Tapering Rolling Returns of Sensex - Chart Of The Day 28 December 2016 - Equitymaster

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Tapering Rolling Returns of Sensex
Dec 28, 2016

Benjamin Graham once famously said:

    "In the short run, the market is a voting machine but in the long run, it is a weighing machine."

In simple words what he meant to say is that the long term investor is amply rewarded for his patience. The power of compounding always unleashes in the long term, maximising the return potential to the full. A look at the 5 year rolling market returns offered by Indian markets clearly shows how remaining invested over the long term reaps the maximum benefit. In the past five years, an equity investor saw his 5 year rolling returns increase from 3% to a peak of 20% before tapering off to 10%.

Post demonetisation, the ensuing cash crunch has led to a forced slowdown at least for the next 1-2 quarters. The much awaited recovery in the economy may have been pushed ahead for some time. Added to this, the anticipation of further rate hikes by the US Fed has led to increased volatility in the stock markets.

However according to us this is a very narrow outlook. We are not into predicting when the demonetisation pains will ease or the next increase in interest rate by the Fed will take place.

We are more interested in how the long term trend will pan out.

In fact the Co-Head of Research, Rahul Shah, has written about the very real possibility of a 70% upside in the Sensex. This is what he had to say:

    The aggregate data we have pulled for Nifty companies suggests that profit margins were at a ten-year low at the end of FY15. Even if they were to rise to the average of the last ten years, not immediately, but three years out, the upside would be close to 70%.

    Put differently, markets will go up 70% over the next three years if profit margins revert to the mean.

Therefore, the present gloom may just be the right opportunity to ride the wave and earn higher returns over the long term.

Data Source: Ace Equity

This Chart Of The Day was published in The 5 Minute WrapUp - Why Buffett Continues to Stay Out of India

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