As I write this today, the Sensex is up by more than 1,000 points, making today’s gain as the 3rd highest in terms of points since January 1980. However, in terms of percentage rise over previous close, it is 354th highest. Looking at the other way, only twice has the Sensex closed by more than today’s gain (so far), making it one of those rare events. The percentage gain, however, tells a different story – 354the highest out of a total 9046 working days so far means Sensex has registered such a gain roughly every 25 days – it’s like a monthly event.

However, let us look at the reason why the markets “shot up” today. The exit polls suggested a clear majority for the NDA – the coalition that is in power currently.

It is in this regard that I would like to reproduce an article I had written for www.moneycontrol almost 5 years ago on 7th May 2014. See it is:

Enjoy reading!

The current Lok Sabha election was a major event in recent times and various market participants were keenly watching the mood of the public. Which party (or coalition) would form the Government or whether any coalition would get majority at all – were commonly asked questions.

Well, all that is speculation. It is very difficult for one to gauge the mood of the voters. However, many market participants tried exactly that. And what do they get?

A look at the history offers some interesting perspectives here.

• General Election 2004:
  • Results announced on 17^thMay, 2004
  • Sensex dropped by over 11%
• General Election 2009:
  • Results announced on 18^thMay, 2009
  • Sensex went up by over 17%

The surprising thing is: on both the occasions, it was the UPA Government that got the majority.

So what explains the opposite movements on these two days when the result was more or less the same?

It was the gap between the expectation and the actual result.

While in 2004, the markets expected NDA Government to continue, they were toppled by UPA, whose largest coalition partner was the leftists. Markets did not expect the new coalition to be capable of continuing Economic reforms.

In 2009, the market was expecting a fractured mandate. In stead, UPA got overwhelming majority. This was a huge positive surprise for the markets.

Both these instances highlighted how sensitive the market participants are. (It is not for nothing that our most popular market index is known as Sensex – Sensitive index). Both the events were worthy of headline news in the dailies.

If these events were so significant, what was their impact on the long-term performance of Sensex?

• Sensex was 5,070 points a day before the single day drop of 11% in 2004
• Sensex was 12,173 points just a day before the single day gain of 17% in 2009
• The one-day gain of 17% took Sensex to 14,284 on 18^thMay, 2009
• Sensex is at 22,417 on 30^thApril, 2014 – only 16 days before the results of election 2014 are out

The above three data points indicate something.

The single-day crash of 11% was followed by a market rally that took Sensex from 5,070 to 12,173 – CAGR of 19.15%

The single-day jump of 17% was followed by a much-muted rally that took Sensex from 14,284 to 22,417 – CAGR of 9.43%

Over the entire 10-year period, Sensex has gone up from 5,070 to 22,417 – CAGR of 16.03%. An investment of Rs. 1,00,000 would have grown to Rs. 4,42,150 in these 10 years.

It only indicates that those one-day sharp movements had an insignificant impact in the long run. With the growth in the Indian economy, the markets delivered a 16% CAGR. It is important for a long-term investor to ignore such short-term noise in the market. Such sharp price movements often influence the investors’ thinking and one ends up making mistakes of judgment. It is important for an investor to focus on one’s personal goals and plan to achieve those. The external market noise will continue to drive investor behavior in a counter-productive manner.

The message is loud and clear.

• Focus on your goals
• Understand the nature of the investment
• Match the two, i.e. choose investment avenues in line with your own requirements. For example, for all your short-term requirements, avoid stocks
• Review periodically, but do not bother too much about short-term market movements
• If the above four steps are too much, please take professional help
• Enjoy life

Note: All the Sensex numbers are for a principal return index, which means all the CAGR returns are without adding the dividends one would have got. Through this article, we are not offering our view on the future performance of any investment.

Amit Trivedi

The author runs Karmayog Knowledge Academy. The views expressed are his personal views. He can be reached at amit@karmayog-knowledge.com.