The time element is the most misunderstood concept in stock trading. And probably the most important.
How many times have you heard someone is up 30%? But ask over what time period and it turns out that it is over the past three years. 10% annually? Not bad but nothing to brag about either. On the other hand, someone else may be up 5% over the past month but if they manage to replicate that five more times during the course of a year, that’s 30% annually.
The important thing is not so much how much you are up but over what time period. Stock market moves are not linear. Most stock advances resemble a staircase: consolidation – spurt – consolidation – spurt. The key is to capture as much of an advance as possible while staying in cash during consolidations. The time element is how fast you can produce a given return and how often you can replicate it.
Up until 2008 we were told that on average the market appreciates 10% annually. If you make 9% in a month and stay in cash for the rest of the year to pick up the remaining 1%, you take much less risk to achieve the average return than someone who gets the same 10% by staying fully invested at all times.
We all want to make money in tenbaggers – stocks that go up 1,000% or more. But tenbaggers are rare and hard to find. More stocks have runs of several hundred percent. At the bottom of the spectrum is an average stock that can fluctuate 5% in a day and as much as 50% in 12 months. Statistically, it’s easier to capture multiple 20 to 50% runs than to find a tenbagger and stay with it for the duration of the advance.
Bull markets typically last several years, interrupted by several intermediate corrections. But few stocks run for the entire duration of a bull market. Typically, every new leg up is powered by a new crop of leaders. When a stock begins to correct, you never know if it will resume the advance when the correction is over or roll over for good, to be replaced by another emerging leader. If you get in each time a new leg up starts and get out at the beginning of each correction, you will be able to stay in the best performing stocks during the entire bull market, regardless of whether the stocks are the same or different during each leg up.