Are there patterns to market cycles? If there are, we could adjust our investing strategy to exploit such patterns. However, the data don’t show any clear patterns. Take the historical record of the Sensex from June 1991. We could count bull markets, from 52-week lows to the successive record peaks. Vice versa, we can count from peaks to lows for bear markets. In these 26 years, there have been seven big bull markets, including the current one, and six big bear markets. The longest bear market could, in some sense, be said to have lasted 50 months starting September 1994. Prices did not climb during that period; the market just went sideways, without much direction.
Excluding the 1994-98 phase of drift, India has had pronounced trends. The longest bear market was 39 months between March 2000 and May 2003. That phase started with breaking news of the Ketan Parekh scam and bursting of the internet bubble. It got worse due to the 9/11 attack in the US. The subprime global financial crisis of 2007-09 triggered another 14-month bear market. The absolute low was in October 2008 but the market stayed depressed until April 2009. The most recent bearish period was March 2015-February 2016. Since March 2016, we have experienced a bull market.
The longest bull run was the massive 55-month uptrend from May-June 2003 to December 2007. There was a 22-month post-crisis bull run in 2009-10. There was another 31-month bull market after the second global financial crisis that lasted 2012-15.
The data indicate we can’t predict how long any cycle will last. The triggers for a reversal could be external. Returns, or losses, are not aligned to time. That is, a longer lasting trend might not produce greater returns.
The deepest corrections were in 1992-93 (56 per cent down in 12 months) and 2008-09 (63 per cent in 14 months). Both were relatively short bear markets. The most freakish return was 260 per cent in just over a year, in 1991-92. The 2003-2007 bull run returned over 600 per cent (absolute) across 55 months.
The randomness has important implications. If you can’t predict how long a phase will last and the quantum of returns, and you cannot pinpoint triggers for phase changes, you cannot time the investments.
The argument for systematic investment plans (SIPs) gets stronger. Research outfit Value Research has done a lot of number crunching oriented to SIPs. Their findings are useful. The risk of loss declines with the length of an SIP.
Given all diversified equity funds with a record of 10 years or more, 22 per cent of SIPs held for just one year (or less) produced negative returns. That’s one in five. Only 16 per cent of SIPs held for two years produced negative returns, while only two per cent produced negative returns over six years. Over 10 years, only 0.3 per cent of SIPs produced negative returns.
The magnitude and volatility of returns also stabilises over time. A short-term SIP can generate massive returns or big losses. The longer the time period, the more stable the returns. Over a one-year period, the best return was a mind-boggling 535 per cent but the greatest loss was 88 per cent of capital. Over 10 years, the biggest return was a very impressive 51 per cent (annualised) and the highest loss was minus eight per cent (which effectively wipes out capital). A 10-year SIP had a 77 per cent chance of scoring over 10 per cent annualised return, whereas a one-year SIP only had a 56 per cent chance of scoring 10 per cent-plus return.
The Value Research study also shows huge variation between fund returns. The best funds returned well over twice as much as the worst. Many funds consistently beat the benchmark indices, very unusual for most big markets. Putting the statistics together, the investment philosophy would be simple. Stay invested. Look at discretionary diversified equity funds with a long-term performance record. Or, if you fancy doing it yourself, invest systematically and hold your preferred portfolio for indefinite periods. There is one caveat — an SIP started during a raging bull market (like the present one) might take longer to yield returns. Moderate expectations, accordingly.