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How Did Sensex Survivors Perform over 25 Years?
Aug 8, 2016


Recently, my colleague Tanushree asked a potent question in a recent edition of The 5 Minute WrapUp:

When Will You Start Owning Sensex 2030 Stocks?

Now, why is this an important question? I have two reasons...

One, many investors do not take a very long term view of stock investing. They invest based on tips, stories, themes...the ideas that are most talked about in friend circles, newspapers and television.

Two, many investors believe that investing in index stocks is the safest way to invest in equities. They believe that stocks that are part of the benchmark Sensex or Nifty index are always safe bluechips. But that's not the case.

Tanushree and her StockSelect team have carefully studied the history of Sensex companies. In fact, a few years ago they examined companies that were part of the Sensex in 1992...particularly the ones that later dropped out of the index. I would highly recommend you read 1992 batch of Sensex stocks Series. If you had invested in these stocks banking purely on the big-bang economic reforms that took place then, you would have had a pretty bumpy ride.

Here's what Tanushree wrote...

    Now, in August 2016, we saw the passage of another landmark reform. Experts call the Goods and Services Tax (GST) the most important reform since '91. The bill could be a driver for the economy for a very long time. And one may assume that fundamentally well-placed stocks today could go on to unleash the big gains expected from a post-GST market. The sentiments today are reminiscent of Sensex '92.

    Unfortunately, not every Sensex '92 stock went on to create shareholder wealth. Many faded into oblivion. In fact, only seven Sensex '92 companies remain on the index today. And we can expect many Sensex '16 stocks to go the way of Premier, Hindustan Motors, and Century Textiles. Indeed, few are likely to feature on the Sensex of, say, 2030. The blue chips of today may not be the blue chips of tomorrow.

    Of course that does not mean one should not be investing in any Sensex stock today. We see steep earnings upside in few big blue chips over next three to four years. Hence, these could be amongst the safest investments for the medium term.

If you are interested to know more about the companies that have caught the StockSelect team's attention, do read this special report - Sensex 40,000: 4 Stocks to Profit from the Coming Stock Market Wave that is still available for download.

By the way, here is an interesting bit. Out of the 30 companies that were part of the Sensex 25 years ago, only seven have managed to still be part of the Sensex - ITC, Hindustan Unilever, Reliance Industries, Tata Motors, Tata Steel, Mahindra & Mahindra, and Larsen & Toubro.

We did some data crunching on these companies. If you had invested in these companies in 1991 and held them for 25 years, your returns on each of the stocks would be as shown in the chart. The important thing to look at is not the size of the company's turnover, but its profitability and return on capital.

Data source: Ace Equity
*Based on stock price performance from 5 Aug 1991 to 5 Aug 2016. Dividends not included.

This Chart Of The Day was published in The 5 Minute WrapUp - CEO Salaries: A Disturbing Trend for Minority Shareholders

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