The market was slammed down almost 3% on small caps, and everything else was also down. Apparently, the fear that was triggered by the fund manager a couple of days back percolated into a lot of folks selling, which caused redemption pressure on many funds, resulting in morning bouts of selling.

Whenever you find that either there is a margin call or redemption pressure, it usually happens in the first half of the session, and that’s what was playing out today as well. The market became extremely oversold at one point and bounced back from the bottom. However, the issue of being in a downward spiral has not gone away. We’ve come back in the second half to some extent, but it may only be a temporary relief. We are still yet to climb out of the hole that the market has dug itself into.

Today’s topic of discussion is about short-termism in the long-term investor’s mind. You come into the market with a long-term view, but as the market falls, suddenly your focus shifts to the short term. This is something you don’t want to do, as you came in with a purpose and a time frame in mind. You accepted that you may have to bear some volatility in the markets, but now, due to current circumstances, your original thought process and resolve get shaken.

That is the real test of an investor. If you think about it, why should the market give you any returns if you are not willing to bear the pain? What compulsion does the market have to give you returns, any returns greater than what you get from the bank? The reason is that you are willing to take that risk and bear the volatility. That’s why you are rewarded with returns in due course of time. So, if you don’t want that volatility or risk, then the markets probably aren’t the place for anyone looking for good returns. You can’t have the cake and eat it too.

Where is the market headed?

Market Overview

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The market has rejected today’s morning move. Nifty has almost closed flat after six sessions of downward movement. There is a nice long-legged pin-type candle. The only thing is that the volume on this pin candle isn’t very high. Usually, when there’s a fall followed by a candle formation like this with huge volume, it indicates an intermediate bottom. I still think it won’t be easy to take out this bottom. Right now, the market is reasonably oversold, and we may again bounce toward that average level.

Nifty Next 50

Nifty Junior also saw a sharp move down but an equally sharp move up, closing exactly at the zero mark. This doesn’t mean we will just go higher from here, but rather that for now, the market is finding a floor. There is buying emerging at this level, and if that buying gets exhausted over time, we might see new lower levels.

Nifty Mid and Small Cap

Mid-caps showed a similar kind of pattern, closing 0.37% up. Small caps were down 0.7% until now.

Going forward, if we don’t break today’s low for all these charts, that would be a good outcome for holding this bottom. But by looking at this, you cannot say we’re out of the woods. The most extreme selling is probably over, but let’s see where we go from here.

Nifty Bank Overview

Bank Nifty closed in the positive, which is a very good sign that Bank Nifty is at least not participating in this waterfall movement, down 0.15%.

GOLD

Gold is down 0.22% for the day, resting after a huge run-up.

Advanced Declined Ratio Trends

Looking at the advance-decline trends, you can see 317 declines to 181 advances on the Nifty 500. On the Nifty 50, the advanced-decline ratio is almost even, with the lower part of the market slightly more red than green, while the top part is more green than red. That’s the major change.

Nifty Heatmap

A few life insurance and financial services companies were running up. Steel stocks were up. L&T did well, but Mahindra was smashed down 3%, ITC was down 2%, and Reliance hit a new 52-week low, down 1.5%. If Reliance is not holding up, you can expect that the market won’t be able to move upward. DLF lost 4% today, while LIC, Geo Finance, and others were down. On the flip side, Varun Beverages, Union Bank, Chola Finance, and Bajaj Holding were up, but it was a very mixed bag with no major trend available.

Sectoral Overview

Most sectors were down 0.5% to 1%, but the real slam-down came in real estate, down 2.7%, and defense, down 1.2%. Capital market stocks like BSE, CDSL, etc., managed to eke out some gains, though they have been hit hard, losing 10% in the last month. The last week has been horrible for almost all sectors except banking, which wasn’t too bad. Looking at the past year, only a few sectors have shown any reasonable gains for the year.

Sectors of the Day

Nifty Capital Markets Index

In the capital markets segment, you saw CAMS, Angel 1, Motilal, and BSE with more of a reactive bounce. It’s hard to say whether the bottom has been made, but there was a good bounce from the bottom in these stocks.

