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Saturday, July 20, 2013

the 1000-6000 market

Nifty crossed 6000.....well,......again. Its journey has been pretty interesting. 

Tryst with 1000 points
In March-1992 Nifty crossed 1000 points for the first time. Then it drifted until Dec-1993 when it got to 1000 again.

I am not sure whether it was possible to trade in 1992 as NSE was incorporated in November 1992, recognized as a stock exchange in April 1993 and the equities market went live in November 1994. But here is how the historical data for 1992 looks like as per the NSE website:


In Sept-1995, Nifty was 1000 points. In Jan-1997 it reached 1000 again. In March-1999, 1000 again. The wait was not over, for it reached 1000 points in Nov-2001; it was 1000 again in Sept-2002 and May-2003. It was like a 7-year-itch with Nifty for the investor.

Talk about investing for the long-term: Where is the return?


The journey to 6000
We know what happened after May-2003. The rally was mind-blowing: 1500 in Oct-2003; 2000 in Dec-2004; 3000 in Jan-2006; 4000 in Dec-2006; 5000 in Sept-2007; 5500 in Oct-2007 and then 6000 in Dec-2007.

More than 5 years later it is back to 6000 in July-2013. On 5 Nov 2010, Nifty reached its highest points of 6312.45. 


Past Vs future
Despite the volatility in the market, if someone had invested in Nifty in 1995 and held on to it until now, the return would have been about 10% compounded; not bad considering the long-term capital gains tax environment. However, there were numerous opportunities in the interim to enhance returns considerably.  For instance, if the investment was made in 2003 the return would have been about 19.6%. It might appear to be an achievement based on the hindsight, but the point is that one need not have had major insight on long-term economics of this emerging market. Instead, the guys waste time on short-term predictions.

The truth is, to make real money, be it investing or anywhere, you need time. Go ask any good businessman. Things falter as they did: investment return from 2007 to now is nil, a heavy opportunity cost. But then who is saying put everything in equities, especially for the passive investor? Let's talk about it in a separate post. Things get back too as they did: recollect that 19.6% return.

Can this return be replicated in the future? We are talking about the foresight now. I don't know, but consider this: this country has gone backward (well, almost..) in the last few years due to pathetic decisions by the government which has brought us higher inflation, rupee depreciation, current account deficit, depletion of foreign exchange reserves, slow growth rate, and much worse. Now there is no choice but to correct those mistakes which is likely to happen irrespective of which party forms the government next year. Back to the same story: growing population, growing needs, growing demand. If the right environment is created this market should go way ahead. There is so much to be done in infrastructure, energy, and other sectors - public-private partnerships, market-driven pricing policies and job creation.

Take your call on this market.

Sellers market 
As of now, Nifty has earning yield of 5.46%; compare this to the government bond rate of about 8%. It is trading at about 3 times book and 1.37% dividend yield. I am not sure if the broader index is in any way attractive. 

Sure there are some good stocks out there. But then they are always there. We need to just dig them out as they don't come announced. That's where investing skills (thorough analysis, not gambling) come to play: right investment behavior and approach. 

All that is required is to beat inflation by some points. Easier said than done for many. You could be a passive investor by buying the market itself; or you could be an analyst picking the right stocks. Where do you belong? Don't tell me there is a middle way. 

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