The Stock Investing Myopia..!!!
– KIRAN KUMAR K V
The father of security analysis Benjamin Graham quotes – “In the short run the market is a voting machine. In the long run it is a weighing machine”. In the short run markets respond to noise of investor emotions like fear and greed, are driven by factors that are far removed from fundamentals. However, in the long run markets tend to be driven solely by fundamental factors such as economic growth, corporate performance and the like.
Many investors get into this trap of what can be called “Drink & Drive Syndrome”, while investing in stock markets. Buying and selling a security is a matter of decision to be taken in one’s conscious mind, with complete clarity, confidence and knowledge of consequences of the decision. Quite often markets send such gens, which induce the investors to think and act that very moment, as if the world is going to end otherwise. Many investors tend to drink & drive at these moments, leading to short-term oriented decisions, turning into speculation, and never be able to capitalise the real return that markets can deliver in the long term.
The below table-1 gives the returns that BSE Sensex, one of the oldest indexes of India given since 1990 (Source: www.hdfcfund.com). A detailed glance into this and reference to table-2and one should be able to notice that, an investor who has stayed invested for a longer period has gained more consistency in his return earning capacity, as evident from the standard deviation presented at the end of the table. Simply, put risk has been almost nil, if one has been an investor in Sensex for more than 10 years.
Table-1: SENSEX ROLLING RETURNS FROM 1990 | ||||||||
Returns (%) | ||||||||
Date | SENSEX | 1 Year | 3 Years | 5 Years | 7 Years | 10 Years | 12 Years | 15 Years |
01-Jan-90 | 783 | |||||||
24-Dec-90 | 1048 | 33.82 | ||||||
01-Jan-92 | 1957 | 86.72 | ||||||
24-Dec-92 | 2615 | 33.62 | 49.46 | |||||
24-Dec-93 | 3346 | 27.94 | 47.24 | |||||
23-Dec-94 | 3927 | 17.36 | 26.12 | 38.04 | ||||
01-Jan-96 | 3128 | -20.35 | 6.15 | 24.44 | ||||
01-Jan-97 | 3261 | 4.26 | -0.85 | 10.75 | 22.6 | |||
01-Jan-98 | 3696 | 13.32 | -2 | 7.16 | 19.72 | |||
01-Jan-99 | 3060 | -17.19 | -0.73 | -1.77 | 6.59 | |||
30-Dec-99 | 5006 | 63.57 | 15.36 | 4.97 | 9.72 | 20.38 | ||
01-Jan-01 | 3955 | -20.99 | 2.29 | 4.8 | 2.42 | 14.2 | ||
01-Jan-02 | 3246 | -17.92 | 1.98 | -0.09 | -2.68 | 5.19 | 12.58 | |
01-Jan-03 | 3390 | 4.44 | -12.18 | -1.71 | 1.16 | 2.63 | 10.28 | |
01-Jan-04 | 5915 | 74.49 | 14.36 | 14.09 | 8.88 | 5.86 | 9.65 | |
31-Dec-04 | 6603 | 11.62 | 26.7 | 5.69 | 8.64 | 5.33 | 8.02 | 15.27 |
30-Dec-05 | 9398 | 42.33 | 40.48 | 18.9 | 17.38 | 11.63 | 8.99 | 15.75 |
29-Dec-06 | 13787 | 46.7 | 32.58 | 33.54 | 15.57 | 15.51 | 11.03 | 13.9 |
01-Jan-08 | 20301 | 47.25 | 45.41 | 43.04 | 26.32 | 18.57 | 16.87 | 14.64 |
01-Jan-09 | 9903 | -51.22 | 1.76 | 10.86 | 17.27 | 12.46 | 9.7 | 7.5 |
31-Dec-09 | 17465 | 76.35 | 8.2 | 21.48 | 26.39 | 13.31 | 13.82 | 10.46 |
31-Dec-10 | 20509 | 17.43 | 0.34 | 16.89 | 19.44 | 17.89 | 17.18 | 13.36 |
30-Dec-11 | 15455 | -24.64 | 15.99 | 2.31 | 12.92 | 16.89 | 9.85 | 10.93 |
01-Jan-13 | 19581 | 26.7 | 3.89 | -0.72 | 11.06 | 19.17 | 14.26 | 11.76 |
01-Jan-14 | 21140 | 7.97 | 1.02 | 16.38 | 6.3 | 13.58 | 16.9 | 13.75 |
01-Jan-15 | 27508 | 30.12 | 21.19 | 9.51 | 4.44 | 15.34 | 19.06 | 12.03 |
01-Jan-16 | 26161 | -4.9 | 10.14 | 4.99 | 14.89 | 10.78 | 13.19 | 13.42 |
