Lunch time at office is very entertaining, stress relieving & learning experience. Entertaining because one learns about all the grapevine, stress relieving because it allows you to crib and let some steam out & learning experience because it allows to pick the brains of extremely intelligent people from different expertise & background.
This particular lunch happened about 5 years back in 2005. I was a young convert to equity investments. I started investing when Sensex was at 3000 & riding the wave to 10,000 by 2005. My early successes came completely by fluke but the advantage of early success helps one to learn & try & become an expert. When someone said that it better to keep the money in PPF especially because of the tax benefit, I was challenged. I had to study if my choice was right or it was just the irrational exuberance of easy initial success. I did my study & reached a conclusion that Sensex would be 20,000 by 2010 & it does not make sense to exit. When I shared this few days later, I was a lone heretic, nobody shared my confidence, many thought I was mad.
But, I had done my research. Hopefully well. To answer these questions we need to go a few years back. Bombay Stock Exchange is the oldest stock exchange in Asia. What is now popularly known as the BSE was established as “The Native Share & Stock Brokers’ Association” in 1875. In 1986, almost 110 years after its existence it decided to launch a Index called as the Sensex comprising of 30 stocks. The base year of the Index was 78-79 & the Index was set at 100. By 90s the Index reached 1000. After many ups & downs the Index reached 10,000 in 2005. For the first 10 times growth the Index took 12 years, the second one it took 15 years. Thus every 15 years Sensex can multiply 10 times, which means every 5 years it will grow by more than double. This gave me the confidence to say that Sensex will grow to 20,000 by 2010. It raced to 20,000 much but could not sustain it. But now it almost back there & hopeful before the end of the calendar year should reach there.
Now that we are almost at 20,000 in 2010, the next forecast would be to reach 1,00,000 by 2020. For this we also need to establish when we should look at growth from a multiplication point of view & not linear. One of the most important things which Peter Lynch teaches us that when evaluating something over many years use logarithmic scale & not linear scale. I am using the same logic here. This logic applies to the US stock market which has data for almost 80 years. The next 10 times growth would come in another 15 years. Thus by 2020 Sensex should reach 1,00,000. A number which looks gigantic today but very much achievable because of many factors
• Our GDP is growing much faster today than it was in the previous decades.
• India was the primary market place for our companies earlier, but now the world is up for taking.
• Indian companies, management, products & business models are fast catching up with the best in the world, in fact may be surpassing/redefining a few.
Let us look at this from a different perspective (annual one). A 10 times growth in 15 years only means a CAGR (Annual growth rate)of 16.5%. Is it possible? Our GDP is growing at 8%. Agricultural GDP is 30% which grows best at 3%, rest of the GDP grows at 10%. Sensex companies operate in the non-agricultural space. This is real GDP in which inflation has been removed. When we add back inflation at 5% the real GDP growth for non-agricultural sector is only 10%+5%=15%. Thus it is not difficult for the largest companies to grow marginally better than Indian GDP growth.
But what does this mean for us. What are the alternatives. The other choice for long term investment is fixed Interest earning savings. The average that you can expect from them is 8% per annum return. Over 15 years Rs 1 lakh invested in Sensex should give you Rs 10 lakhs while in Fixed Interest investment at (8%) should give you Rs 3.7 lakhs. The difference is huge. The difference is so much that even if you had to pay income tax on getting the money in first place it would still make sense . As after paying income tax the Rs 1 lakh corpus would shrink to Rs 70,000 which would grow 10 times to Rs 7 lakh, still double of the fixed income.
There are some investments which we do with very long-term horizon. The corpus which we want to have when we retire or achieve financial independence. For someone who has just joined the workforce this is good 30 years away. For someone who around 40 this is still good 15 years away. Also many people who are retired or about to retire have some investible surplus after taking care of investment which will give them monthly fixed return this can be a good route. The Sensex or Equity route is best for investments with a 10 year plus horizon.
Be careful about just one thing when it comes to Equity investments. It is a roller coaster ride. Fear & greed can hurt us a lot. Don’t invest out of greed when market has already risen & don’t sell out of fear when market already has fallen. Easier said than done. If you can do the opposite it would be great. Buy when the market has fallen to ridiculous lows & sell when it is at peak. Very few people manage it.
I have another bet going for the 2020 Sensex made when the Sensex was around 8000-9000 about a year & half back. A past-colleague has said it will not be above 30,000. I said it will be at 1,00,000. Lets see who wins.