What’s NOT wrong with the markets today!
The Great Indian Markets: Are we turning it into a game of smoke & mirrors?
It intriguing to look at how media today has the power to sensationalise an otherwise regular event. Like it always does, media has continued to amplify the current situation (with pink newspapers buzzing with headlines with keywords like “crash”, “bear-grip” and “meltdown”).
The party effect
While doing some homework of my own, the current reactions reminded me of an old classic lore that I had read while studying behavioural 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 popularly known as The Party Effect or in a more technical fashion – Recency Bias.
This is a classic parallel to how most investors generally perceive and react to a market scenario, with the elephant being the market and the men being the examples of general investors. They form an opinion solely on the basis of what they see, feel or hear in the immediate moment and construe it to be perpetual and a fact of life.
Now let me get back to what’s happening in markets. There’s panic all around and shocked investors are saying things like “Sensex dives xxx points due to crude/liquidity crisis/rupee depreciation etc” or “Markets wiped out ‘some-huge-amount-in-crores’ of investor wealth”.
However, let’s analyze what has actually happened to investor wealth in the past 1 year and demonstrate how Recency Bias works. For the sake of this analysis, our team used Nifty50 as the reference index assuming to be the bellwether index (as popularly cited).
Let’s assume different investors invested at various points in the past one-year – 1 year back, 6 months back and 3 months back. Here’s what their investment would look like today:
So who is actually losing money?
With some additional number crunching, we found out 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 know that this would sound redundant, but I will use this opportunity to state 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 is 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 we should ask ourselves:
Is this really an unprecedented and shocking event? Is equity market volatility an unexpected phenomenon?
Finity Portfolio v/s Nifty
Meanwhile, here’s how our investors’ “Build Wealth” portfolios have fared across market cycles in the past three years vis-à-vis Nifty:
At MyMay Wealth, our research is dedicated towards 3 fundamental principles of wealth management: risk-optimal returns, resilient performance, and sustainability.
It is highly advisable to stick to asset-allocation and perhaps, utilize this slump as an opportunity to invest. After all, nothing is permanent – not even this dip! It is totally up to you to avoid being a victim to the party effect.
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