Long periods of boredom punctuated by moments of terror
This phrase is attributed to many different people said to be describing many different professions. From driving big-rig trucks, flying aircraft to modern warfare. And of course, it has since been co-opted by the investment profession and by the best investors, as a metaphor for the vagaries of the market. Personally, I think it’s a bit dramatic comparing warfare with the buying and selling of stocks.
True to form, financial media in the US announced 5th Feb 2018 was “the worst point decline in history“. Phrased like that you can’t help but feel we’re experiencing “moments of terror”. Compared to the 38 point drop on 28 Oct 1929, the 508 point drop on Black Monday in October 1987, or the 778 point drop on 20 Sep 2008, a 1,175 point drop does sound bad. Except, the single-day declines in 1929, 1987 and 2008 were 13%, 23% and 7% of the total market respectively, compared to 5% yesterday.
Closer to home, the NIFTY and the broader NSE 500 have declined 5.8% and 6.6% since 30th Jan. Since the usual end-of-days quotes are already making their rounds, I took a look at historical data.
In 4,718 trading days since Jan 1999 to Feb 6th 2018, the NIFTY has ended down on 2,180 days (46%). Moves of more than 2%, either way, are not frequent, only 631 days (13%), but hardly newsworthy given one in 10 days sees moves of this kind.
How to read them: Think of the charts like a timer that counts up for each day there isn’t a 2% or higher correction and resets to 1 each time there is, thus resuming the count.
Key points to note:
- Over 19 years, the NIFTY has had 310 such corrections, i.e. 1 every 16 trading days. But they have not been equally spaced, see how there were frequent corrections in periods like 1999 to 2001, 2007 to 2010 between periods of relatively lower downside volatility
- The 2nd Feb NIFTY & NSE500 correction was over 303 (304 for NSE500) days after a similar one on Nov 11th, 2016. We went all of 2017 without a correction of over 2%!
- Overall corrections have become much rarer since 2010. Between 1999 and 2010, the NIFTY (NSE500) corrected 229 (236) times over 11 years. Since 2010, there have only been 81 (76) such corrections
What changed since 2010?
In a nutshell, interest rates in all major economies hit rock-bottom in 2009 as a stimulus for a global economy where credit had dried up almost overnight after the collapse of multiple large financial institutions. Since then central banks have dithered over raising rates back to anywhere close to normal.
Given rates are finally starting to inch back up, it is highly likely that minor corrections like the one yesterday will be much more frequent. Overall returns in 2018 will not be like those in 2017. While I’m not selling everything except for reducing allocations to some stocks, my base case is we end the year lower than where we began based on some quick-and-dirty probabilistic reasoning.
As investors, we cannot wish the markets higher, but we can focus on what’s in our control. Since financial media is poorly designed for investors to achieve their goals, our efforts need to be to tune out the noise. What bad design teaches us about investor behaviour
The continuous endeavour should be to move from:
So that when “moments of terror” show up, we use them to our advantage. Happy Investing.