Monday, February 25, 2013

Timing Is Literally Everything

I got started in investing in the summer of 2007. I had a decent paying temp job during the summer and one of the contractors I worked with suggested investing the money I was making there. By the end of the last trading day of the year, I was up 44.7% over my initial investment. The good times were rolling.

2008 was a vastly different story. I was in school when Lehman and AIG catalyzed the financial crisis and by the time my portfolio limped to 2008's finish line, I was down 55.4% for the year, completely wiping out all the gains I had made the previous year and also taking a significant chunk of my principal investment away. But I stayed in the market.

When the financial crisis hit, I had already read multiple books on investing, had a subscription to the WSJ which I read on a daily basis, and had already accumulated a solid foundation on investing. When the financial crisis hit, I was able to keep a level head and stuck to my guns. I became a fan of Efficient Market Theory and passive investing. All of my assets were tied in exchange traded funds that tracked a broad market.

My reasoning was that if most of the pros on Wall Street didn't see this crash coming, it was unrealistic to expect me, a lowly retail investor, to figure out what most of them didn't. I figured that since everybody else was taking a beating, there was no shame in taking a beating along with them and then taking opportunity to buy more assets at lower prices. To be sure, a number of notable contrarians made a killing when everybody else lost their shirts, but they are notable precisely because they were so few.

The trough of the market was in March of 2009. And after that, stocks came roaring back. By the end of 2009, I was only slightly down from where I was initially in 2007. By 2010, I was treading water, barely. And that 2 and a half year stretch really opened my eyes to how financial markets worked. The experience was worth a lot to me, and I'm a much wiser and smarter investor now than I was back then.

I have no clue what would have happened if I had started investing in the summer of 2008. If I had pushed my 2007 timeline exactly one year ahead, I would have just put in all of my initial investment about 3 weeks before AIG and Lehman. With the markets in free fall and with very little experience, I could have very well sold out after sustaining a substantial decline, and then never waded back into stocks until well after the mini bull run of 2009 and 2010.

The conclusions I would have drawn would have been vastly different had I started investing right before the market crash versus accumulating 1 year's experience and then experiencing the market crash. In hindsight, I was very lucky to have started investing when I did. There are many anecdotes of people who got into the market right before the Great Depression who never got into stocks again. They had heard about the amazing gains of the Roaring 20s, but they only got in right when that extraordinary run ended but right before the biggest bear market of the 20th century hit them.

Luck played an extraordinary role in my investing experience. A year too late, and I might have been one of those guys who never touched stocks again. It's so easy to play the "what if" game, but if there is one thing I've learned, it's that you can never take anything for granted. And it doesn't take much to alter one person's course. There's a saying, very similar to "fortune favors the bold". It's "chance favors the prepared mind". And perhaps this is so, but it's impossible to prepare against everything. A very prepared mind could find itself dashed against the rocks of misfortune. A chance encounter, bad break, or indigestion on a certain day, and our lives are changed forever.

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