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One of the great paradoxes of equity investing is that most of the times, investors buy when they should be selling and sell when they should be buying.

Regular readers of this column would know that I keep hammering in the fact that winning in the stock market is actually easy. All you have to do is to buy low to eventually sell high. However, as simple as it sounds, it is one of the most difficult things to actually implement. Which is why most investors end up buying high to sell higher, or buying high and selling low when the market reverses its trend. In other words, timing the market never works.

The reason for this is simply that we do not know how the market would behave tomorrow or three, six or ten months from now. For example, in January 2008, when the market was kissing the 21000 level, most analysts and commentators were busy painting glorious pictures of the future. Levels of 25000 and 30000 were talked about as almost a certainty. But we all know how that story ended. And then, during the fall, from 8000 we were supposed to go down to 6000 and even lower. Which brings me to the next point that I keep on harping about: Market predictions are nothing but an extrapolation of current events.

Or, like Bernstein William says in his book The Intelligent Asset Allocator, “There are two kinds of investors — those who don’t know where the market is headed, and those who don’t know that they don’t know. Then again, there is a third type — the investment professional, who indeed knows that he or she doesn’t know, but whose livelihood depends upon appearing to know.”

That being said, however, most investors would maintain that he or she is in the market for the long-term. However, it’s only one-and-a-half years since the market touched its highest point and the very same investors would in all probability have sold out sometime during the interim — perhaps even incurring huge losses.

The situation reminds me of the saying “If you can’t stand the heat, you shouldn’t enter the kitchen”.Translated into the context, it would mean that if you enter the stock market, you should be willing to withstand volatility.

Yes, when the market is volatile and choppy, equity investments seem to be fraught with risk. However, let’s get a perspective.

The Sensex has gained 49.2% in the three months ending June — the best quarterly gain in 17 years. When the rest of the world is struggling, the worst case scenario for us is a growth of 6%. This makes the world sit up and take notice.

Take the macro front — amongst all emerging economies, our export to GDP ratio is the lowest. Consequently, even a full blown US recession will shave only around 40 to 60 basis points off our GDP growth rate.

Like already mentioned, though GDP growth is expected to decelerate to 6-6.5% this year, even this rate makes India one of the fastest growing economies in the world. At a time when the West is in the midst of nationalising its banking system, most of our banks are already nationalised. Those that are not, are well-capitalised and well-regulated. A sustained policy of controlling foreign borrowings has resulted in limited dependency on foreign sources of capital. Rounding up, a savings rate of 35% makes India as insulated as it can against a global recession.

However, no one has seen what tomorrow brings. Though it’s a question of when and not if, no one can say when the market will regain its earlier highs. It may take three months or six or even more. But know that just like night follows day and day follows night, markets will rise and fall only to rise again.

Money can be made and lost depending upon how you play the ball. Not keeping an eye on the ball and trying to play the situation is like trying to put handcuffs on an octopus. There are simply too many factors — both global and local — that affect the valuations, and timing the same is a lost cause.

Instead, invest regularly — on the way up and on the way down. More importantly on the way down. There is also another very important benefit in investing on the way down. It helps you prevent a situation of having invested at the medium term peak.

For a practical example, have a look at the following table:

The example assumes that a lump sum investment is made on January 1, 2008 when the market was almost at its peak. After 18 months at the beginning of July, the Sensex was around 14,645 — around 28% down from its January 2008 peak. In our example, the NAV at the beginning is Rs 50 and the NAV after 18 months is lower by 28% at Rs 36.08. This yields a net loss of 19.57% per annum.

Now, if the same investor, instead of investing at one time, had spread his investments over the period, the following would be the result:

Notice that the amount invested is the same i.e. Rs 3 lakh. However, instead of a lump sum, it is spread over three month installments of Rs 50,000 each.

The NAV movement in the example reflects the real-life Sensex movement over the 18-month period. After 18 months, it reaches Rs 36.08 just like in the previous example. The total invested amount over the 18-month period is the same — Rs 3,00,000. However, the rate of return has jumped to 16.47% p.a.!

To sum If you want to be a successful investor, take the above example seriously. Choose an appropriate mutual fund which is well-diversified and which has a long-term track record. Set up a systematic investment plan and keep at it month in, month out; year in, year out at least for five years. The result will speak for itself.

The writer is director, Wonderland Consultants, a tax and financial planning firm. He may be contacted at sandeep.shanbhag@gmail.com