When Mark Twain popularised the saying “Lies, damned lies, and statistics”, he must not have thought about it temporally. The statistics of today can seem irrelevant tomorrow. Society found it hard to rely on statistics for future trend forecasting. What will happen tomorrow is hard to judge from the statistics of today. Such is the divergence between any two periods of time that calling all statistics a lie might have eased some pressures for policymakers and thinkers juggling with data, trying to make sense of it.
Even today, we are struggling with the same challenge. We have so much data and data analytics, but we still can’t see very far into the future. The euro is a clear example of how limited our ability is to anticipate the future. Leave aside two years, even a 12-month outlook is a tall task. What happened? Why is society skewed to the five minutes (shorter time) and why does it find it hard to look ahead into the year and take risks for longer term. Can you buy TCS for five years? Or, can you sell Reliance for three years more?
Technicals, fundamentals and quantitative techniques helped breach the multi-month outlook. Behavioural techniques illustrated seasonality in three-year investing horizons. More than three years were for the celebrated money managers. And, going into a decade-long holding was for the entrepreneur. Few invest a decade of efforts into an idea. And, guess who tops this list of holding periods. The common man, who does not invest in the stock markets and assumes (or unaware) that he (she) is insulated from the stock market vagaries, is the one with the longest holding period. He keeps holding, never exits.
Unfortunately, the risk is connected in time. A small five minute trade is connected to what happens in a year in the market, which in turn is connected to what happens in a decade. So, whether you are in the market or out of it, your life is ruled by ‘the five-minute year’. The Lehman butterfly fluttered in New York on September 15 at 1:45 am in 2008 and we are still feeling the vibrations of the five minutes, years ahead. One can’t eliminate the risk of the five-minute flutter. The risk and holding periods are temporally connected.
There is a reason why we don’t see the connection in time durations. A five-minute signal can be verified in minutes. But a decade-long signal might take a few years to indicate its correctness. This is why “bubbles” take time (months and sometime years) to burst. Lack of patience or short sightedness are other reasons we don’t even look that far. This inability to see longer-term cycles leads to failures in business or in markets.
We took the daily returns of the Sensex for daily, weekly, 15 days, 30 days, 50 days, 90 days and compared it for two periods, 1997-2012 and for the last 12 months. The quarterly average last 12-month returns on the Sensex equalled the quarterly historical returns for the Sensex since 1997. A month (1.5 per cent return) in 1997 equalled a quarter (1.6 per cent return) in 2012. Markets are full of such statistics, which are not lies but truth about how five minutes make a year and how the game is about anticipating large cycles and knowing when to enter and exit.
The author is CMT, and Co-Founder, Orpheus CAPITALS, a global alternative research firm