We all know that the stock market prices sometimes go up and sometimes down. We also know this share price volatility (See https://www.helpindiainsure.iistpune.in/2018/01/18/and-the-tortoise-wins/  ) can result in a loss to customers who hold the shares for a long time.

But why do the financial advisors suggest that you hold the share for a long time so that you can make money? One of the arguments of those who suggest investing in risky investments such as mutual funds and shares is that one must keep the share or mutual fund for a long time to really get the benefit. One example that is often given by financial advisors is that the SENSEX was 100 in 1979 and is today over 37,000. Their argument is that if you had invested Rs. 100 in shares in 1979, your shares would be worth Rs.37,000 today! A return of 3700 %!!!

Many people get carried away by this argument and begin to believe that tons of money can be made without any risk, in the share market. What the financial analysts do not tell you is that the shares of companies that formed the basket of SENSEX in 1979, are not in the basket any more. So, if you had invested in shares of SENSEX in 1979, the chances are you would have lost all your money, since those companies are out of the list, as they are not performing well or at least not performing sufficiently to remain in the SENSEX.

Volatility creates a loss as well as a gain

When the share markets go up and down, the phenomena is called volatility. Once every few years the share markets go through a slump or what is also referred to as a crash of share prices. Over the next few years the share market overcomes the crash and starts doing well again. This is referred to as the cycle of share prices. The prices touch a peak, then go down and again start rising, When the share prices crash, either because the share prices are over-valued or because of some other reason in the overall economy, it essentially is a reflection of the lack of faith of the investors in the stock markets given the circumstances surrounding the crash.

The Crash of 2008

Let us take a look at the last major share price crash that took place in 2008. In 2008 there was a stock market crash all over the world. The newspaper Mint ( See 6 September 2018, page 3) listed the world most valued companies in 2008 and the most valued companies in 2018. That is the world’s most valued companies in terms of the share prices on the stock markets. This is reproduced in the table below. The companies given in bold and italics are the only names common in both lists.

The World’s 12 Most Valued Companies

What do we Observe?

75 % of the top 12 companies have fallen down in their valuation. Only 3 companies out of the top 12 have remained at the top. Suppose you had invested in one or more of the remaining 9 companies that fell out of favour with investors, the chances are that you would have lost your money.

What do we Learn?

When the share market goes through a crash and again rises in the subsequent years, it does not mean that the share you have invested in will rise again. Which of the shares in the stock market catch the fancy of the investors is a matter of guesswork. Your guess is as good or as bad as mine. It is only a guess and your guess or my guess could be either right or wrong. For example it would have been extremely difficult in 2008 to predict that in 2018 General Electric would not even appear in the list of most valuable companies!

The situation will be no different for the Indian stock markets. But it will be worth doing more research on this. Look out for this research in the near future in this Blog.