Correct your reference point

Recent interaction with the market participants indicates that the sentiment of fear is now strongly dominating greed. Most of the investors/traders are complaining of pain in their respective portfolios.

Indubitably, the portfolio values have corrected noticeably from their September 2024 high levels. However, the damage is far less as compared to the previous major bear market, which lasted for almost thirteen months (2008-2009), followed by a 20-month period of recovery (March 2009-November 2010) and a three-year period of consolidation (November 2010-October 2013).

We had a tentative two-year market cycle between 4Q2013 and 1Q2016, before the latest proper bull market started at the end of February 2016. Notably, this bull market has been the longest one (8 years); and it is still not certain that it has ended on 26^th September 2024.

Pain-check

In my view, the pain from stock price corrections could be of two types – absolute and emotional.

Absolute pain occurs when an investor or trader loses his capital permanently. This may be due to excessive leverage, error of judgement in the stock selection, and/or liquidating portfolio at a low point due to panic.

Emotional pain occurs when an investor or trader becomes greedy and internalizes the excessive returns as normal. The pain is felt when the market reverts to mean and excessive returns made during the euphoric phase evaporate, leaving only normal returns for them.

It is therefore important to use a correct reference point for “pain-check”.

So far, most of the regular investors/traders may be feeling emotional pain only, as the correction so far has been mild and they are still earning normal returns (13% CAGR on Sensex and 18% CAGR on BSE Smallcap) since February 2016 when the latest bull market started.

For traders and investors who started investing/trading in stocks and/or mutual funds in 2020, the returns are still above normal (15% CAGR on Sensex and 26% CAGR on BSE Small Cap since September 2020 when lockdown was lifted after the first Covid wave).

It is important to note that during the last bear market (2008-13), stock price correction lasted for 13 months - from the end January 2008 to early March 2009. However, January 2008 high levels were not breached till October 2013. The 2008-09 correction was so severe that it not only eroded entire gains earned during July 2006 – January 2008, but erased a significant part of the invested capital. In the end (March 2009), the Sensex was 18% lower than the starting (July 2006) level; while Smallcap (-41%) and Midcap (-36%) were sharply lower. In comparison, the investors and traders are in a significantly comfortable position in the present correction.