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While discussing the distribution of wealth in India, I had referred to the idea of self-similarity with the example of the Pareto principle. Today I would like to discuss how the stock market behaves in a similar way!

The first part of this series is here: Fat Tails: The True Nature of Stock Market Returns – Part 1

To recap, we say that 20% of the population hold 80% wealth. If we zoom in on the 20%, then: 20% of 20% population hold 80% of 80% wealth.

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In a two-part post, I discuss the nature of stocks market returns, first by pointing out the influence of extreme market events and then by considering their fractal or self-similar nature. Readers may recall that last week, we considered self-similarity in wealth distribution where I had mentioned their universal nature.

Both posts in this series shall deal with the same data set: daily, weekly and monthly returns of the S&P 500 from Jan 3rd, 1950 to Jan 21st, 2017 obtained from Yahoo Finance.

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The corpus obtained when buying “low” or when the Nifty is below its 200 day moving average (dma) is compared with the corpus from buying “high” (nifty above 200 dma). Apologies for yet another post on this subject, but I had to satisfy my curiosity. Kindly bear with me.

Before we begin a clarification on nomenclature. As we all know, SIP is systematic investment plan. All thismeans, is investing with a system in place. Buying each month is just one of those systems. In the previous posts, I had used terms like low-SIP and high-SIP. This simply means, buying when the Nifty is below or above a certain average (10 month was used). The observation is made once a month and investing is done only the condition is satisfied.

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The previous two studies on buying “low” vs. buying “systematically” pointed to the surprising regularity with which systematic investing does better (or at least as well as – good enough).

In response to this, many suggested that in order to ensure buying “low” wins, I should ensure the cash that is put away waiting for the right “time” to invest in the market should not be idle and should be allowed to grow in a suitable instrument (liquid fund, ultra short-term fund etc.).

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In the second part of the buying "low" vs buying "high" study, I consider return differences for identical investment amounts. And guess what? The results are most surprising!

For those who have not read the first part, I request that you head over to Equity: Buying “High” vs Buying “Low” and then come back.

Some definitions:

1 Buying low (low-SIP): Buying when index (S&P 500 and Nifty total returns indices) has a value lower than its ten-month average. This is checked only once a month - on the first.

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