Biggest Fallacy in the Market-1

Sorry friends for not publishing my New Blog Article last Monday. I was very busy compiling the SENSEX and Nifty50 data for preparing this Blog Article, which I promised to publish in the last article. A few months ago I published an article with the title “The Biggest Blunder in the Market” which was republished on 22/12/2022 as being the 3rd most visited article. Through that article, I was trying to spread awareness about Forward PE.

In our previous blog article, we discussed what is essential, Time in the Market or Timing the Market. Most people believe that we should never try to time the market based on the data that is circulated against timing the market.

Let us see the set of data which strengthens the belief that “One Should Never Try to Time the Market.”

TABLE 1 Difficulty in Timing the Market

Let us explain the chart shown above. This chart shows that if we missed the 10 best market days, we would have lost about 25+% of the potential profit that we could have made if we had stayed invested all the time from January 1991 to March 2019. If we missed 20, 30 and 40 such days loss will be around 45+%, 60+% and 77+% respectively compared to that of in Stay-Invested.

Many questions arise when we see such charts:

  1. Is this Myth or Reality?
  2. how is it calculated?
  3. What is the outcome of it?

For getting the answers, I collected SENSEX (1979-2022) and Nifty 50 (1990-2022) indices data, put it down in excel and found the following results.

Table 2 Impact of missing best 10 days in SENSEX

Let us check it against the above questionnaires.

Table 2 clearly shows that if you miss the Best 10 Days from the market then your profit can be reduced by almost 2/3 in absolute terms. You may say that it’s not a Myth it’s a Reality.

Now I will tell you how it was calculated. In Table 1 calculation is done by simply removing daily rolling returns for the best 10 days from the list and then presenting the total returns into CAGR. The same is written in the notes just below the chart.

The assumption is that we are selling the entire holding and repurchasing it at the market close every day. We are not doing any transactions on the said Best ten days and we miss the returns virtually for that particular day. The problem with this theory is that the calculation process applied is non-technical. Though we are not doing any transactions (profit booking) on the day we are getting the result, including the returns but just removing them from the list.

We have corrected this in our calculations. In Table 2 we are assuming that we are not making any trades (profit-booking) in the best 10 days during this period. We have fixed the error from Table 1, instead of buying again after selling the entire holding at the previous day’s market closing of best days, we are buying at the market closing of the best days. This way we are getting more accurate results which is scarier. As we are seeing

Now come to the third question. No doubt that if we miss the best ten days, our profits may reduce by more than 65%, the question is there anybody in the world doing Market Timing this way? Not even a fool can act like this.

Even though we want to spread awareness of the impact of missing the best days, it would be one-sided to interpret only this chart.

Using this chart against the concept of Timing the Market is only a half-truth story. If you show the impact of missing the Best Ten Days, you should also show the impact of missing the Worst Ten Days. I am sure most of us do not know about it as we have not heard about it from any stalwarts. This side of the story has been covered up intentionally. Let us check the other side also.

Table 3 Impact of Skipping 10 worst days in SENSEX

By studying Table 3, you might be surprised that the result is inverse to the Best ten Days. Like the Best Days boost your portfolio returns, the Worst Days restrict your portfolio returns to a lower level from half to one-third of your potential return. The results in table 3 indicate that we should try to skip the worst days, which need to time the market. That is why this side of the study is covered up and kept mum.

The Conclusion of the above research:

  1. Missing the Best Ten Days will reduce your returns by almost two-thirds of the returns you would generate if you stayed invested throughout the period.
  2. Ignoring the worst ten days will restrict your returns to one-half to one-third of the potential returns you may get by managing to skip the worst ten days. If you want to manage to skip the worst ten days from your investment period, you need to time the market.
  3. However, while conclusion 1 supports the belief that one should never try to “time the market,” conclusion 2 proves that this belief is wrong

The result of the research proves that the belief that “One should Never Try to Time the Market” is not true, it’s nothing but a half-truth story.

“The problem with relying on rational models and treating them as the foundation of finance is that new findings that are inconsistent with the bedrock theories are dismissed,”

Frank J. Fabozzi, CFA, tells Paul Kovarsky, CFA.

This quote is suggesting that the reliance on rational models in finance can be problematic because these models are often treated as infallible and any new findings that contradict these theories are dismissed or ignored. This could lead to a lack of progress in the field and an inability to adapt to changing market conditions. It is important to consider new evidence and be open to updating or modifying theories in light of new information.

This is not the end of the story ‘Picture Abhi Baki hai Mere Dost.’ One more angle is there in the research: what will happen if we miss both the best and worst days? We will cover this in the next blog post. We will check whether it supports or denies the belief. We will also see when one should not time the market, when the Best Days and Worst Days come, and how to manage them. (Continue… In the Next Blog Post.)

See you Next Monday.

What will you expect from your investment in bear market conditions? Less profit or loss.

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Most important note: Views expressed above are the author’s own. The objective of this Blog is to share knowledge and info about new ideas/opportunities in Mutual Funds. Neither is this trading website, an analyst website, nor an advisory website. For Mutual Fund Investment success, always do your homework, analysis, and make your own decisions.

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