Time in the market

Time in the market vs. Timing the market

A quick google of sensible places to invest one's excess cash quickly brings back article after article extolling the virtues of the stock market. The Barclays gilt study tells us that over the long term investing in the stock market provides the greatest return over other asset classes. That takes care of where to invest. But how should I do it?

This is usually presented as the need to decide on one of two approaches:

• Time in the market
• Timing the market

Time in the market

On one side there is the buy and hold camp – who suggest drip feeding a small amount regularly into your investments. Don’t look at the news. Come back in a few years to a (hopefully) healthy pile of profits. Time in the market is more important than trying to time the market, because people typically aren’t very good at it. And we’re told that missing the small number of best trading days have a massive impact on returns.

Timing the market 

In the other camp are those that advocate more activity, not necessarily trying to flip stocks over short time frames, but buying and holding for a while, then sell for a profit. In other words, not simply time in the market, but timing it. After all if you suspect that your investments have peaked, why sit there and watch those profits all disappear as Mr Market throws a tantrum?

A closer look

I’m a UK investor and my starting point is the London stock market, I'll take the FTSE100 as it's the driving force behind the UK indices – as I’ve noted here the UK indices have a few interesting characteristics. But it’s where the majority of my investments are, and will likely continue to be, so that's where I'll focus my attention.

I’ve taken monthly data for 10 years, the last 10 full years from 2009 – 2018. It turns out that across that period, the biggest monthly gains are between 6% and 8.5%. There are 11 months that fall into that size of gain, 7 of them in 2009 and 2010, perhaps reflecting the recovery from the financial crisis. (I’m ignoring dividends for this)

The gain from 2009 – 2018 was around 47%, a £10000 investment would have increased to £14749.

Missing those 11 months would indeed have a significant impact on the investment. It would have resulted in a loss, -30%. The same £10000 would have ended up being worth £7045.

FTSE100 2009 to 2018 missing the best months

So it would appear to be correct, using this data at least, missing the 11 months with the highest gains would indeed have made a real difference - turning a decent return into a loss. We never seem to hear a related question though: what if we missed the worst trading days?

The 11 months in my data that have the largest losses range from -5% to -9%. These are more evenly distributed across the years. What would happen to our £10000 if we manage to miss these 11 months? Now the £10000 increases to £31077 - that's a 211% return, more than doubling the result from leaving the money invested every day.

FTSE100 2009 to 2018 missing the worst months

The calamitous impact on one's investment should one be foolhardy enough to try to time the market now looks a little less clear cut. Miss some of those big dips and you could be looking at much better gains.

My activity is limited, partly through having a job and a family and therefore relatively limited time to dedicate to doing this. In part it’s fear and laziness. I feel I would need a scientific and systematic approach, and don’t really know where to start. So I’m more in the camp of simply leaving money invested in (hopefully) good companies, and just leaving those investments to do their thing. As I noted here, had I tried to time the market when we had a big market sell off towards the end of 2018, I'm not sure when I would have jumped back in once I'd sold. So I guess I'm a time in the market kind of chap, at least for the moment.

July 2019 portfolio update

Lots of companies giving updates during July, so some quite big price moves both up and down, but the markets were maintaining their overall upwards trend. A few of the price moves put some things on the shopping list into buying territory which was helpful. Many of the big cap stocks that I'd prefer to be buying are still looking expensive, helped in part by the devaluation of Sterling. But I shall keep an eye on them as one or two have wobbled over the last few weeks.

Portfolio
The portfolio followed the markets upwards during July, just about getting it's nose in front. The portfolio was up 3% compared to my chosen benchmark the Vanguard FTSE All Share Accumulation fund which was up 2.3% over the same period.

Keen bean this month was Fulcrum Utilities (FCRM), +16%. I suspect this is partly due to over-enthusiastic selling last month when preliminary results were delayed, but an update stating that they were trading in line with expectations was welcomed.

Dignity (DTY) was showing a distinct lack of enthusiasm this month, -17% due mainly to a poor trading update and withdrawing their interim dividend. Not enough people dying apparently.

July share purchase 1: CRW
Craneware (CRW) develop software to help US hospitals and healthcare providers to understand their costs, maintain regulatory compliance, avoid pricing errors and streamline their administration. They were founded in 1999 and listed on the AIM in 2007, and have been a bit of an investor darling ever since, now with a market cap around £530m.

Despite deriving it's revenues from the US, the business is based in Edinburgh and have some great
 operating numbers, including ROCE and net margins averaging over 20% across the last 10 years, and zero debt. Customers typically enter 5 year contracts and provide nice predictable revenues. As a consequence of Craneware providing such an attractive investment proposition, the price has been chased ever higher. So when the company announced it's sales were off course at the end of June, the price took a nosedive of over 35%.

The price basically reversed out it's gains over the last year in a matter of hours on publication of the trading announcement. I'd be quite happy to see a slow recovery, if the price gains 10% in each of the next 5 years it will have got back to where it started before announcing the slow sales. Craneware has a sticky customer base and operates at the intersection of technology and healthcare which are sectors in which I'm comfortable investing, however the price is still high in my view (at least in PE terms, less so if you're looking at price to cash flow). Given the high price, I've kept the investment small, recycling a chunk of dividend payments into this one.

July share purchase 2: BAG
AG Barr sell soft drinks - and have since 1875 built their business of adding sugar and flavourings to water, and in some cases some carbon dioxide for a little fizz. They have a number of brands, the most famous of which is Irn Bru, but they have also branched out into juices, waters, cocktail mixers, and partnerships with other soft drinks sellers including (my favourite) Bundaberg ginger beer.

The Barr family ran the business for over 100 years, and still have family members in senior management. Robin Barr serves as a non-executive director and owns around 5% of the business. It is also a favourite of a number of funds, including Lindsell Train who own around 14% of the business.

It's not difficult to see why it has proven an attractive investment, it is a simple business, which has been successfully and conservatively run for quite some time. Over the last decade it has averaged double digit ROCE and net margins, and has no debt. It also has a proud track record of dividend increases, which again over the last decade have averaged 5% increase per year.

Food and drink businesses are typically seen as defensive investments, steady earners that can rely on many small repeat transactions. AG Barr's share price has indeed been increasing steadily, and from October 2016 until June 2019, more or less doubled. Much like Craneware above, with the valuation getting into nosebleed territory (at least for BAG), there was little room for error. So when AG Barr released a profit warning in the middle of the month, the sell off sliced 30% from the share price, to a level it was selling for in 2014. The reasons given included a couple of poor performers in their portfolio, the sugar tax, and a subsequent change in strategy to focus on volumes. And the weather. I'm not impressed by any business that relies on the UK weather for it's sales. However, having a couple of underperforming products is forgivable, and driving volumes and increasing marketing spend at the expense of margins is understandable given the altered recipes to accommodate the sugar tax.

I don't think the price drop put it into bargain territory, but shifted it from overvalued to reasonably priced, which is good enough for me.