Nature of Markets

It was many months ago (November of 2008) that I made this study(?) on the BSE Sensex Interday High and Low. I should have followed it up with a bigger sample size. Good thing I did not. Why bother when someone much brighter has got it all figured out. This man is perhaps one of the greatest living scientists today. He is called the father of Chaos Theory and he responds to the name Benoit B. MandelBrot. Yeah you go that right - he, of the famous Mandelbrot Set.
Here's what he has to say about a typical characteristics of a market in his absolutely remarkable book, The (Mis)behaviour of Markets ...
Markets have a personality
Prices are not driven solely by real-world events, news, and people. When investors, speculators, industrialists, and bankers come together in a real marketplace, a special new kind of dynamic emerges - greater than, and different from, the sum of the parts. To use the economists' terms: In substantial part, prices are determined by endogenous effects peculiar to the inner workings of the market themselves, rather than solely by the exogenous action of outside events. Moreover, this internal marketing mechanism is remarkably durable. Wars start, peace returns, economies expand, firms fall - all these come and go, affecting prices. But the fundamental process by which prices react to news does not change.
Here's a thesis topic for students of finance and economics: Carry out a study of the pre-1991 Sensex and post-1996 Sensex variations. Examine how the markets have reacted to Indian and World events. It is bound to reveal how the characteristics of the Indian Share Market changed with the entry of Foreign Institutional Investors. And don't forget to thank me!

Stock Brokers Are Still Making Money - An Analysis of BSE Sensex Data

And in short term too. You don't believe me?
Just check out the BSE Sensex prices over the past few days (rounded off).

2008
------

Date--------------High--------------Low---------------Difference
12-Nov---------9,929--------------9,377----------------552
11-Nov---------10,397-------------9,801---------------596
10-Nov---------10,571------------10,096---------------475
07-Nov---------10,065------------9,632----------------433
06-Nov---------10,109------------9,635----------------474
04-Nov---------10,668------------10,116--------------552

You would see a remarkable consistency.

Ok. Now let us now check out what happened a year ago:

2007
-----

Date--------------High----------------Low---------------Difference
13-Nov----------19,210--------------18,636------------574
12-Nov----------18,815--------------18,333------------482
09-Nov----------19,330--------------18,737------------593
08-Nov----------19,210--------------18,917------------293
07-Nov----------19,679--------------19,249------------430
06-Nov----------19,919--------------19,337------------580
05-Nov----------20,009--------------19,502------------507
02-Nov----------20,026--------------19,256------------770
01-Nov----------20,204--------------19,634------------570

Zapped?

Did you expect the inter-day high and low in the BSE Sensex of Nov 2007 and 2008 to be similar? Except for 08-Nov-2007, when the fluctuation was the lowest (and hence less money was made) and 02-Nov-2007 when the fluctuation was the highest (when more money was made) the variation is largely confined within 430 to 596 in both the set of data. This is remarkable.

Now are you convinced that the stock-brokers are still making money?

Agreed that the analysis does not indicate if the inter-day high came before the inter-day low in the day or vice-versa, but one can make money the normal buy-low-sell-high way or by short-selling. Please understand that stock-brokers make money everyday.

But what of the ordinary investor? Surely, the average matters? The average of Nov-2007 is way above that today. So, someone who has invested money in Nov 2007 has lost out in Nov 2008. There is subtle difference between sensex falling and making profit/loss. One does not make loss just because sensex falls. One makes profit or loss only when you buy and sell. As long as you don't sell, you are fine. One just needs to ride out this wave. See here.

You are still not convinced? You are a tough nut ... I must say.
Ok this data is extracted from Against The Gods by Peter L. Bernstein.

In early 1930, right after the Great Crash, price of shares fell about 50% of their previous highs. Prices proceeded to fall another 80% before they finally hit the bottom in the fall of 1932. In 1955, the Dow Jones regained their old 1929 prices. Just nine years later, in 1964, the prices were double that of 1929 highs.

Now are you convinced?

Please note that the above analysis was done as this blog was typed out. I took November because this is November. So, it is possible that the conclusion arrived at is purely coincidental. Heck of a coincidence, I must say.

Note: The photograph used belongs to Myles Davidson. Please go here to see more such photographs