Originally published on LinkedIn Pulse

The main purpose of the stock market is to make fools of as many men as possible.

– Bernard Baruch

Indian stock markets have created a great interest among investors in India and world wide, yet again. While we aren’t seeing the kind of euphoria that we saw in 2008, the interest is no less. Perhaps, the 2008 experience is still keeping a large number of retail investors at bay and thus, making it difficult for market makers to take the full advantage of the last 1 year’s unprecedented bull rally. This rally definitely smells more sensible than the one we saw in 2005-2008 but the picture will only get clearer as we scroll further.

We all keep reading several articles and stories of how investing in stock markets has made people millionaires or billionaires. It appears such an easy thing to do. People keep saying how Rs 10000 invested in Infosys is worth some 2-3 crores today, how some x amount invested in mutual funds is 100x today and so on. All said, how certain can we be that the same will repeat over the next 10-15-20 years? To this, the market experts quote historical returns of stock markets and guide that this will be replicated in the future, although they add the disclaimer that past performance are not indicators of future returns. So, how do laymen decide whether or not to invest in equities or equity underlying instruments? A million dollar question.

Following are some numbers that give you interesting insights on performance of the stock markets in India from January 1991. For the purpose of ease and convenience, I have used data for Sensex (monthly data). All percentages are in absolute terms (unless stated otherwise)

Monthly performance

  • On a closing basis, in March 1992 saw a return of 42%, highest ever. In October 2008, the Sensex fell 24%, again the highest month over month decline.
  • Would you believe that in October 2008 (intra month), the Sensex fell 42%? The month high was 13203 while the month low was 7697.
  • The Sensex nearly doubled between Feb and Mar 1992. Lets say you are successful in buying at month’s low and able to sell in the next month at the month’s high, the highest gain you could make is 97% (March 1992 saw a high of 4318 and February 1992 saw a low of 2193).
  • Can you believe that you would never lose money if you bought at any of the month’s low as the Sensex has always gone higher in the next month. In other words, in all the months, at least on one occasion, the Sensex has always gone higher than the previous month’s low in the subsequent month.
  • On the other hand, lets say you bought at month’s high and sold next month at the month’s low, the worst possible case is that you would lose 49% and the best possible case is that you could gain 2%. It is even more unbelievable that you would make a gain only in 4 out of 291 months. (2.1%, 1.1%, 0.3%, 0.2%). You’d end losing money in the remaining 287 months.

3 month performance

  • The sensex has posted a 124% in the 3 month period ending March 1992. It declined 38% in 3 month period ending November 2008.
  • Assuming you picked the index at the lows of December 1991, you could have made a gain of 139% by March 1992. On the other hand, if you had picked up at the highs of July 2008, you could have lost 49% by October 2008.

6 months performance

  • What’s further interesting is that the best 6 month return the Sensex has posted is 127% for period ending March 1992 (just 3% more than 3 month best performance). It declined 45%, however, for the 6 months period ending Nov 2008.
  • If you could pick the index at the lows of October 1991, you’d have made a 170% gain in 6 months (Apr 1992). However, if you had picked up at highs of Oct 2008, you’d have lost 56% by Apr 2009.

Annual performance

  • The best 12 month closing was posted in March 1992, a whopping 267%. It could have been 286% if the buying was done at the lows of Apr 1991.
  • The worst 12 month closing was seen in Nov 2008, a loss of 53%. If the purchase was done at highs of Nov 2007, the loss could be up to 62% by Oct 2008.

2 and 3 year performance

  • Now, here comes the interesting part. On a 2 year closing, the Sensex gained the most by Jan 1993, gaining 173% compared to levels 2 years ago then. On a 3 year closing, however, it gained 307% by Apr 2006.
  • What’s even more interesting is that the Sensex lost 41% on a 2 year closing basis (Sep 2001) and lost 40% on a 3 year closing basis (Feb 2003), which are the worst performing 3 year periods. Note here that the worst 1 year period was much higher at 53% loss and the worst 6 month period was a 45% loss. Does this answer something about long term investing?
  • Now, if you were able to pick at the lows of Feb 1991, you could make a 212% return by Jan 1993 (2 years), and 339% by Jan 1994 (3 years). Can you now see the kind of alpha?
  • To further show what long term investing can do, the worst possible return you could have in a 2 year period would be by buying at the highs of Nov 1999, which could results in a loss of 47% by Oct 2001. In a 3 year period, if you’d have bought at highs of Apr 2000, you could have lost up to 48% by Mar 2003.

5 year performance

  • The best 5 year period on a monthly closing was posted by Oct 2007, an incredible 573%. If the buying was done at lows of Nov 2002, it could have been 616%.
  • Funny enough, if you’d bought in Aug 1997, you’d still be in a loss of 31% for 5 year period ending Jul 2002. Unluckily, if you’d entered at the highs of Sep 1997, you’d be in a loss of 36% even at the end of a 5 years period ending Aug 2002.
  • Now, slowly, are we asking a question on whether stock markets really help create wealth in the long run? Does timing the market play an important role?

10 year performance

  • Can you take a guess of what the best performance would be for 10 years? It’d be very difficult to believe that the best 10 year performance posted by the on a monthly basis is 559% by Apr 2013. Can you now see that this is lower than the 5 year best of 573%. It could have been up to 597% if buying happened at lows of May 2003.
  • Now, if we take a look at the worst possible returns in a 10 years period, you’d still be in a loss of 19% by March 2002, if you’d bought at the closing of Apr 1992. If bad luck had its way, buying at highs of May 1992 would still keep you in a loss of 28% by Apr 2002.

One should take these numbers with a pinch of salt as these numbers speak only of the extremes on a monthly closing basis assuming that all the investment was done in a single go at a single point of time. However, one should also note that the periods are long enough to show some kind of inference too. A negative return in a 10 year period is simply unacceptable for any investor for any reason. After all, when the adviser pushes an investment, he always says, even in worst cases, you will be positive in the long run, which he generally means 3-5 years. So, 10 years is really long enough. At any point of time, there are proponents of both buying and selling, and investors often get confused due to multiple opinions. Often, investments by common people are in the times of boom and even higher in euphoria (when the bull market is exactly ending), as the sentiments are very positive. So, does timing the market play a significant role? The data at least clearly shows that it does. How important is the time in the market? Now, the data says that it is important but there are several instances where you’d make far money in shorter periods than longer ones.

So, what do we conclude from all this? May be nothing. One may feel that we must follow an SIP route to beat this volatility and take advantage of rupee cost averaging. However, there could also be periods where even SIP would give a negative return (probably, I’ll do an analysis on that next). Investment managers always advise investors to look for the long run (10-15 years), perhaps because they too are aware of the kind of returns volatile markets could post, and you never know when they turn volatile. The markets always take a long time to move up but they are very sharp when they are moving down. The truth could just be that nobody knows. Simply nobody. Perhaps, that is the reason why we do not have stock market experts debating on news channels, rather they patiently wait and speak as less as possible, unlike political or social experts who are on the top of their voice always.

So, again, what do we conclude? Perhaps, I’d just close it in the words of NSE.

Soch kar, Samajh kar, Invest kar..