The Signal – The Hidden Opportunities In Market Falls

“Abnormal times make for abnormal markets” is an adage we can subscribe to in describing the latest developments in Indian equities. An optimist would paraphrase the same as the opportunity to realize abnormal returns, and hopefully by the end of the this note, you will be that optimist. 

However, the making of an optimist begins with challenging the concerns of the pessimist. And to the latter’s delight, recent market-oriented headlines have investors painted as the victim with markets tumbling 1500 points+ in a single trading day, wiping ~Rs.9 trillion in wealth. Catching many by surprise, the knee-jerk volatility in the market has fueled worries about it being “investor-friendly” in current times. With many investors writing to us with similar concerns, we put pen to paper in addressing these mostly “loud” woes. 

In diving head-first in telling investors to not worry about market troughs (and peaks for that matter), we browsed through market data over the last two decades to understand the frequency of such mis-happenings. The chart below presents our observations:

Over the previous ~5,300 trading days, markets have borne the brunt of many a crisis/disruption (global and domestic) in Dot-come bubble, SARS, Global financial crash, Demonetization, GST and Covid-19 to name a few. In spite of all the bumps, markets have observed a minimum of 3% fall only 5% of the time. This helps instill belief in market’s resilience over the long-run while parallelly advocating investors to remain tone-deaf to such daily turbulences.

On broadening scope of study, we observed that market falls of such intensity were blessings in disguise for investors willing to enter the markets at times when fear was its protagonist flavor. The approach here resonates Mr. Buffett’s widely applauded, but rarely practiced wisdom in being greedy when others are fearful.

The table below highlights the returns realized by market participants (across tenures) who capitalized on the breaking of markets by investing fresh monies on said days:

The table above brings forth two key observations:

• Wealth is created in the long-run irrespective of the quantum of market fall (table shows 3% fall and more) on the daily as is reflected by the wealth multiple. The only losers are those who scurry away due to concocted participative fears
• Investing is a timeless activity (table covers time-variate starting points), offering pockets of return amplifiers, which are more-often than-not disguised as market falls. This observation encapsulates Mr. Munger’s words in Success coming to those who are very patient most of the time, and aggressive when it’s the right time.

On a longer time-frame it is evident that markets, for the better, carry an upwards rising trend. Does it hold true in the short-term as well? Especially when the short-term is infected with the coronavirus?

Well, to address this concern, it is imperative to acknowledge that there still leers a community reservation about market’s ability to override Covid’s disease as, quote-unquote, This time its different. 

This is a tough statement to refute as Covid is the once-in-a-century (at least till the next one comes along) pandemic, meriting a deep-dive into market’s behavior with a more microscopic lens. Present below are observations from that study:

• Markets closed in the green 184 times out of 320, equating to 57.5% of total trading days
• Markets gained more than 3.5% 8 times, crossing the highly anticipated 15,000 mark in the process
• Markets made multiple all-time highs, besting the prior figure 4 times in November 2020 itself (Vaccines were unheard of at this point)
• Navigating through the virus, the markets ended the year delivering 14.8% in 2020 on calendar-year basis, making it best year (return-wise) since 2017.

In a year of negatives, markets delivered many positives. More importantly, all the dips which were at the epicenter of eroding investor wealth, were in hindsight, a trampoline which augured wealth at magnitude of higher intensities than the virus itself.

The table below highlights findings that were born out of Covid-printed market levels:

Like in times of prior crisis, and as is this time as well, markets out-shone the virus in the across horizons even after having being deemed “infected”. 

There is a funny saying which is phrased as, “Each time history repeats itself, the price goes up”. Many questioned the learnings this phrase stood to serve, or rather did, till covid and aforementioned table happened. After looking into all the facts and figures, this phrase captures all of market’s offerings and participant’s hesitancies, only to help the latter re-learn the golden rule in staying invested. And if you have the vantage, then you can see the advantage!

As vaccination drive takes centerstage globally, Covid will become soon become a feature in the history books and markets will gear up to fight newer tensions. In the interim, it is those who remain tone-deaf to recurring murmurs who will stand to gain. As an example, an investor who invested on the eve of this millennium and did nothing in the interim, would today realize an XIRR of 11%, or wealth growth of 9x! Mr. Buffett was right indeed when he referred to markets as a “device of transferring money from the impatient to the patient.”

In conclusion, fell free to view markets through any lens, across any time period, and see for yourself who comes out as the winner. As a pro-tip, if you want it to be you, then get investing.