Purchase price determines success

Time in the market better than timing the market – fact or fiction?

By Andró Griessel


You may have often heard the remark: “It’s time in the market that counts, not timing the market.” I have uttered these words a lot and there is some truth to it and is, of course, said with good intentions. However, what should be added to this is that the price you pay for an asset matter, and if you get it substantially wrong, you will permanently damage your return profile.

Here I am typically referring to someone who suddenly has a lot of money to invest from, for example, an inheritance, the sale of a property or a business, or someone who makes a major asset allocation decision such as moving all of their investments from one asset class to another. Let me explain using the JSE as an example. The JSE’s all share index (dividends included) has produced an average return of 16.37% per year since 1970. However, average inflation over that period was around 9% per year, which provided a real return (above inflation) of around 7.3% per year. To put it in perspective, a R10 000 investment in 1970 would be worth around R29.4 million today. An equivalent item which increased in price at the same rate as inflation would cost R927 000 today. You would therefore have multiplied your wealth in real terms by almost 32 times.

This is phenomenal and surely attests to the saying above. At this point, I may lose readers who believe that the distant past has no analytical value due to the fact that it includes the 20 years or so of data before the wrecking ball of the ANC started to create havoc in the halls of our economy. This sentiment is totally understandable, but take note that from 1 January 1995 up to today, the average return was 12.93% against an inflation rate of 5.78% representing an almost identical real return of 7.15%. I, therefore, urge you to put the oversimplified assumption aside that poor stock market returns are directly related to the ruling party. Try to entertain the thought that there might be another explanation.

Back to long-term return expectations for the stock market. The very long-term history (both 52 and 27 years) suggests that returns from shares should be around 7% above inflation. If the expectation is “sold” to you, and your actual experience is only 3.83% above inflation for 14 years (as is between 2008 and today) or even worse, only 2.31% above inflation over a time period of more than 7.5 years (2015 until today), it is a bitter pill to swallow, and I can understand that people think that there is foul play involved somehow. Can this data be taken as evidence that the cumulative effect of poor governance has only started to trickle down in the last few years?

Although a popular opinion, it does not explain why, if you invested on 1 January 2009 instead of a year earlier on 1 January 2008, your return over the following 13 years (still a long time) would have achieved a real return of 6.88%. I want to claim that there is another reason for these disparities, and that is the valuations at the starting point of the respective measurement periods. Investors are drawn to high historical returns like moths to a flame. In the 5 years up to 2008, the real return from South African equities was an astronomical 24.9% per annum, and in the 5 years up to 2015, it was also a considerable 14.55%.

Remember that the very long-term average is “only” 7%. What investors let themselves in for or expected (same kind of returns) and what they achieved afterwards were of course as different as night and day. As much as I want to blame the ruling party, inflation, deflation, the pandemic or finance ministers who are fired unexpectedly, a large piece of the puzzle is unfortunately explained by the price that investors paid at the end of these “fat” years.

Many investors have given up on local shares last year and moved a considerable part of their portfolio, if not all their investments, to offshore shares. Once again, I could sympathise with this strategy if you compared the historical performance (for 10 years) of offshore shares with local shares. But at what cost has this conversion been done, and perhaps more importantly – what will the cost be to your wealth over the next ten years? See the analysis in the graphs below.


The one graph shows developed countries’ (foreign) multiples of price-to-book value that you have historically paid (since 1995) at various times. The other graph presents the data points of the total forward return over ten years in dollars that you would earn at the price-to-book value at which you would have purchased the asset in the past. In 2021, when many investors finally gave up and moved their portfolios to offshore equity, the market was very expensive from a relative point of view. At the beginning of 2010 (a popular starting point for many analyses that want to illustrate how well foreign assets have performed), offshore equity was very cheap. It is therefore not too far-fetched to conclude that the next ten years’ returns (from 2021 onwards) will probably look substantially different from the previous ten years.

Time in the market is important, yes, because for the miracle of compound interest to work you need two elements, namely time and growth. So give yourself as much time as possible, but please remember that growth is determined by your starting point and what you paid for the asset. An investment with a great long-term return profile can be a constant disappointment to you if you do not understand at what price you are acquiring those assets.

I have no insight into the next curveball that awaits us, and neither does anyone else. The best we can do is to avoid buying shares when they are trading at record highs and to wait patiently for better opportunities.

Andró Griessel is a certified financial planner and managing director of Woodland Wealth (formerly ProVérte Wealth & Risk Management). Contact him at info@woodlandwealth.co.za.

Although all possible care has been taken in the preparation of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone who intends to take any financial action based on this document is strongly advised to first consult with his/her personal financial advisor. Woodland Wealth is an authorized financial service provider with FSP no. 5966.

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