Recency Bias in Indian Markets: Why Your 2025–26 Winners Might Be Your 2027–28 Losers

A sector rallies for months. The headlines get louder, your watchlist fills with its stocks, and it starts to feel as if the trend will continue indefinitely.

Then leadership changes. A theme that recently looked unstoppable begins to lag, while the sectors investors had written off start recovering.

That shift is not guaranteed on a calendar. It is a reminder that recent performance is information, but it is not a forecast.

🧠 What Is Recency Bias?

Recency bias is the tendency to give recent events more weight than older or broader evidence when forming expectations.

In investing, it often appears as extrapolation:

• “This stock has doubled, so it must be a great business.”
• “This sector has led for two years, so it will keep leading.”
• “My portfolio fell this quarter; equities are too risky.”
• “This fund beat its benchmark last year, so it is the best choice now.”

The bias can work in either direction. A recent rally can make investors overly optimistic. A recent fall can make them overly pessimistic.

The underlying mistake is similar: treating the latest part of the market’s history as if it were the whole story.

⚖️ Recency Bias Is Not the Same as Momentum Investing

A useful distinction: momentum is a documented return pattern and an investment strategy; recency bias is a way of forming expectations.

A systematic momentum strategy applies defined rules to past returns, portfolio construction, review frequency, risk and rebalancing. A recency-driven investor may simply buy a recent winner because it is prominent, sell a recent loser because it feels uncomfortable, or switch sectors after seeing a short run of performance.

This matters because “buy what has gone up” is not a complete momentum process. It says nothing about valuation, liquidity, concentration, trading costs, risk controls, or what would make the strategy exit.

Nor does evidence of momentum mean past performance guarantees future performance. It means price trends can persist over some horizons and in some market conditions. That possibility deserves analysis; it does not justify blind extrapolation.

🇮🇳 What Recent Indian Market History Shows

The sector leaderboard can change, but it does not always reverse immediately. Indian index data offers examples of both persistence and sharp changes in direction.

The Nifty India Railways PSU Total Return Index returned about 39.8% over the year to 31 March 2025. By 30 September 2026, the same index was down about 23.5% over the preceding 12 months. These are different, overlapping measurement windows, not a clean “FY25 versus FY27” comparison. They do show how a strong past sector return can be followed by a much weaker period.

Contrast that with the Nifty India Defence Total Return Index. It rose about 66.0% over the year to March 2025 and was still up about 18.8% over the 12 months to September 2026. That return had moderated, but it had not simply reversed. A recent winner does not automatically become a loser.

That contrast is the point: performance leadership is uncertain, and dates do not dictate reversals. By September 2026, FY 2026–27 was only halfway through. A partial-year result cannot tell us which sectors will finish the year ahead, or what will lead after that.

Index returns are also not the same as an individual investor’s return. They do not include an investor’s timing, stock selection, concentration, taxes, transaction costs or ability to hold through drawdowns.

📚 Does History Support Mean Reversion?

The evidence is more complicated than “winners always become losers.”

Research on Indian equities has found both momentum and reversals, depending on the period studied, the time horizon and the liquidity of the stocks. One study of BSE-listed stocks using data from 2000 to 2021 found intermediate- and longer-term momentum, particularly among more liquid stocks. It also found short- and intermediate-term reversals among less liquid stocks, with those reversals not persisting across longer holding periods.

Other Indian studies have reported longer-horizon mean-reverting tendencies in selected index data, while research on Indian retail investor accounts has documented trading patterns consistent with investors responding to recent experience. These studies use different samples and methods. They do not produce a universal timer for market rotation.

Three ideas are easy to confuse:

• Momentum: Recent relative winners may continue to outperform over a particular horizon.
• Short-term reversal: A very recent move may partially reverse, particularly in some stocks or conditions.
• Longer-term mean reversion: Extremely strong or weak performance may move back toward a longer-run average over time.

Each describes a pattern observed in particular data. None says that a sector must reverse after one year, or that a weak sector is automatically due for a rebound. Markets can remain away from their past averages for a long time, and structural changes can make the old average a poor guide.

🔄 How Recency Bias Creates Sector-Rotation Mistakes

Sector rotation becomes dangerous when investors confuse a narrative with a valuation or a trend with a forecast.

Mistake 1: Buying after the story is already popular

An investor sees a sector outperforming, hears more optimistic commentary, and increases exposure. But the share prices may already reflect high expectations. Even if business growth continues, returns can disappoint if the market had priced in still higher growth.

The risk is greatest when investors focus on the compelling story—defence orders, railway spending, manufacturing incentives, power demand—without asking what the price already assumes.

Mistake 2: Chasing last year’s top-ranked sector

A ranking table makes leadership look obvious in hindsight. But a sector’s past return is not the same as the return available to a new investor at today’s price.

