Timing vs Time in

The timing versus time in argument is a long standing one in investment circles. And it gos a little bit like this:

People who are for timing the market proclaim that smart investors should time their entry and exit for their investments. And that investors should exit when markets are too hot, for example when price earnings ratios are well above the long term average. And enter at the opposite end of the spectrum. Resulting in higher profits.

People are are for time in the market proclaim that smart investors should stay in the market at all times. That when you enter or exit the market does not matter so long as the investment has been in market long enough. Which will result in a long term result of profitability due to the period of time in the market, allowing market averages to endure.

Both parties happen to be correct.

What neither side bothers to discuss is most important factor in either strategy. Probability. The probability of success of either the two different investment strategies. It turns out that its a pretty simple proposition related to risk and probability.

Timing the market Can have very high returns (losses) but a much lower probability of success.

Time in the market Has average returns (rarely losses) and a very high probability of success.

Numerous studies have proven the above to be fact.

How does this pertain top startups? Well it reminds me a lot of the internet and entrepreneurs attitude towards it. Most entrepreneurs believe that the only way to succeed is to win big. To sell out our startup to some digital behemoth. Our business brains have been hijacked by the Techcrunch stories and the large novelty checks presented to the likes of My Space. Facebook. Digg. Flickr and friends

These are a little bit like investments where the market has been timed. Its a low probability event. Sure theres a lot more to it than a passive investment vehicle, but the probability of it happening is so to us, is so low that its not worth considering.

What we ought do instead is focus on the high probability events. In an entrepreneurial sense success is a very long term proposition. So our goal should be to remain in the entrepreneurial game as long as possible. As we do this we inevitability move up the learning curve and increase our chance of winning at some time in the future. Winning may not mean a cheque in the millions, but it might mean earning 5 times what we could in wages, as well as having a lot more fun doing it.

So how do we stay in the game?

Keep our costs low. Know how to bootstrap. Enjoy the simple things in life. Know that the having is in the doing, not in the owning of stuff.

Startup Blog says: Use probability to your advantage