What’s NOT wrong with the markets today!
The Great Indian Markets: Are we turning it into a game of smoke & mirrors?
It is quite interesting how media today has the power to sensationalize an otherwise regular event. With pink newspapers buzzing with headlines with keywords like “crash”, “bear-grip” and “meltdown”, it has continued amplifying the current situation – like it always does.
The party effect
While doing some homework of my own, I happened to relate the current reactions to an old classic that I had read while studying behavioral finance. This is how the story goes –
“Six blind men were asked to describe an elephant. Each of them approached the elephant and touched a part of the elephant. Here’s how they interpreted the elephant basis the part they touched – the one who touched the side described it as a wall, the one feeling the tusks thought it to be like a spear, the person feeling the trunk felt a snake-like animal, the knees felt like a tree, the person touching the ears imagined a fan and finally, the one holding the tail likened the animal to a rope.”
This was a lesson in what is known as The Party Effect or in a more technical fashion – Recency Bias.
This is a classic parallel to how investors generally perceive and react to a market scenario. The elephant being the market and the men examples of general investors. They form an opinion basis only what they see, feel and hear in the immediate moment and construe it to be perpetual and a fact of life.
Let me place this in today’s context.
There’s panic all around and investors are quoting headlines similar to “Sensex dives xxx points due to crude/liquidity crisis/rupee depreciation etc” or “Markets have wiped out ‘some-huge-amount-in-crores’ of investor wealth”.
However, let’s see what has actually happened to investor wealth in the past one year and demonstrate how recency bias works. For this, I will be using Nifty50 as the reference index assuming to be the bellwether index (as popularly cited).
Let’s assume investors invested at various points in the past one-year – a year back, six months back and three months back. Here’s what their investment would look like today.
Data as on 03 Oct, 2018. Source: Google NSE: Nifty
The next question that comes to my mind is – “who is actually losing money?”
With some more number crunching, I’ve arrived at the precise entry period during which investors could be seeing a red in their portfolios – it is 85 days before 3 October 2018! (Or, the ones who entered in the unfortunate period of 18 trading days of 9 Jan’18 – 5 Feb’18)
I would sound pretty redundant if I were to reiterate the fact that equities are for long term and 85 days are by no measure a long term. Anyone who would have invested in Nifty at any given point in time before 85 days (except the unfortunate 18 days) would have their investment in green, today.
The panic we sense around today are nothing but a manifestation of the party effect.
True, events have unfurled, multiple variables are churning at the same time, there has been a dip in market indices but then, is this really an unprecedented and shocking event? Is equity market volatility an unexpected phenomenon?
Meanwhile, here’s how our investors’ “Build Wealth” portfolios have fared across market cycles in the past three years vis-à-vis Nifty.
At fisdom, our research is dedicated towards three fundamental principles of wealth management: risk-optimal returns, resilient performance and sustainability.
It is highly advisable to stick to asset-allocation and perhaps, utilise this slump as an opportunity to invest. After all, nothing is permanent – not even this dip! Avoid being a victim to the party effect.
Please reach out to us in case of any clarity/guidance you may need for your investments; we are committed to assist you and make your money work for you in the most efficient manner.