A sector can keep growing while its stocks deliver weak returns if valuations contract. Or a sector can look dull just before earnings, cash flows or market expectations improve. The investor needs to analyse both the business cycle and the price paid.

Mistake 3: Selling what has lagged and buying what has led

This creates a familiar cycle:

1. A sector underperforms.
2. Investors lose patience and sell.
3. A different sector has already rallied, so they buy it.
4. Leadership changes again, and the investor repeats the process.

The result can be buying after optimism has spread and selling after pessimism has become widespread. Switching also creates costs: taxes on realised gains, brokerage and other charges, and the risk of being out of the market during a recovery.

Mistake 4: Treating an index or theme as a single business

A sector index groups companies with different economics, valuations, balance sheets and competitive positions. A popular theme can include both strong businesses and weak ones. Owning the theme is not a substitute for understanding what the underlying companies can earn.

🔍 A Better Way to Read Past Performance

When a recent winner attracts your attention, separate the return from the reason for the return.

Ask:

• Did earnings and cash flow improve, or did the valuation multiple expand?
• Was the performance broad across the sector, or driven by a few large constituents?
• Did returns come with greater leverage, cyclicality or volatility?
• Are orders, profits or margins sustainable, or unusually elevated?
• What expectations does the current valuation appear to embed?
• Has the market’s risk appetite changed?
• What evidence would show that the original thesis is wrong?

For a recent loser, use the same discipline:

• Did the business deteriorate, or did the share price fall more than fundamentals justify?
• Is the weakness cyclical or structural?
• Has debt, governance, competitive position or capital allocation changed?
• Are current estimates and valuation already reflecting bad news?
• What would need to improve for the investment case to recover?

This stops the investor from giving winners an automatic “quality” label or losers an automatic “bargain” label.

🧰 A Framework to Resist Recency Bias

1. Compare several time windows

Review recent performance alongside longer periods, but do not assume the longest window is always more meaningful. A five-year return can conceal a major change in the business; a one-month return can be noise.

Look at multiple windows to notice how sensitive the conclusion is to the chosen start date.

2. Use a benchmark and a base rate

Compare a stock or sector with a relevant benchmark and with its own history. Then ask what the typical range of outcomes has been across market cycles.

A sector beating the Nifty over one year tells you what happened in that window. It does not establish that the same lead is likely to continue.

3. Separate business, valuation and sentiment

Write down three short observations:

• Business: What has changed in earnings power, cash generation or competitive position?
• Valuation: What expectations are embedded in the current price?
• Sentiment: Is the story now widely owned and discussed, or ignored?

Recent price action may contain useful information. It should prompt investigation, not replace it.

4. Set portfolio limits before a theme becomes exciting

Decide in advance how much of your portfolio can be exposed to one sector, theme or correlated group of stocks. Review concentration after a rally, because winners can quietly become a much larger share of the portfolio.

Rebalancing can be sensible when it follows a deliberate risk policy. Selling simply because a stock has gone up is not the same thing.

5. Write down the reason for each switch

Before moving money from one sector to another, record:

• Why you are reducing the current position.
• Why the new investment offers a better risk-adjusted opportunity today.
• What you expect to happen and over what time frame.
• What evidence would make you change your mind.
• The taxes and transaction costs of switching.

If the explanation is only “this sector has done better lately,” pause and do more work.

6. Review on a schedule, not after every headline

A fixed review schedule can reduce impulsive changes. For a long-term investor, quarterly or semi-annual portfolio reviews may be more useful than responding to every weekly sector ranking—unless a material company or portfolio event requires attention sooner.

A schedule is not a reason to ignore important new information. It is a guardrail against changing the plan because a recent price move has become emotionally salient.

⚠️ What This Framework Does Not Mean

Avoiding recency bias does not mean:

• Buying every recent loser.
• Holding every winner indefinitely.
• Ignoring new information.
• Treating a historical average as a price target.
• Rejecting momentum as an investment approach.
• Refusing to rebalance an oversized position.

The goal is not to predict the next winning sector. It is to make decisions using evidence, valuation, risk and a defined investment process—not just the latest return chart.

🔑 Key Takeaways

• Recency bias gives recent market events too much influence over expectations.
• Momentum and recency bias are different: one is a measurable return strategy; the other is an unstructured way of extrapolating recent experience.
• Indian market research finds momentum and reversal effects can coexist, varying with horizon, liquidity and sample. “Mean reversion” is not a reliable calendar signal.
• FY25 railway-sector strength was followed by a much weaker trailing period by September 2026, while defence-sector returns remained positive over that later 12-month window. The contrast shows why past winners should be examined rather than automatically chased or rejected.
• Compare several time windows, separate business growth from valuation and sentiment, set concentration limits, and record the reason for each portfolio switch.

📣 Call to Action

For more practical investing frameworks and research for Indian investors, explore Smart Investing India. Invest smartly, India! 🇮🇳📈