolidating') around 550. I felt that it was bound to fall and sold it. In the next two days, the stock touched 730 !

After selling the shares at top, you wait for it to bottom. You assume that it has bottomed out and buy it and immediately afterwards, it falls another 40%. I purchased Vakrangee recently at 65 and it fell to 45 in just three sessions !

Another reason it works is this. You identify a great stock and want to play this 'Sell and buy' game. You time the top perfectly and sell it. Now you wait for the price to fall to a particular level so that you can buy it again. The problem is that the stock starts consolidating on the down, with a downward bias, all the while you are sitting with cash in hand and other shares are going up. You keep observing a few shares that are going up and after some time, you lose patience and use the cash to buy the novenu shares that have already run up. Once your cash dries up, the original target share falls to your target level and you do not have cash !. 

Another problem is that after selling a share, you forget about it and later on you see that the share price reached its target level, reversed course and now trading at a price that was higher than when you sold originally !. I remember buying Subros at 50 and selling it at 70 and waiting for the price to reach 50 again so  that I can buy it. Then I used the cash to buy some other shares and then I forgot all about Subros. Later when I checked the price it was trading at 300 !

The main reason that the strategy of 'Sell high and buyback low' doesn't work is that you can neither predict the high or the low of individual shares, nor can you do that for the market.

For example, currently the Nifty PE is 28 as I mentioned earlier. However, there are some people who say that the current situation is not comparable with 2008 because only five stocks are driving Nifty Up. These are TCS, Reliance, Infosys and two more. Other stocks are still trading much lower than their peak valuations. As per this view, when the corporate earnings of the other stocks revert to mean, the Nifty PE will fall and market will become less risky.

Do you see what is common among all these strategies? All these are looking only at the share price, none of them are looking at the underlying business. And that is what you should work on.

It is all very complicated. So, in times of peak PE, the only strategy is to sit tight and do nothing. Buy some solid companies and let them deliver returns for you compounded over long time.

There are many great companies out there.