Yearly Rolling Returns | 26 | 24 | 22 | 20 | 17 | 15 | 12 | |
Negative Returns | 7 | 4 | 4 | 1 | 0 | 0 | 0 | |
TABLE-2: ANALYSIS OF SENSEX RETURNS | |||||||
Time Period | |||||||
1 Year | 3 Years | 5 Years | 7 Years | 10 Years | 12 Years | 15 Years | |
Yearly Rolling Return Observations | 26 | 24 | 22 | 20 | 17 | 15 | 12 |
Negative Return Observations | 7 | 4 | 4 | 1 | 0 | 0 | 0 |
Loss Probability (%) | 27 | 17 | 18 | 5 | NIL | NIL | NIL |
Median Return (%) | 17 | 9 | 10 | 12 | 14 | 13 | 13 |
Average Return (%) | 20 | 15 | 13 | 12 | 13 | 13 | 13 |
Max Return (%) | 87 | 49 | 43 | 26 | 20 | 19 | 16 |
Minimum Return (%) | -51 | -12 | -2 | -3 | 3 | 8 | 8 |
Standard Deviation (%) | 34 | 18 | 13 | 8 | 5 | 3 | 2 |
Hope that explains the moral of the story. Now let’s examine, why this happens. When one invests for a shorter period, one-year for instance, she is giving the market and the company – whose stock she purchased – a period of one-year to grow from its current position and deliver. And this growth is what will have to reflect in the stock price. Practically and in the normal course of any business, this is close to impossible and if occurs also, would be one of th
e events and definitely not a sustainable one. And it would be an unscientific method of investing to expect such miracles and buy a stock. Instead the process of buying the stock, giving it time to grow, letting it reflect in the stock price, and earning the return that the company has actually earned and distributed, seems to be more pragmatic.
e events and definitely not a sustainable one. And it would be an unscientific method of investing to expect such miracles and buy a stock. Instead the process of buying the stock, giving it time to grow, letting it reflect in the stock price, and earning the return that the company has actually earned and distributed, seems to be more pragmatic.
Getting carried away by the mouth-watering ‘tips’ of brokers also leads to the erratic behaviour of investors in markets. There are brokers or employees of brokers who give ‘tips’on hourly and daily basis, latest in the line is BTST (Buy Today Sell Tomorrow), all aimed at maximising their brokerage revenue and exact opposite inducement for what investor should be doing. Remember, more number of times an investor transacts (buy or sell) more is the brokerage he pays. While it is not wrong or evitable on the part of stock broker to earn his revenue, investors’ ignorance can incline him to tempt the investor to transact more.
Its like a person goes to a vegetable market, the vendor will tempt to buy from him or buy more from him, but former decides not based on his persuasion, instead based on his need. Following the same logic while shopping for stocks can avoid many types of damages. It must be reiterated that investors shouldn’t get tempted, have composure, be conscious and then take decisions. They shouldn’t ‘Drink and Drive’.
Bibliography
Chandra, P. (2012). Investment Game: How to Win. CFM Tata McGraw Hill Professional Series in Finance.
G, B. R. (2015). Investing in Financial Markets is Not a Rocket Science. Partridge Penguin Publishers.
Sensex Rolling Returns Calculator. (n.d.). Retrieved from HDFC Mutual Fund: http://www.hdfcfund.com/Calculators/SensexRollingReturnsCalculator.aspx?ReportID=C208C983-C4A5-41B4-B245-CB77C8D2EDC3
V, K. K. (n.d.). Retrieved from Kiran Kumar K V – Personal and Corporate Finance: http://kirankvknet.blogspot.in/
