After India's shocking defeat to Bangladesh and their inability to defeat Sri Lanka in an important match had ensured they would be out. Yesterday, Bangladesh defeated Bermuda and sealed the fate.
The world cup format was an exciting one in the sense that no team could afford to lose against the minnows in the group stage. I think in Super 8 it would have been a different story but each team had to win atleast 2 matches to make it to Super 8 stage.
After losing to Bangladesh Indian team was in a do or die match with Sri Lanka. And what a mess that was. I believe the team has been over-rated for a while. The senior players in the team are there not because they are performing well but on their past glories.
It is time that BCCI have a fair selection procedure on the lines of Australia. They should select players who are performing on the domestic scene and not on potential. It is all right for a player to not perform in 5 to 6 matches but then a limit should be set. The players should have to fight for their place in the team and not take it for granted.
The pathetic play in the world cup and their shocking exit has been a total disappointment. I hope players are held accountable for the fiasco. Everyone should be asked to perform at domestic level before they are allowed back in the national team.
Monday, March 26, 2007
Sunday, March 25, 2007
Investing in Indian Market
Investing in Indian Market
In the last two articles we have looked at the Risk / Return of the Indian Stock Markets and have made the case for bank deposits. The question remains is investing in stock market worth it? Can market timing help? This research by Fidelity
I have data from Jan 1, 1991 to March 9, 2007. This has 3622 1-year rolling periods (i.e. Jan 1, 1991 – Dec 31, 1991; Jan 2, 1991 – Jan 1, 1992 and so on). Of these 3622 1-year periods you would have made lost money 40% of the times and made money 60% of the times. The results, along with other periods, are:
| Period | 1-Year | 3-Year | 5-Year | 10-Year | 15-Year |
| Total rolling periods | 3622 | 3220 | 2757 | 1540 | 293 |
| % age Up Days | 59.88% | 70.40% | 76.97% | 95.00% | 100.00% |
| Average Returns | 19.99% | 11.74% | 7.65% | 6.72% | 14.36% |
| Risk (Std Dev) | 40.16% | 17.89% | 9.81% | 5.91% | 1.47% |
Therefore, for 10-year period there was just a 5 % chance that the returns would have been negative. The average returns would have been 6.72%.
So, by market timing can you increase your returns? Let’s say you invest a fixed amount every year. Consider these 3 scenarios; you invest at random (say on Jan-1 of every year), you invest at absolute high for that year and finally you invest at absolute low for the year. This will indicate whether timing the market has any impact on your investments.
First for the entire data:
| Entire Period | Random | High | Low |
| Jan-91 to Dec 06 | 9.73% | 7.19% | 10.80% |
| Investment Growth | 4.42 | 3.04 | 5.16 |
This indicates that over 16-year period there is only a little difference. Over a 16-year period money invested at market highs would have grown to 3 times its value, at random it would have grown to 1.5 times to approx 4.5 times and at market highs it would grown to almost double to 5 times. Importantly, there would not have been a huge difference between investing at market lows and at random.
However, this does not tell us about what happens for shorter durations and during bear markets (and for that matter bull markets). The results for 3, 5, 10 & 15-year periods for year’s ending in 2000 to 2006 are tabulated.
| Year | 3-Year | 5-Year | |||||
| Random | High | Low | Random | High | Low | ||
| 2000 | 1.58% | -8.00% | 9.07% | 2.66% | -3.61% | 5.83% | |
| 2001 | -5.79% | -14.20% | 2.85% | -2.29% | -7.65% | 1.95% | |
| 2002 | -5.52% | -9.76% | 4.90% | -1.85% | -6.14% | 3.03% | |
| 2003 | 18.39% | 8.66% | 28.23% | 9.87% | 3.47% | 14.68% | |
| 2004 | 19.35% | 8.86% | 27.17% | 9.92% | 5.14% | 16.23% | |
| 2005 | 24.55% | 10.09% | 32.68% | 17.15% | 11.48% | 22.78% | |
| 2006 | 25.23% | 14.69% | 33.26% | 23.20% | 16.05% | 27.31% | |
| | |||||||
| Year | 10-Year | 15-Year | |||||
| Random | High | Low | Random | High | Low | ||
| 2000 | 4.34% | 0.08% | 5.71% | -- | -- | -- | |
| 2001 | 0.20% | -3.05% | 1.94% | -- | -- | -- | |
| 2002 | -0.13% | -2.51% | 1.84% | -- | -- | -- | |
| 2003 | 5.17% | 2.42% | 7.08% | -- | -- | -- | |
| 2004 | 6.01% | 3.38% | 8.22% | -- | -- | -- | |
| 2005 | 9.39% | 6.32% | 11.48% | 7.94% | 5.28% | 9.07% | |
| 2006 | 12.69% | 9.47% | 14.87% | 9.34% | 7.03% | 10.60% | |
As the investment period increases impact of market timing decreases. There is not much difference between investing at random and absolute low for 10 & 15-year period. Moreover, for shorter periods investing at random is still a good option. Since you never know when the market is at absolute low, therefore, for long term, one should not worry about timing the markets.
