The COVID-19 has reminded us, as investors, that predicting future events is nearly impossible. Attempting to time the stock market often leads to losses more than to profit.
Over the past two decades (2003–2023), the IHSG has grown at a CAGR of around 12%. However, missing the best days in the market over the time span (perhaps by selling during downturns and reinvesting later) would drain your CAGR to below 3%. While this may seem trivial, it highlights the importance of staying invested.
The key takeaway is that investing is challenging, but constantly trying to time the market or making frequent short-term trades is even riskier. Investors who can't handle volatility will likely miss out on the benefits of compounding returns.
To help avoid this trap, consider a simple mental exercise before buying a stock: Would you still buy this company if the stock market were to close the next day and remain shut for five years?
This approach serves as a useful mental filter. It helps investors avoid overemphasizing short-term results, discarding mediocre ideas, steering clear of investments they don't fully understand, and focusing on the price they pay. When you choose to invest in a company, it should be because you genuinely want to own it, not just because you hope the stock price will rise.
Similarity in buying a farm.
Farmers face both good and bad seasons, but the experienced ones know to expect the unexpected and handle the tough times calmly. They understand that unpredictable weather – just like the volatility of stock prices – is a reality. A wise farmer wouldn’t sell off their entire farm after one bad season, nor would they constantly buy new farms or expect quick profits from new purchases in good weather.
Yet, despite the fact that the intrinsic value of a farm is essentially the same as that of a company (based on the present value of its future cash flows), stock market investors rarely exhibit the same patience.
The essential difference between farming and the stock market lies in the constant price updates. In farming, no one shows up daily to shout prices for your farm. On the other hand, prices fluctuate constantly in the stock market, and many investors react poorly to this noise.
Instead of viewing price volatility as an opportunity, they follow the crowd, unlike a wise farmer who wouldn’t rush to sell just because a neighbor sold their farm cheaply. If anything, the wise farmer might see it as a chance to buy more at a reasonable price.
Therefore, using the mental trick of asking whether you would still buy a stock if the market closed for five years can help prevent getting caught up in investments you don’t understand. It encourages investing with the long-term mindset of a wise farmer.
