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A Good Market Timer is the Best Passive Investor

The timing of investing in stocks can make huge difference in annualized returns. Below is an example from Berkshire Hathaway Inc. stock.

This article was motivated by a post in social media about an investment in Berkshire Hathaway Inc. Class A common stock (BRK.A). The investor claimed to have realized high annualized return by buying the stock in February 2000 and holding it.

The chart below shows the amazing performance of BRK.A from March 19, 1980 to May 14, 2021.

Annualized return (CAGR) is 19.5% and Sharpe is 0.85. I have drawn a vertical line on the chart on March 8, 2000, when the stock made a low and then started a new uptrend.

Below is a simulation that shows how CAGR varies after January 3, 2000 by changing the starting date of the investment by five-day increments forward.

An investment at the start of 2000 would have realized7.65% CAGR but an investment 45 days later would have realized 10.67% CAGR. This is a substantial difference of 311 basis point that translates to a gain in final wealth by a factor of more than 2 due to continuous compounding. Timing of investing can make a huge difference.

In fact there was a window between 30 and 50 days after the start of 2000 that offered a significant CAGR boost. Of course, this is hindsight but shows the significant impact of the timing of investing and how luck can play a major role.

A good market timer is the best passive investor. Oxymoron? I don’t think so.


Disclaimer:  No part of the analysis in this blog constitutes investment or trading advice. The past performance of any trading system or methodology or analysis is not necessarily indicative of future results. Read the full disclaimer here.

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