Financial television channels rarely go more than a few minutes without flashing the latest movement in INDEXBOM: SENSEX or referencing where INDEXNSE: NIFTY_50 currently stands relative to its previous close. For newcomers to equity investing, this constant stream of numbers can feel simultaneously important and confusing: important because everyone seems to treat these figures as significant, confusing because the underlying meaning often gets lost amid rapid-fire commentary and dramatic presentation. This article explores how investors can develop a more sophisticated, less anxiety-driven relationship with these frequently cited benchmark figures.
Moving Past Surface-Level Number Watching
The most basic level of engagement with these benchmarks would be simply comparing the number with the previous session and experiencing a mix of emotions (relief/excitement) or (anxiety/disappointment) depending on the direction and magnitude of the move. Whilst completely understandable, this approach yields little meaningful insight and, in fact, could encourage counterproductive investment behaviour, especially impulsive decisions based on a few fluctuations that rarely capture long-term market movements.
A slightly more involved approach is reading the tea leaves behind the headline number. In case of a day when the index rises a little, it’s useful to get clarity around whether this growth is widespread (most of the companies in the index rising) or led by just a few weight-draggers with others falling. In fact, this information is critical to understand market breadth and sentiment and is something that a headline number in itself cannot portray.
A similar thought process applies to volume data, which tells you about how many shares changed hands on a particular day. A significant price movement on exceptionally higher volumes tends to be more significant and sustainable as compared to a similar price move on lower than average volumes. Being able to read context around these additional bits of information gives a more rounded perspective as compared to solely reacting to the headline number that makes newspapers and occupies stock brokers’ screens.
Understanding sector rotation and its implications
More experienced investors would be familiar with the concept of sector rotation, where in a given period, some sectors (usually the ones representing broad economic themes like banking/finance or technology) tend to dominate the market. During the same time, other sectors that are more sensitive to consumer demand or have specific commodity linkages tend to underperform.
It’s critical for an investor to get clarity around what is moving the market at any given moment since this could significantly inform the decision to either buy or sell the stocks of a specific company depending on whether it belongs to the set of favourite sectors or otherwise.
It’s important to understand here that the movement in the broad market benchmark (the number that gets reported in the news) is only indicative of overall market health. The actual returns for a given portfolio will vary depending on the stock specific movements and whether it’s in line with the broad market or not. Thus understanding sector rotation and its implications on your stock of choice can help with understanding why your particular portfolio is performing the way it is relative to the headline number. A similar concept of diversifying one’s portfolio across multiple sectors (as opposed to overexposure to a single sector) also helps in reducing the overall volatility of the returns (risk) for the portfolio.
The danger of overreacting to short term market volatility
The most valuable lesson for an experienced investor is to not get fazed by the day to day movements of the broader market bench marks. Markets are bound to have corrections (periods of sharp decline) and every such period is generally heavily hyped up and magnified by the media to appear to be significantly more severe than it actually is. A good understanding of historical context and perspective is critical during such periods to avoid making knee jerk decisions that could hurt long term gains.
It’s important to remember that a large body of historical evidence suggests that patience during such phases tends to reward the investor with better long term returns. This isn’t however to suggest that there are no warning signs at the onset of prolonged down trends but it does mean that avoiding panic selling during day to day volatility is more likely to help an investor’s cause.
This type of mental resilience generally comes with practice and one way to accelerate the process is to reduce the amount of time one spends tracking the movement of the broad market indices during such volatile periods. The less you look at the market, the less likely you are to panic during its down days and the more likely you are to make decisions based on a considered analysis as opposed to impulsive decisions based on day to day fluctuations.
Developing genuine market literacy over time
Genuine market literacy can only be achieved via practice and a willingness to understand the nuances of market volatility, how different sectors tend to perform under different macroeconomic environments, and how stock prices are informed by such data points. Investors who are willing to understand not just the movements of the broad numbers but also the directional bias of specific sectors and what could be driving them (interest rates, consumer demand, commodity prices, etc.) are more likely to gain confidence in their ability to navigate the Indian equity markets in the long run.
Such literacy is also critical to help an investor achieve a balanced perspective on the movements of his or her portfolio and avoid knee-jerk decisions during down days. It’s important to keep in mind that market literacy provides significantly more value to the investor than simply trying to keep track of day-to-day movements of the broad-based market numbers. In fact, the time spent trying to understand market movements can be much more rewarding to the long-term Indian equity investor as compared to any time spent trying to time the market.