Timing the market for quality stocks

In the first part of the story, we studied the correlation between the rate of compounding of share prices with the amount of benefit derived from a perfectly timed purchase of such equities on an ongoing basis. In this story, let us continue further and see how timing the market turns out for quality stocks. Investment implication #1: Mean reversion and high-quality stocks Given that the last 18 months have witnessed a strong rally in the broader market and in share prices of most companies, investors might have a temptation to wait for some 'mean reversion' before making an incremental investment. This approach might make sense for the broader market, but it has a very high probability of failure for Consistent Compounders. To understand this from empirical evidence, consider the two histograms shown in table 'Histograms of annual share price returns for Asian Paints and Nifty 50' and observe what happens after the drawdown related to the Global Financial Crisis and the very shar

This article was originally published on February 15, 2022.