VR Logo

These highs are not highs

Equity markets are suddenly hitting a series of all-time highs and some investors are getting spooked

These highs are not highs

To the equity investor who is dedicated to buying stocks at a good value, there is nothing so worrying as markets at or near all-time highs. Somewhat unexpectedly, the end of 2020 has turned out to be a period with a great concentration of all-time highs. Since November 9, the Sensex has recorded 19 all-time highs in 34 trading days. Thus, more than half the days have been all-time highs. If you look at the entire history of the Sensex, this is not all that unusual, although it has been so in the last 10-15 years or so. There are 52 previous occasions when a stretch of 34 trading days yielded 19 or more all-time highs. However, all the earlier instances are from the three steepest bull runs in the past, which are 1981, 1992 and 2006. This is the first occasion that such a thing has happened since May 2006.

This means that investors' shock and awe is entirely justified. There's a whole new generation of investors who have not seen such a surge and many older investors have forgotten that such things used to happen. The problem with markets being near or at all-time highs is that the reflex action of investors is to not invest. After all, the central goal of all investing is to buy low and sell high, so why should one buy when stock prices are at an all-time high? This reflex ignores the fact that in the phrase 'all-time high', we are making a comparison to the past whereas in the phrase 'buy low, sell high', we are making a comparison to the future. Today's high can very well be a low of the future, and indeed it has always been so.

To give some numerical shape to this idea, I played around a little more with a spreadsheet that had the complete history of the Sensex. As many as 6.4 per cent of all days were actually all-time highs with huge concentrations in the few sharp bull runs that we have seen in the last 40 years. That much is obvious. Then, I calculated what kind of a difference there was in the returns obtained while investing on days that were all-time highs versus all days, in general. It turned out that for one-year returns, the average gains you would obtain by investing on high days would be 22.3 per cent while for all days, this would be 19.6 per cent. So that's the reverse of what a naive idea would suggest. For cumulative gains over three years, all days were 67.7 per cent and high days were 55.3 per cent. And for cumulative gains over five years, all days were 136.4 per cent and high days were 122.3 per cent. Thus, for longer periods, there is a distinct but not earth-shaking disadvantage to investing at a high. However, the gains are still great.

This is not an exhaustive research project and I can think of some obvious caveats and yet I think the basic point is established: don't sweat this all-time high problem too much. There's a danger in becoming too enamoured with ever-finer nuances of the numbers and lose sight of the basic goal: the important thing is to invest and invest for the long term. No great disaster will befall you if you invest too close to the high points of the markets.

There is a genuine problem though, which is that when you are near all-time highs, there is a greater probability of a steep fall. Of course, such a fall can take place at any time, so regardless of whether the markets are at a high or a low or anywhere in between, putting in a large lump sum is never a great idea, with 'large' being defined by your personal finances rather than any universal rule.

The reason is mostly psychological. There could be a good fall soon after you invest and it will be painful and scary to see a chunk of your money erode soon after investing. So, it makes some sense to put the money in a fixed-income investment and then do an SIP/STP into equity or an equity mutual fund. However, being worried about catching highs or waiting for lows is not a great idea.