No. Stock Markets Never go Up Straight.

Stocks Markets Never go Up Straight
If you think you are a long-term investor, then here is the truth – Its not easy.

Just calling yourself a long-term investor is easy. But being one, year after year, for a decade or two, is not easy. Period.
The problem with markets is that it does not know that you are investing your hard earned money in it. It does what it does best. And that is – be volatile.
Just look at the following graphs:
Period 1: A fall of 20%-25% in about 6 months
Indian Markets 2003 2004
Period 2: A fall of more than 20% in less than 2 months
Indian Markets 2006 Fall
Period 3: A fall of more than 50% in less than 15 months

Indian Markets 2008 Crash

Period 4: This is recent one. A fall of about 15% in less than 6 months.

Indian Markets 2015 Fall

This is how the markets operate. There can be some really volatile moves that can throw everyone off balance.

At times, falls are small – 10%, 15% – types.

But at times, these falls can be as much as 30% or even 50%!
Just think about it. How would you have felt when your portfolio was worth Rs 50 lac at the end of 2007 and fell to almost Rs 25 lacs by early 2009?
Horrible might be an understatement. Seeing your hard earned money evaporating in front of your eyes is not easy. It’s painful.
Your faith in equities would have been shaken.
It’s even possible that your family might have turned against investing after such a fall in your portfolio.
This is real long term investing my friend.
It comes with its share of unbearable pains and temporary losses in short term. It will test your patience. It wants to test your mettle. It wants to see if you have the heart* to follow through when the going gets tough.
* I would have used the word ‘need’ here. But thats an obvious thing. There is ofcourse a need to invest for almost everybody.
But in long term, the general trend remains up.
Combine all the above graphs and this is what you get:
Indian Stock Markets Long Term
Looks like a decent upmove in last 15 years. Isn’t it?
But it’s easy to look at above graph and say that markets ‘will definitely’ move up in long term. It’s a different ball game altogether to remain invested during severe falls and be brave enough to buy more.
So if you feel that Dev is saying that 12% CAGR for next 15 years will make you a Crorepati, then you need to be cautioned a little.

This 12% is the AVERAGE. It does not mean that you money will grow exactly by 12% every year. That is how averages work.
In fact, a very successful long-term investor Howard Marks once quoted:
Never forget the 6-foot tall man who drowned crossing the river that was 5 feet deep on average.
Do not forget that the range of depth of the river can be between 2 and 10 feet. 🙂
Same is the case with markets.

A 12% average expected returns means that there might be a sequence of returns like one below:
+20% : -15% : +7% : -35% : + 20% : +40% : + 15% …..and so on.
The average of such a sequence might mathematically result in a CAGR of 12%.
Markets will never do something like this:
+12% : +12% : +12% : +12% : +12% : +12% : +12%…..
So just because markets have been doing great in recent past, don’t start thinking that it will go up in a straight line in future too. It will fall and it will rise.
The markets overestimate and then underestimate. This leads to over-reactions and then to reversion back to means.
It is very important to understand that markets don’t just go about in straight lines. Neither up nor down. Every calendar year cannot be an UP year. Infact at the start of 2015, I am sure that given a 30% rise in 2014, most experts and common investors would have felt that markets (Sensex) will be at 30,000 or 35,000 at end of 2015. The same doesn’t seem to be happening.

Just because markets did well last year does not mean that this year too will be good. Infact, statistically speaking and using the concept of mean reversion, chances of having a bad year after a good year is quite high. So don’t give too much weightage to short-term fluctuations.

You are a long-term investor and your job is to stay invested. Over the long-term, the markets reward discipline. So keep calm. Don’t start taking action just because you are bored and not getting a 12% return this year. Don’t be fooled into taking unnecessary actions.

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40 Words To Question Your Notions About ‘Long Term’

We all want to be rich. And if this ‘being rich’ comes from the stock markets, there is nothing like it. Its glamorous… Imagine being able to tell everyone that you are rich and you don’t need to go to office anymore. And its because you are rich (now) thanks to your great stock picks. Seductive…right?

But unless and until you are a superhuman trader who can pick the correct stock on a daily basis, its almost impossible to become rich enough, overnight. This is assuming you had to start from Zero. Then there is this risk of using leverage in stock markets.

But this post is more about a very simple, but difficult to answer question which was posted by Seth Godin in one of his recent short posts (link).

Though post is more general and not specific to money, it still is applicable to our world of investing.

And I quote what Godin writes…


A simple question with an answer that’s difficult to embrace.

What are you willing to give up today in exchange for something better tomorrow? Next week? In ten years?
Your long term is not the sum of your short terms.

I was quite impressed and more importantly, unsettled by this question. Read it a few times and you might experience what I did. Do let me know if you have any thoughts on this…

Long Term Investing Vs Short Term Trading

Do you believe in long term investing? Or is it that you do not believe in short term trading? 
 
