Statistics suggest that most Indian investors in equity funds make most of their investments in bull markets. As someone put it, “Rather than buy low and sell high, most investors attempt to buy high and sell higher.” So, what are the chances of making money by doing so?
Obviously, it depends on how much money one is looking at making, and over what time frame. While I don’t have a crystal ball or any other means to know what the future may hold, in this post, I propose to examine some historical evidence.
In a way, I had skimmed the fringes of this in an earlier post, where I attempted to make the case for equity funds serving a certain purpose. To do so, I had looked at the NSE-50 Total Return Index and had examined the outcomes from hypothetical investments made in this index each day between 11 Feb, 2000 and 5 Nov, 2010 (both dates representing market peaks). This period covered 2682 trading days. The trailing P/E ratio ranged between 10.68 and 28.47, with a median of 18.10.
In this post, I propose to use the same data and examine the instances of making varying levels of returns by investing on 211 peak days i.e. days on which the index was at, or near, a peak in terms of price as well as valuations (these days were amongst the top 20% in terms of the trailing P/E ratio and also represented either a new price high or were not more than 10% below the last price high).
The performance has been analyzed up to 19 Sep, 2014. It would be pertinent to point out that of the total 2682 days, there were 281 days on which, if an investment were to be made, would not have completed 5 years on or before 19 Sep, 2014. Of the shortlisted 211 days, there were 48 such days.
Here, then, are some of the observations:
Across the 2682 days, investments made on 1283 days could have, on completion of 3 years, resulted in an appreciation of 15% p.a. or more. Of the 211 peak days, there were only 21 days when an investment could have seen similar results.
Overall, there were 1366 days on which an investment, if made, could have, on completion of 5 years, seen an appreciation of 15% p.a. or more. There wasn’t a single peak day, investing on which this would have been possible.
What if, instead of a buy-and-hold strategy, one were to have actively monitored one’s portfolio and cashed in the gains?
An annualized return of 15% p.a. over 3 years equals a total return of 52.1%. An annualized return of 15% p.a. over 5 years equals a total return of 101.1%. Of the 211 days, there were 41 days, investing on which, one could have seen a cumulative appreciation of 52.1% in 3 years or less. These included 21 days, investing on which, one could have seen a cumulative appreciation of 101.1% in 5 years or less.
The tables below give a more detailed set of observations pertaining to investments made on the 211 peak days.
| Targeted Return | Instances of achieving targeted return by holding for exactly | ||
|
| 1 year | 3 years | 5 years |
| 30% p.a. | 19 | 1 | 0 |
| 20% p.a. | 20 | 21 | 0 |
| 15% p.a. | 26 | 21 | 0 |
| 10% p.a. | 32 | 33 | 9 |
| Targeted Cumulative Return | Instances of achieving targeted return in a period of | ||
|
| 5 years or less | 3 years or less | 1 year or less |
| 10% | 184 | 115 | 92 |
| 20% | 144 | 68 | 48 |
| 30% | 133 | 55 | 34 |
| 40% | 101 | 45 | 24 |
| 50% | 49 | 41 | 20 |
| 60% | 40 | 24 | 0 |
| 70% | 24 | 24 | 0 |
| 80% | 22 | 21 | 0 |
| 90% | 21 | 21 | 0 |
| 100% | 21 | 21 | 0 |
| 120% | 21 | 14 | 0 |
| 150% | 21 | 0 | 0 |
| 200% | 21 | 0 | 0 |
| 250% | 12 | 0 | 0 |
In case you have difficulty relating to cumulative returns, here are some quick indicators:
A cumulative return of 100% is approximately equal to a compounded return of 15% p.a. over 5 years, or 26% p.a. over 3 years.
A cumulative return of 150% is approximately equal to a compounded return of 20% p.a. over 5 years, or 36% p.a. over 3 years.
A cumulative return of 200% is approximately equal to a compounded return of 25% p.a. over 5 years, or 44% p.a. over 3 years.
A cumulative return of 250% is approximately equal to a compounded return of 28% p.a. over 5 years, or 52% p.a. over 3 years.
One final observation: there were dates on which, investments made and held, would not have achieved a modest targeted return even over periods beyond 5 years. For instance, investments made on certain dates in Oct, 2007 and Nov, 2007 would not have seen an appreciation of 8% p.a. at any point over the last six-odd years. As of 19 Sep, 2014, these investments, if made and held, would have registered an annualized return between 6% p.a.-7% p.a.
Based on these observations, I am inclined to conclude that investing at, or close to, market peaks is fraught with considerable uncertainty. While it may have been possible to generate returns as high as 50% in a period of a year or less, or in excess of 25% p.a. over a period of 5 years, such opportunities would have been very, very few. The evidence suggests that there were far greater instances of, at best, generating single digit returns over the short term, and annualized single digit returns over the long term.
If at all one still chooses to make investments at similar peaks, I would recommend investing in a staggered manner, such as through a Systematic Investment Plan. Further, I would suggest one set modest return expectations, actively monitor the returns and cash in and/or average out, as and when opportunities present themselves.
