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An Almost Zero-Loss Strategy that Works Best When Markets Correct

Feb 15, 2016

In this issue:
» NPAs in December surge 29% sequentially
» Market roundup
» ...and more!

0.00 Chart of the day

Richa Agarwal, Research analyst

As I write, the BSE Sensex is down more than 21% from its lifetime highs touched in January last year. We are back to where we were a year ago.

Investors are wondering if we're in a bear phase. Experts who predicted the Sensex at 40k are now forecasting doom.

What about you? What is your strategy now? Do you believe that the worst is yet to come? Are you planning to stay away from markets?

Volatility can be unsettling. But before you panic, check out this analysis of market behaviour.

Sensex's range of returns over different time horizons

Note: Time period considered is December 1981 to December 2015.Assumption is that the investment is made at the end of the year.
*CAGR (Compound annual growth rate)

The chart above depicts the Sensex's highest and lowest returns across different intervals. As you can see, the returns have been volatile during the past one year (ranging from 94% gains to losses of 52%). However, as the time horizon increases, volatility diminishes. The best part is that there are no losses for intervals of ten years or more.

The takeaway from historical data is - as your time horizon increases, your odds of earning positive returns improve. For ten-year intervals and beyond, the probability of negative returns is almost nil.

While one could argue that chances of higher gains are better over short-term intervals that alone cannot be the reason to move in and out of stocks. Remember, no one can time the markets with success all the time. If you have been lucky so far, chances are you will be addicted until you lose. And the loss will be big enough to wipe all previous gains. Not to mention the impact of trading costs.

Moreover, these are just the returns on the benchmark index. When you invest in quality businesses at attractive valuations, your long-term gains are likely to be much higher.

My colleague Radhika Pandit, editor of ValuePro, which is based on Buffett's investing philosophy, recommends her subscribers hold quality stocks for at least ten years. She believes the recent market correction could be an opportunity to buy businesses with good fundamentals and management.

Don't let market volatility give way to panic. Keep a wish list of businesses ready. And buy when their valuations look attractive.

While the markets may correct further, if you are investing in the right asset allocation for the long term, you can sleep well at night and not worry about daily corrections...unless, of course, you are looking for a buying opportunity.

For your existing investments, revisit the reasons you bought in the first place. If they are still valid, forget about short-term volatility.

As Ben Graham said, 'In the short run, the market is a voting machine. In the long run, it is a weighing machine.'

Has the recent market correction made you nervous? Or do you think it could offer a good buying opportunity for the long term? Let us know your comments or share your views in the Equitymaster Club.


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3:30

As reality seems to have hit markets, real issues in the economy are getting acknowledged.

Mounting bad debts is one of the key concerns for the Indian economy that we have been highlighting for some time now.

The banks so far have indulged in creative accounting of bad assets. While this has under represented the bad loans so far, it just magnifies the issue. With Mr Rajan setting a March 2017 deadline to banks to clean their balance sheets, the magnitude of mess has begun to surface.

As per the data collated by Capitaline, the listed banks' NPAs have surged by Rs 1 trillion in the quarter ended December 2015. This is a 29% growth in bad assets on a sequential basis.

Banks are now recognizing troubled assets that were earlier being window dressed and provisions are being made accordingly. This has taken a toll on the December quarter profits . .. And the valuations of these banks.

While this is going to be a tough time for banks, we believe that this is a necessary step to discipline the banking sector and segregate the banks that are fit to be the pillars to the Indian economy in the long run.

4:00

Indian stock markets witnessed further gains after opening the day on a positive note. At the time of writing, the BSE Sensex was trading up 573 points (up 2.5%) and the NSE Nifty was trading up 183 points (up 2.6%). The BSE Mid Cap index was trading up 3.4%, while the BSE Small Cap index was trading up by 3.5%. Stocks from the metal, realty and capital goods sectors were leading the gains.

4:30 Today's Investing mantra

"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Richa Agarwal (Research Analyst).

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