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MAKING SENSE OUT OF 'NOTHING'

January 3, 2017

 

Dear Investor,

 

2016 was the second consecutive 'nothing' year for the stock markets. BSE Sensex grew just 2% in CY16 after declining 6% in CY15. Inertia portfolio too was on a trip to nowhere. It was up 2% in CY16 after an absolutely flat CY15.

 

Two full years of virtually zero returns are bound to create some amount of anxiety, even panic in some investors. This is natural as all of us start a new year with expectation of at least 15-20% returns from our stocks portfolio.

 

So how to reconcile when these seemingly valid expectations do not get met? Many people might even be wondering whether this the new normal... 

 

So, is the era of handsome market returns over? How do we make sense out of the 'nothing performance phase the stock market seems to have gone into?

 

To distract you a bit from the markets, I have often wondered many times how the seemingly unplanned and chaotic cities start looking perfect like a piece of art when I look down from an airplane after the take off. It all somehow starts making sense from the top, isn't it?

 

Taking a 30,000 feet view in the stock market parlance would entail parsing through long-term stock market behavior. Very few take a long-term view! We all know markets go up and down but have you ever wondered what are the odds? Last two years might seem perplexing, but do fit neatly into the last thirty years track-record. And there in lie the real insights...

 

Lets look at the data first:

 

 

 

 

 

We categorised each of the last thirty years based on the Sensex returns performance for that year. There are seven categories for the returns ranges varying from huge negative (fall of more than 30%) to huge positive (more than 40% gain).

 

 

 

Some really interesting insights emerge:

1) 'Nothing years' have been more of an exception than the normal: Markets have been in the 'nothing' zone (10% negative to 10% positive) only in 8 out of past 30 years (17% of the time). However, beware of the recency effect as 3 of these five years are recent ones.

2) Markets have rewarded the investors handsomely most of the time: Markets have given more than 10% returns in 18 out of 30 years (60% of the time!). Moreover, 8 of these years have given a whopping 40%+ return.

3) Significant negative return years are a market reality but odds are against them: More than 10% market decline has happened 7 out of past thirty years (23% of the time). Of this, only once has the market declined by more than 30% (year 2008).

 

To conclude, these are exceptional times and require investors to bring forth the most important but elusive quality: patience.

 

So, what is the probability of 25%+ returns in the year 2017? If history is any indicator, it is 43% :)

 

WISH YOU A HAPPY, FULFILLING AND PROFITABLE 2017...

 

And heartfelt thanks for all your support and encouragement.

 

Happy Investing!

 

Team Inertia

 

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