It is OK to buy stocks at the peak of the market?

The billion dollar question on the minds of investors is; should they buy stocks at this Sensex level and is it OK to buy at market peaks? That is exactly what we try and check in our rear view.

Jul 06, 2021 09:07 IST India Infoline News Service

As the Nifty and Sensex scale all-time highs, the stories of investors are varied. At one end, there are sceptics who believe that there is too much froth in the market. But, this segment has been sceptical for just too long. At the other extreme is the bravado brigade, which believes that this time is different. The truth is, obviously, somewhere in between. Markets look simple on the rear-view mirror, so let us look for some insights in the rear-view mirror.

Why we are looking at the rear-view mirror?

The billion dollar question on the minds of investors is; should they buy stocks at this Sensex level and is it OK to buy at market peaks? That is exactly what we try and check in our rear view. We look at 5 major corrections in the Sensex over the last 35 years. To make the data more credible, monthly average prices are considered to smoothen out volatility. A minimum fall of 30% from the peak has been considered as a serious correction. We assume that the investor buys a Sensex portfolio at each peak and then evaluate returns over different time periods. The observation is that it is absolutely OK to buy at peaks.

Correction 1: Feb-86 to Mar-88

This was the period when finance minister VP Singh came down hard on suspected cases of excise evasion. Industry was spooked leading to a free fall in markets.

Correction Fall (%) 1-Year (%) 5-Years (%) 10-Years (%) Till Date (%)
Feb-86 to Mar-88 -39.42% -16.29% 13.20% 17.75% 20.84%
Data Source: BSE (returns above 1 year are CAGR)

This was a prolonged 2 year correction so the 1 year returns were bound to be dampened. But 5 year returns at 13.2% CAGR is impressive and 10 year returns at 17.75% is a lot more impressive. And if you had opted to hold the portfolio to the present day, you would be laughing all the way to the bank with 20.84% CAGR returns. Remember, you just bought at the peak of 1986 and left the portfolio to the wisdom of the market; and did pretty well.

Correction 2: Mar-92 to Apr-93

It was the big stock market scam that saw an incredible meltdown after it became clear that banks had funded the Sensex rally all along.
Correction Fall (%) 1-Year (%) 5-Years (%) 10-Years (%) Till Date (%)
Mar-92 to Apr-93 -50.48% -46.77% -4.76% -2.15% 17.87%
Data Source: BSE (returns above 1 year are CAGR)

This was a violent correction followed by a prolonged slowdown in the Indian economy amidst high interest rates. Not surprisingly, had you bought at the peak of the Harshad Mehta rally, you would have earned negative returns after 5 years and 10 years. However, had you held on till date, you would still be laughing all the way to the bank with CAGR return of 17.87%.

Correction 3: Jul-97 to Aug-98

The Asian crisis, a major liquidity crunch in India and the sanctions post the Pokhran test in May 1998 contributed to a crash in stock markets during this period.

Correction Fall (%) 1-Year (%) 5-Years (%) 10-Years (%) Till Date (%)
Jul-97 to Aug-98 -31.86% -25.43% -7.10% 13.75% 10.98%
Data Source: BSE (returns above 1 year are CAGR)

Here again, you would have been in losses at the end of 5 years, but at the end of 10 years you would have been sitting pretty with 13.75% CAGR. However, the returns would have tempered if you had held on till date, but at 10.98% CAGR over a 25 year period, it is still better than most other asset classes.

Correction 4: Feb-00 to Sep-01

This was the famous millennial fall in the markets when global technology stocks unwound after an astonishing rally. The fall continued for 19 months, all the way to 9/11.

Correction Fall (%) 1-Year (%) 5-Years (%) 10-Years (%) Till Date (%)
Feb-00 to Sep-01 -48.38% -22.03% 4.28% 11.68% 22.83%
Data Source: BSE (returns above 1 year are CAGR)

Despite the vertical fall in this period, the Sensex had already generated positive CAGR by the fifth year. Returns were at an impressive 11.68% at the end of 10 years. The icing on the cake is that had you bought at the peak of Feb-00 and held on till date, you would be sitting on 22.83% CAGR returns.

Correction 5: Dec-07 to Feb-09

Sub-prime created one of the sharpest falls in recent memory and many of the sectors like power, capital goods and realty are yet to recoup those peaks.

Correction Fall (%) 1-Year (%) 5-Years (%) 10-Years (%) Till Date (%)
Dec-07 to Feb-09 -56.17% -52.45% -0.85% 5.35% 7.32%
Data Source: BSE (returns above 1 year are CAGR)

Most investors in the market would perhaps remember this correction distinctly. Even if you had bought at the peak of the sub-prime boom, you would have been neutral in 5 years and positive over 10 years. You can argue that 7.32% CAGR returns over 13 years is not great, but you have still created positive value despite buying at the peak.

It is absolutely OK to buy at the peak

We don’t know if this is a peak or the start of a bull rally. The moral of the story is that even if it is a peak, you don’t have much to worry about if you are a long term investor. Firstly, this is Sensex returns and you can get better returns through stock selection. Secondly, we have not considered dividend yield and that would add 1.5% to annual CAGR yield. Above all, the data gives you comfort that even if you buy at the peak, you do not have to exert yourself too much about timing the market. On the positive side, if this is the beginning of a rally, you are in a sweet spot anyways!

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