Last week, as the Sensex was tumbling in sync with global tunes and local mis-steps, several market analysts were on television and other media to peddle their insights, experiences and ‘what to do now?’
A number given by one such senior broker to reassure investors to come and buy amid this mayhem gave birth to this article. This person asked the viewers of a television channel which other asset class had given returns as consistently as equities. He cited the BSE Sensex's performance. He said no other asset class had given such consistent long-term return as equities. In the past two decades, the index gave a compounded annual growth rate (CAGR) of 17 per cent. The icing on this was the tax regime which exempted long-term capital gains. This was the crux of his argument.
So, investors should get into stocks, he said. He said so even though he was well aware that they are falling like a bunch of knives kicked down the kitchen table by a Chinese kitten.
While it might be possible to pick an odd stock and showcase its 10x or 20x returns, painting the entire market or the asset class as an outperformer and in the long term seems a bit of a stretch. Let us examine the long-term index returns argument.
The Sensex as of its Friday’s close of 25,201, returned an annualised growth rate of 10.6 per cent over the past 20 years. According to data culled out by the Business Standard Research Bureau, the Sensex was a different being two decades earlier. At the end of August 1995, when it was trading at 3,346, it did not have any representation from two of the major sectors of today – financials and information technology. In fact, some of the index heavyweights of today from these sectors did not even exist in their current form.
Some other heavyweights of today were heavyweights even then. These were Reliance Industries, ITC, Hindustan Unilever, Tata Motors and M&M. Several others have fallen off the index. These include Futura Polyster, Premier, Hindustan Motors, GE Shipping, CEAT, India Hotels and Bharat Forge.
Ironically, Bharat Forge was the best performing Sensex stock from the class of 1995. It went from a Rs 307 crore market capitalisation to Rs 25,090 crore. That translates into a CAGR of 24.6 per cent over 20 years.
The only other company in the index of 95 that delivered a return of 20 per cent CAGR was ITC. Seven of the 1995 Sensex class are now trading below their values of 20 years ago.
Thus, the index today is not what it was in August 1995. A significant number of its present components were not part of it 20 years ago. Thus, it appears the index has been consistently throwing out what it thought was an underperformer and picked the better performer to make itself look better. Even this it did not do correctly, as it has thrown out its best long-term performer, with the top 20-year track record.
To me, this looks like some silly trick of a half-clever salesman. Why should we rely on this comparison of apples and oranges to catch hold of falling knives? Dear Mr Senior Broker, can you show us something better?
A number given by one such senior broker to reassure investors to come and buy amid this mayhem gave birth to this article. This person asked the viewers of a television channel which other asset class had given returns as consistently as equities. He cited the BSE Sensex's performance. He said no other asset class had given such consistent long-term return as equities. In the past two decades, the index gave a compounded annual growth rate (CAGR) of 17 per cent. The icing on this was the tax regime which exempted long-term capital gains. This was the crux of his argument.
So, investors should get into stocks, he said. He said so even though he was well aware that they are falling like a bunch of knives kicked down the kitchen table by a Chinese kitten.
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This idea of equity being the best asset class is peddled only by two kinds of people — those who have shares to sell and those who have already bought these. I am not sure which kind our man on TV belonged to. It is possible that he was both.
While it might be possible to pick an odd stock and showcase its 10x or 20x returns, painting the entire market or the asset class as an outperformer and in the long term seems a bit of a stretch. Let us examine the long-term index returns argument.
The Sensex as of its Friday’s close of 25,201, returned an annualised growth rate of 10.6 per cent over the past 20 years. According to data culled out by the Business Standard Research Bureau, the Sensex was a different being two decades earlier. At the end of August 1995, when it was trading at 3,346, it did not have any representation from two of the major sectors of today – financials and information technology. In fact, some of the index heavyweights of today from these sectors did not even exist in their current form.
Some other heavyweights of today were heavyweights even then. These were Reliance Industries, ITC, Hindustan Unilever, Tata Motors and M&M. Several others have fallen off the index. These include Futura Polyster, Premier, Hindustan Motors, GE Shipping, CEAT, India Hotels and Bharat Forge.
Ironically, Bharat Forge was the best performing Sensex stock from the class of 1995. It went from a Rs 307 crore market capitalisation to Rs 25,090 crore. That translates into a CAGR of 24.6 per cent over 20 years.
The only other company in the index of 95 that delivered a return of 20 per cent CAGR was ITC. Seven of the 1995 Sensex class are now trading below their values of 20 years ago.
Thus, the index today is not what it was in August 1995. A significant number of its present components were not part of it 20 years ago. Thus, it appears the index has been consistently throwing out what it thought was an underperformer and picked the better performer to make itself look better. Even this it did not do correctly, as it has thrown out its best long-term performer, with the top 20-year track record.
To me, this looks like some silly trick of a half-clever salesman. Why should we rely on this comparison of apples and oranges to catch hold of falling knives? Dear Mr Senior Broker, can you show us something better?