Story of the Day : Don’t come to the market or stay away from it if you cannot remain invested.

The resolve to stay invested is key. Yesterday’s Daily Byte video received a lot of positive feedback, and many people saw the power of coming into the markets for the long term through SIPs. The data is comprehensive and has a substantial impact on your mindset if you go through that video. Definitely check out the February 11th Daily Byte – the data will blow your mind if you haven’t seen it yet.

Today, in that series, we’ll look at different data: Two-year rolling returns. Yesterday, we studied SIPs, and today, we’re focusing on lump sums. As you know, unless lump sums are timed well in the market, lump sum returns can be very poor. We’re addressing that as well. Just in case you’re doing lump sums, history isn’t necessarily averse to you making money.

For instance, in the last two years, you might have had great returns – 30-40% in 2005-2006, 30-40% in 2010-2011, and 40% in 2022. This can make you feel that every two years, you’ll get similar returns. But take a look at the chart to see how this moves. The long-term average for two-year rolling CAGR is 13.28%, but the two-year returns will range from 40% on the higher side to even negative 18-20% on the lower side. That’s the nature of the market. Understanding this will help you internalize what to expect from the market now.

If you don’t have a view for 10 years, for instance, for lump sums, let’s look at the 10-year rolling CAGR for the last 33 years. The average is 11.5%. If you remained invested for 10 years in a lump sum in the Nifty, assuming worst-case scenario, you would still have made a decent return. For example, if you bought at the peak of the Harshad Mehta rally in 1992, your 10-year rolling returns might have been negative just about. But in the last 23 years, 10-year rolling returns have never gone below 5 or 6% in the worst-case scenario.

Even if you bought at the highest point of 2008, you would have made 5.5% CAGR 10 years later. So, making the worst mistake of your life and still getting a 5.5% CAGR after 10 years isn’t bad. The average works well for the Nifty rolling CAGR, which is 11.5%. The percentage of time the 10-year CAGR for Nifty is greater than 20% is very low (only 0.34% of the time). Most of the time, the 10-year CAGR is in the 5-10%, 10-15%, or 15-20% range, which accounts for 90% of the data. Below 5%, the chance is only 9%. Below 0%, the chance is less than 1%.

The key takeaway here is that while lump sum investing has its drawbacks in terms of returns, the long-term data gives a significant confidence for remaining invested. Even if you’ve made a lump sum investment at a poor time, there’s no need to worry. You’re likely to make money over time.

Looking at the stronger side, if you want to see where 10-year rolling CAGRs have been greater than 10%, you’ll see there were streaks where this occurred from 2005 to 2015 and again from 2021 to now. There were also periods where 10-year CAGR was greater than 15% for 29 months. But the 20% CAGR has only happened once for one month, in 2003.

Lump sum investing has huge ramifications in terms of returns. However, these returns don’t look as good as those we saw in yesterday’s SIP analysis. But even if you have done lump sum investments, there is no need to worry about your capital being at risk from an index perspective.

In summary, extreme downturns are short-lived. Looking at historical data, downtrends are becoming shorter and shorter. 20 years ago, downtrends lasted for years, but now they are compressed into much shorter periods. I don’t think any downtrend lasts more than a year and a half at best. The outcome is in favor of those who remain invested in the market.

Consistency, not timing, matters. Exceptional returns are possible, especially in the case of Nifty, but they are rare. Expectations of returns should align with the vehicle you’ve chosen. Even from mid-caps or small caps, if the long-term historical average is high teens, expecting 30% every two years is unrealistic. While this may happen once in a while, there will always be reversion to the historical mean.

Of course, long-term patience always pays off. Let me know in the comments your time horizon for equity investments. How are you holding up? I hope these data points are giving you the confidence to continue with your investments. Once you go through a couple of cycles, I can almost guarantee you won’t be bothered at all because by then, you would have realized that this is the nature of the market, and you must bear this to come out good on the other side.

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