One of the biggest biases in investing is Recency Bias, Which means that participants in the markets would make investment decisions based on the recent turn of events. So if the recent news is good and thus the markets are rising everyone is looking at buying and riding the bull market but if the recent events are negative and markets are falling, no one is willing to buy. This is basically the Greed and Fear at work, When markets are going up we tend to get Greedy and vice versa.
To make money in the markets there are a couple of fundamentals that one needs to look at, First one being using a buy and hold strategy, where you buy a good stock or Mutual Fund and ride out the volatile times to basically grow at the rate of growth of Economy in the long run. These profits could be increased when clubbed with the second strategy which is Buy low and sell high. This basic strategy ensures that you make profits but it is not easy to implement. Market experts have always said that buy when everyone is fearful and sell when everyone is greedy, this in essence means that you buy when the markets are low and sell when the markets are high.
Here comes the biggest problem, it is not easy to define when the markets are low and when the markets are high. As there is no single parameter that gives out this information, one needs to look at various factors like Price to earnings ratio, Price to book, Market cap to GDP, Gsec yields, Dividend yields etc. An absolute nifty or sensex index value in itself is not a good enough indicator to make buy or sell decisions.
One of the indicators that we track in our decision making is the attached graph. This graph is as of 28th February and markets have corrected a bit after that. What does this signify in terms of possible returns. Well, whenever the markets have dipped into the Green part (light green) of the graph, the NIFTY 50 TRI has been positive by more than 10% on 87% of occassions after that, also the instance of negative returns after 3 years has historically been NIL.
So sum this up again based on historical evidence and data since April 2005 till date, The probability of + ve returns from here on over the next 3 years is very very high, with a 87% probability of more than 10% CAGR
IT WOULD THUS BE FAIR TO SAY THAT " IN EVERY CRISIS LIES AN OPPORTUNITY"
Past performance may or may not sustain in future. This blog is purely for educational purposes and not to be treated as personal advice. Mutual funds are subject to market risks, read all scheme-related documents carefully.
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