Let’s conclude what we have learnt in this and previous 2 articles:
- Average returns for the 10-year period have been 6.67% with standard deviation of 6.66% implying 95% of the returns lie between -2.76% and 16.08%
- 95% of the times you would not have lost any money over the last 10-year period. 5% of the times 10-year investment would have yielded negative returns.
- The worst return for a 10-year period is -2.80%
- M3 growth still remains high and as inflation generally lags M3 by one year; it is likely that inflation and hence interest rates will go up.
- Currently certain banks are offering deposit rates up to 9.5%, which is higher than historical 10-year stock returns. Risk less.
- Market timing seems to have little impact on 10-year period. Therefore, stick to a strategy of investing on Jan-1 for long term.
Wednesday, March 21, 2007
Investing in India – Case for Bank Deposits
Investing in India
In the last article I discussed the returns offered by Indian Stock Markets from Jan 1991 to Mar 2007. In the article we saw that the “general wisdom” i.e. to buy and hold in the Indian stock markets would not have given any spectacular returns. A long term investor would have had better gains had he invested his money else where, real estate, gold or banks,
Before we proceed further lets quickly recap what we saw in the last article. For a long term investor, I would only look at the 10-year returns (as explained earlier 15-year returns do not provide a true picture as they are for 2006 & 2007, which has been a bull market). The 10-year period in question has witnessed severe bear market (Mid-2000 & to 1st quarter 2003) and an equally impressive current bull market. To look at it another way BSE Sensex fell from 6000 points (in Feb 2000) to 2900 (in May 2003) only to rise to over 14000 (in Feb 2007).
So what have the average 10-year return been? Well, only a measly 6.66%. Risk, as measure by standard deviation, to attain those returns has been 5.54%. What this tells us is that 95% of the returns were between -2.76% to 16.08%. Yes, you read that right; there is a possibility of getting negative returns even after waiting for 10 years. The worst 10 year returns is -2.80%. This is something no long term investor would find appealing.
These are historical returns and in future they can certainly be higher. One interesting insight on such horrible returns can be based on Elliot Wave Analysis. According Vivek Patil's preferred super-cycle-degree count wave 4 started in September 1994 and went on till October 2005. If this turns out to be correct then Sensex averaged 6.66% returns in a 4th wave and if we truly are in Wave 5 then we should see spectacular returns for the next 10 years. However, Vivek Patil has also been suggesting a bearish scenario too. So, don’t invest just yet.
If stocks have provided such horrible returns then it is better to invest in other avenues. This brings us to Bank Deposits. To find the returns from Bank Deposit, I needed data and luckily I found it at RBI’s website. RBI data goes backs to 1971. In some years there were minimum and maximum returns. For the purpose of my analysis I used the average returns. I then set about doing the analysis I had done for the stocks. The results are:
| Time | 1 - 3 Years | 3 - 5 years | 5-year & more | Rolling 10-year |
| Returns | 8.28 | 9.08 | 9.59 | 10.26 |
| Median | 8.50 | 2.00 | 1.98 | 0.92 |
| Std Dev | 2.00 | 10.00 | 10.00 | 10.45 |
| Min Return | 4.63 | 5.38 | 5.38 | 8.21 |
| Max Return | 12.00 | 13.00 | 13.00 | 11.48 |
As the returns are guaranteed, the Standard Deviation is NOT a measure of risk. It just tells us how the interest rates have varied.
The difference between the stock returns and bank deposits is that in latter you know what you will get. It would be a better idea to look at the returns in the recent years
| | Above 5-year Min | Above 5-year Max |
| 1999 | 10.00 | 10.50 |
| 2000 | 9.50 | 10.00 |
| 2001 | 8.00 | 8.50 |
| 2002 | 5.50 | 6.25 |
| 2003 | 5.25 | 5.50 |
| 2004 | 5.75 | 6.25 |
| 2005 | 6.25 | 7.00 |
| 2006 | 6.50 | 8.00 |
As we can see the interest rates have trended lower. However, it would still have been a better idea to invest in bank deposits in 2001 than invest in stock market for 10 years. It’s only in 2003-2005 that 10-year stock market returns look more attractive.
Recent data from RBI suggests that despite tightening inflation remains high. Moreover, M3 (money supply) growth is still high. As the inflation lags M3 by about 1 year, it is expected that inflation will continue to rise in the near future. This implies that interest rates will trend higher at least in medium term. Currently, ICICI Bank (other banks too) is offering up to 9.5% returns on fixed deposits. It is likely this will trend higher when RBI raises rates. In any case these returns are way higher than average 10-year returns from the stock markets.
It would be prudent to invest a part of your assets and lock in virtually risk free 9.5% returns. In the next article we will look whether investing in stock markets is worth the risk. We will also look into whether timing the market can prove beneficial as opposed to buying regularly. In the meantime, seriously think about investing in bank deposits.
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