Volatility? What Volatility? - Dhirendra Kumar

The Indian stock markets have not become significantly more (or less) volatile at least for the last 25 years or so. I know that when I say that it will instinctively sound incorrect to you. You're probably waiting for the 'but…' part of that sentence. But there is no but. It really is true. At Value Research, we're doing some research on whether, as is the general impression nowadays, the stock markets have become more volatile. The study isn't complete yet but it's clear that as far as the bellwether Sensex goes, volatility is essentially unchanged since 1979. True, there was a huge peak in the Sensex' jumpiness during 1992, but that just lasted a few months.

Then why do all of us feel that the markets have become a lot more fickle? There are a bunch of reasons but the major one is simply the media's obsession with the absolute figure of the Sensex. It is a simple fact of arithmetic and mass media that on large bases, percentage changes are much less exciting than absolute numbers. Consider this data: On 15 June 2006, the Sensex closed 616 points higher than the previous close. This was a 6.9 per cent rise. Two decades ago, on March 25, 1986 the Sensex closed a much larger 9.1 per cent higher than the previous close. But in those days the Sensex used to be around 500 points so this was a rise of a mere 48 points. Closer to present times, the Sensex fell by exactly the same percentage (6.9) on April 17, 1999, but this was just 246 points. When I see headlines in newspapers and on TV channels focusing exclusively on the actual numbers of points, it's clear to me that there's a fake idea of the markets' volatility that is being peddled just to add a sensation because sensation sells.

After all, if you were a TV or a print newsman, which of these two headlines would you have chosen for the day when Mr Chidambaram presented Budget 2007: 'Markets register fourth worst fall ever'; or, 'Markets register 96th worse fall ever'. The first one is by absolute points and the second by percentage. Both are technically true but I believe that the first one is misleading and shows a certain contempt for readers' intelligence. Absolute numbers must never be used to compare quantities that have different bases. When a headline says that 28th February was the fourth worst ever, it is comparing all 6,000-plus days on which the Sensex has existed. Every one of those days had a different base and should thus be compared only on the basis of percentages. By any standard of mathematical or statistical literacy, such headlines are nonsense.

By the way, aren't you surprised that leave alone the worst five, the recent much-celebrated declines of the Sensex barely make it to the list of worst 100 one-day declines? That this comes as a surprise to so many people shows how completely we've all been fooled by this volatility story that's being peddled.

So is there no other reason beyond these fun-with-maths headlines that contributes to investors' volatility psychosis? I for one am hard-pressed to think of one. True, our study isn't complete and we'll be looking at indices as well individual companies more closely but my hunch is that this is the way it is.

I'm not ruling out more volatility in the future, at least temporarily, but you know something, the sky isn't really falling. There's a deep bedrock of current and potential economic growth which won't vanish overnight just because of new taxes in China or whatever. And that's going to be true for quite some time to come, even if new-fangled technology like percentages catch on or not.