13 crazy investing facts and what we can learn from them
Since 1980, the Sensex has made new all-time highs less than 7% of all days, but during that time it is up 49,548% (Absolute) / 15.45% (CAGR).
Learning: The stock market is not a linear curve, and you are underwater 93% of the time. The less you look, the better off you will be.
The Sensex has compounded at 7 basis points a day since 1980, with total growth of more than 49,548% (Absolute) / 15.45% (CAGR).
Learning: Compounding really is a magic.
The Sensex has only been positive 53% of all days since 1980. The average daily return is 1.10% when it is UP and -1.07% when it is DOWN.
Learning: Stocks do not have to go up every day to deliver a healthy long-term return.
Since 1980, the Sensex has spent more time 30% or further below the highs than within 2% of the highs (16.77% of days vs 11.55% of days).
Learning: No pain no gain. You will spend more time in drawdowns than near highs.
Between June 1994 and April 2003, which is the initial 9 years of my investing career, the market was lower by nearly 25%.
Learning: Stocks deliver returns in the long-term, yet there can be long periods of famine and opportunity loss. Survival is underrated.
If you had invested in the Sensex on Feb 29, 2000, you would have had to endure a drop of over 50% by Sep-2001. Your return today (Feb 28, 2023) would have been 10.91% (CAGR).
Learning: What matters in the market is time. If you had remained invested even after that ill-timed investment, your return by February 2023 would have improved to a healthy number without accounting for dividends. There is magic in compounding and the most under-appreciated element of compounding is time.
The 10-year yield in India bottomed at 4.95% on Oct 16, 2003. As the RBI hiked rates, the 10-year yield climbed to 7.31% by Nov 8, 2004. So, what did the Sensex do in the face of this sharp hike in rates? It climbed 21%!
Learning: Investing may be simple but it is not easy. Market outcomes are driven by multiple variables and relying on a single variable and its presumed correlation can be injurious to your financial health.
On Jan 3, 2008, the 10-year yield was at 7.77% and the Sensex closed at 20,345. The yield plunged to 5.24% on Jan 1, 2009. The Sensex dropped from 51% to 9,903 during the same period when rates dropped.
Learning: How well do you know correlations and causation? Correlations can change, they can also invert. Causation is uncertain and multiple factors come into play including but not limited to valuations, earnings and the unknown unknowns.
If bought in 2008, Gold outperforms Sensex, but if bought in 2009, Gold underperforms Sensex.
On Jan 1, 2008, the Sensex was at 20,301 and Gold (10gm) was at ₹ 10,631. On Feb 28, 2023 the Sensex is at 58,962 and Gold (10gm) is at ₹ 55,320. Gold is up 5.2x and the Sensex is up 2.9x. Gold did better than the Sensex.
On Mar 9, 2009, the Sensex was at 8,160 and Gold (10gm) was at ₹ 15,501. On Feb 28, 2023 the Sensex is at 58,962 and Gold (10gm) is at ₹ 55,320. Gold is up 3.6x and the Sensex is up 7.2x. Sensex did better than Gold.
Learning: Asset prices fluctuate. You can support any argument by changing the start and end dates. Which is why point-to-point returns can be misleading. It is always better to evaluate rolling returns.
If you had invested from 2010-2020 and beaten the market by 5% each year, you would have made less money than if you had invested from 1980-1990 and underperformed the market by 5% a year. The table below illustrates the same:
|Sensex Decade Returns||Returns in % (CAGR)|
Learning: When you were born &started investing > almost anything else.
Returns are not linear or discrete. Alpha is important but it is not everything. Although being in the right place at the right time may not be in your control, it can influence your outcome.
Sensex earnings went up 38% in FY1996; the Sensex was flat. Nifty earnings were flat in FY2015, but the Nifty was up 27%.
Learning: The Sensex & Nifty is not equivalent to the economy or even earnings in the short term. Markets are forward looking and reflect various sentiments and expectations.
If we discuss the US market, we have to mention how at the bottom in 2009, long-term US government bonds outperformed the stock market compared to the previous 36 years.
Learning: Stocks generally outperform bonds, but there are no guarantees. Also point-to- point returns can be misleading.
Berkshire Hathaway Inc., cofounded by Warren Buffett (who is also the chairman and CEO of the company) had lost nearly 50% of its value during a 13-month period leading up to the dotcom peak in the year 2000. The NASDAQ 100, however, gained 225% over the same time! From its low in 2000 the Berkshire Hathaway stock recouped all its losses and made a new high by November 2003. The NASDAQ 100 which lost over 80% from its peak in 2000 recovered its highs 16 years later in 2016.
Learning: In the short run, the market is a voting machine, but in the long run, it is a weighing machine – Benjamin Graham
When it comes to investing, think of probabilities and of rolling returns. Consider valuations and practise asset allocation. Implement diversification and systematic investment.
To reap the benefits of compounding think long-term. In the formula for compound interest: ‘n’ i.e., time is under-appreciated due the fascination with ‘r’ i.e., rate of return. Together they make magic.
Survival is underrated.
Sources: UTI Research, Bloomberg; Sensex – S&P BSE Sensex PRI, Nifty – NSE Nifty 50 PRI
CAGR – Compound Annual Growth Rate