The whole and the parts

"The best way to get the right answer on the internet is not to ask a question, but to post the wrong answer, because people online are more interested in criticising people than helping them." That's something I came across on Twitter and this is called - at least by some people - Cunningham's law. I don't know who Cunningham is or was and didn't bother to find out why he made this law because this is undoubtedly true.

I have resolved that from now on I shall use Cunningham's law whenever I want to find out about something that I do not know anything about. I'll think of a blatantly wrong answer to some question and write a column. Then, hopefully, a whole lot of people will enlighten me with the correct answer. So is this current page my attempt to utilise Cunningham's law? Well, that's for you to figure out. If I told you then it would surely destroy the effect, won't it?

For the last few weeks, the freshers' class of equity investors - of which there is now a large number - have been going through a hard time. The markets have decided to subject them to a hard bout of ragging. Being freshers - that is, those who have joined this college within the last two years - are having a tough time. Of course, they had stories that all this was bound to happen at some time, but stories are one thing and first-hand experience is quite another.

One of the lessons that the real world of investing teaches newcomers is how irrelevant the stock indexes are. Before you become an investor, all your knowledge of the markets generally comes from headlines here and there. All these are obsessed by the indexes. Specifically, the headline large-cap indexes like the Sensex and the Nifty. Subconsciously, non-investors form this impression that these are important numbers and every day, an investor has a good or a bad day depending on whether the Sensex and the Nifty went up or down.

Then they start investing and discover that the story is something else. Except for the small proportion who are investing through passive funds or derivatives based on these indexes, the reality is that all that matters is your stocks. Take what happened last week, on February 14, 2022. The Sensex crashed by 3 per cent, which is 1,748 points, a fairly large descent for a day. The next day, the 15th, it recovered almost exactly to the point from where it had fallen. As far as the headlines go, the story was over. Fell 1,748 points one day, rose 1,737 the next.

However, in the realm of individual stocks, it was quite different. Looking at just the 200 largest stocks in India, around 140 of them did not manage to return to the same level. Around half of them were more than one per cent down after this putative 'recovery' from the one-day crash. Fully 1/4th of this sample ended up more than 3 per cent down after the one-day recovery was over. The strange thing is that freshers try to take comfort from the rise of the indexes even if their stocks are going down. The attitude I hear is that since the markets are 'good', surely the stocks will recover sooner rather than later. This can be made to sound logical but is based more on hope than reality.

In a way, a phrase like this is a necessary part of the education for new investors. When markets are shaky, and money is not flowing in, then the good, the bad and the ugly get differentiated. It matters not one bit whether the Sensex and the Nifty are going up or not. That matters only to the headline writers. We investors make money out of our stocks, the ones we invest (or do not invest) in, nothing else.

Also read:

How to deal with the stock crash?

News, hype and equities