Perspective on the recent market crash

“Sensex falls by 807 points” – this was a major news item in many leading dailies – general purpose or the pink papers. It looks threatening. Losing more than 800 points in a day is scary. Sensex lost 807 points on 11th February 2016.

It has happened only the 13th time since 1980. In other words, this was 12th largest single day drop (measured in points) in Sensex (on 10th Oct, 2008 Sensex lost 800.5 points, which was the 13th largest Sensex fall – the lowest among the 800+ point falls).

In other words, we have witnessed 800+ points falls 13 times in 36 years, which is roughly once in a three-years event. Once in 3-years does not look as threatening as 12th largest fall. See the beauty of the language. The same event presented differently, looks less threatening – emotions at play.

However, if we dig deeper into the history, it was only in May 2006 that we saw the first ever 800+ points fall in Sensex. And then, it has happened 12 more times since. So now we can say that in the last 10 years, this has happened 12 times. Oh God, the markets have become so volatile of late! See, the same thing looks scarier now.

Having said that, it was only on 8th April, 1990 that Sensex closed above 800 points. Hence, there was no way it would have dropped by 800 points in the first decade of its existence.

However, a “points-drop” should not bother an investor. It is the percentage drop that matters and not the points drop.

So how big was the Sensex fall on 11th February 2016 in terms of percentage of the previous day? It was -3.40%.

Once again, we looked into the historical data. Such a fall has happened 188 times in the history of Sensex (I have data since 2nd January 1980. So, if something happened before that, I have no idea). This makes it roughly a little over 5 times a year.Something happening more than 5 times a year may be considered as normal. Mumbaikars expect to lose one day a year due to heavy rains and water-logging. People travelling to (or within) North India expect delayed flights / trains due to heavy fog at least for a few days every winter. Such events happen. One need not and cannot plan to avoid such events.

The first time (as per the data available), Sensex lost more than 3.4% on 6th June 1980. Incidentally, the drop was 5.76 points and Sensex closed the day at 122.55 points.

See the wonder: it is often not the event, it is how it is presented that evokes the emotions.

807 points loss looks threatening. 3.4% makes it look acceptable.

It is important for investors to develop the ability to put things in a proper perspective, else the environment has the ability to test our resolve, often without substance.

Rise and falls are natural to the markets. So long as people can transact based on their opinions, the prices would remain volatile.

To be a better investor, you need a balanced mind. If you still need help, consult someone who has one.

Enjoy the roller coaster ride. Happy investing

#RidingTheRollerCoaster – 84

Advertisements

One thought on “Perspective on the recent market crash

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s