Irrespective of what you and I believe in, the fact remains that it’s a big mistake to simply ignore short-term(ism). Short term trading can deliver quick returns. Period. But are these (eye-popping) short-term performances sustainable over long term? And why is it that after every crash (2000, 2008, etc), it is the traders who are wiped off and it is the long term investors who are not? There must be some reasons why traders have such high (market) mortality rates?
Lets look at it from another perspective. When we talk about investing or trading, what we are indirectly referring to are the time horizons. Now these time horizons are relative. Your long term can be short term for someone else. One of my close relatives has been investing for last 30 years. According to him, anything less than 10 years is short term!! And just one of the stocks in his portfolio happens to be HUL (Hindustan Unilever Ltd). After adjusting for bonuses, splits and dividend re-investments, his average price per share works out to be Rs 2.00/- (No…it’s not a typo); and HUL is currently trading at around Rs 570. Add to it the current annual dividend of Rs 7.50 per share. i.e. He has a capital appreciation of 28,400% and earns 375% (on his original investment) in form of dividends every year. Now can a trader match that? That too, year after year? One may argue that one can. But figures like 28,400% & 375% make it really hard for traders to challenge this long term investor’s approach of terming anything less than 10 years as short term. 🙂
Now these time horizon also depends on one’s risk appetite. It is a known fact that in short term, markets are volatile i.e. risky. So if one cannot take much risk, then he is not suited for short term trading. He is better off investing for long term by picking up good, solid companies or investing systematically in mutual funds. The longer you have to invest your money, the bigger risks you can take. If you need money in next few years, you should take a more conservative approach and put it in banks or other safer investment products like Bonds, RDs, FDs, etc.
For an average investor like you and me, anything more than 5 years can be termed as long term. Five years is a long enough time to assess whether a company is doing good or not. I personally define my long term as more than 10 years. What about you?
 
Disclosure: No positions in shares of companies mentioned above.

Don’t Invest for Short Term. Don’t Save for Long Term

Many times, we use the words Savings & Investing interchangeably. Some people don’t even realize the difference between these words.

 
One should not invest for short-term goals. One should not save for long-term goals.
 
So what should one do?
 
One should SAVE for short-term goals. One should INVEST for long-term goals.
 
By SAVE, I mean putting money in Savings Account, Fixed Deposits, Debt Funds, etc.
By INVEST, I mean putting money in good mutual fund schemes, stocks of good companies, etc.
As far as the short and the long terms are concerned, it totally depends on what you think. But generally,
  • Short-term is less than 3 to 5 years
  • Long-term is more than 5 years

So don’t forget. Don’t invest for short term and don’t save for long term. 🙂

200 Day Moving Averages (200DMA) Based Investments – 5 Years CAGR

In the previous post, I analyzed returns on investments based on 200DMA and how such investments performed over 3 year periods. This post is an extension of the thought with only change being the increase in evaluation period from 3 years to 5 years.
Just to remind everyone, 200DMA is calculated by taking the arithmetic mean of all values in consideration (Stock prices, index levels) in last 200 trading sessions (40 weeks). Before going forward, I would recommend that you get a basic understanding of how to calculate 200 Day Moving Average & how to calculate CAGR
You can easily find data for last 20 years on NSE’s or BSE’s website. Similar to that in previous post, a comparison of 5 years compounded annual growth rate (5Y-CAGR) was made against the index’s distance from 200DMA.
200 Day Moving Average Returns 5 Year
Correlation | Investing based on 200DMA & 5 Year Returns (CAGR)
The blue portion indicates index’s level (+/-) from its 200DMA. For example, in region marked P, index was trading at levels 20% lower than its 200DMA.
The red portion indicates returns over a 5 year period on CAGR basis.
A few interesting results that can be seen from the graph are –
  • In regions marked P, Q, R, S, & T, the index was trading 20% lower than its 200DMA. And as red graph in these regions indicates, returns have always been in positive territory.
Possible Deduction: Chances of your investments earning a positive return are more if you invest at times when index is trading at a discount of 20% or more to its 200DMA.

  • Region A (i.e. Year 2000-2004) is a possible outlier in this analysis. During this period, India was in long term secular bull market and as evident from the graph, relation between 5Y-CAGR and distance of index from its 200DMA is not evident. Returns continue to be positive even though Distance from 200DMA continuously switches between positive and negative territories.
This 5-Year analysis and a similar 3 year analysis done previously reveal that if an investor is ready to invest in markets trading at large discounts to their 200DMAs, probability of earning positive returns over long terms is quite high.

Though 200DMA is generally considered as a tool to be used by traders, it can very well be a potent tool in the hands of a long term investor who wants to time his entries in the market.

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