Can Sensex stocks make you wealthy in 20 years? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Can Sensex stocks make you wealthy in 20 years? 

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In this issue:
» Should investors dump gold to buy equities?
» Iceland's impressive turnaround
» What is common between Gujarat, Uttarakhand, Haryana and Sikkim?
» Asia offers reprieve to investment bankers
» ...and more!

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00:00  Chart of the day
They say blue chips are safe. Fund managers advise new investors to buy blue chip index stocks. For there cannot be a more conservative exposure to equities. This combined with long term investing should be a deadly combination for wealth building. Is it not? Well if you answer in the affirmative, it is time for some eye opening facts.

Let us have a look at few stocks that were components of the benchmark BSE-Sensex way back in 1992. Not one or two, but nearly a dozen stocks from the pack of 30 did little to add to investor wealth in 20 years. A couple got delisted. Few got merged. Many others went into oblivion thanks to their incompetence in envisaging the post liberalization business scenario.

Many readers would remember buying their first four wheelers - Ambassador and Premier Padmini - from Hindustan Motors and Premier Auto respectively. These companies that pioneered India made passenger cars enjoyed the heydays of monopoly for several years. That was until cost efficient and better designed Maruti shoved them into losses. Mukand, Ceat, Bombay Dyeing, Century Textiles are also very interesting stories about large companies failing to preserve their fortune. Worse there were cases like Peico Electronics (Philips) that got delisted.

These entities drive home the point that not every blue chip is destined to remain so. Of course there are the likes of Hindalco, Mahindra & Mahindra Ltd. (M&M), Tata Motors, Hindustan Unilever (HUL) and ITC that managed to withstand every storm over the past two decades. Some more have managed to retain their position on the index but are now a shadow of their past glory. Had any investor blindly held on to all the large caps from the batch of Sensex 1992, the outcome of the portfolio would be rather unimpressive in 2012.

Hence buying safe blue chips is certainly not the easiest task in investing. It is in fact far from it. Since blue chips should ideally comprise the largest chunk of an investor's equity portfolio, one would be better off being well informed about them. Not just researching the stocks thoroughly but also tracking them consistently is paramount to successful wealth building.

Data source: Ace Equity

At a time when the world economy is slowing down and central banks are devaluing their currencies, gold has been one of the best investments. In a time span of just two years, gold prices have doubled in rupee terms thanks to the US Fed's QE (quantitative easing) programs and the massive rupee devaluation over the last one year. The performance of Indian stocks, on the other hand, has been dismal.

However, ever since the so-called 'reforms' have been announced, Indian share markets have witnessed a change of sentiment. While the BSE Sensex has crossed its 14-month high, gold prices have dipped by about 4%. Many so-called 'experts' have already started giving big targets for the Sensex. Some are of the view that investors are now dumping gold to buy equities.

In our view, one should refrain from buying into such arbitrary arguments. And there is no reason why investors should sell gold to buy equities. Instead, we believe an optimal investment portfolio should have a mix of both in the right proportion.

Do you think investors should sell gold to buy equities as stock market sentiments improve? Share your views or you can also comment on our Facebook page / Google+ page

Is there more than one way to recover from a financial meltdown? Not if you keep following the US and European economies. For their response to the crisis has been pretty much similar. They rescued the big banks, increased Government intervention in the economy and did little to help the hapless retail consumers. And this approach clearly hasn't worked. However, there's one economy out there that has actually turned in a pretty impressive performance post the crisis. And this despite being one of the worst casualties of the crisis. The economy is none other than the tiny nation of Iceland.

So, what exactly did Iceland do to bring about this impressive turnaround? Did it adopt the same policies as the US and Europe. Certainly not. In fact, it did the polar opposite. An article on Bloomberg sheds some important light on how exactly Iceland came back on its feet. There are many steps that it took. We can only highlight some of the key ones. For starters, it offered to write off mortgage debt of extremely overleveraged consumers. And generous support was given to the neediest. Secondly, it reduced Government spending and also raised taxes for the rich. And last but not the least, it steered clear from the too-big-too-fail policy and let the banks default. It then seized control of the banks after they defaulted. What these measures essentially did is that they laid the ground for a fresh recovery. The US and Europe on the other hand kept on supporting sick institutions and firms, which will only prolong the eventual recovery and make matters worse.

Agreed that Iceland is a very tiny nation of just around 0.3 m people and many of its policies would be difficult to implement in large countries. But the key take away of keeping Government interference to a minimum and making bankers pay for their mistakes can certainly be heeded we believe.

What was the last big IPO or acquisition that you heard of? With the euro zone crisis still in full swing deal activity remains lackluster and markets volatile. It comes as no surprise that global investment banking (IB) fees in the third quarter of 2012 fell to their lowest since early 2009. Europe has been particularly hard hit with IB fees reaching ten year lows. With investors not willing to play with equity capital, the drop has been more significant with equity capital markets fees falling 31% to US$ 9.6 bn so far this year. Debt financing is the only area which has seen a 14% increase in fees this year. JP Morgan continues to rule the roost in the investment banking fee league table, earning US$ 3.6 bn so far this year. Bank of America-Merrill Lynch placed second followed by Goldman Sachs.

What is common between between Gujarat, Uttarakhand, Haryana and Sikkim? Not that they all are Indian states. Well, they are, but there is something unique that interlinks these states. It is their GDP growth rate. All these four states have registered GDP growth in excess of 9.5% between 2003 and 2012. What is noteworthy is the fact that they have been able to manage such high growth in last 2 years as well. This was the time when the country's growth rate as a whole took a backseat.

While we all have heard about Narendra Modi's administrative skills that have heralded Gujarat to the pinnacle of growth, what is worth mentioning is the performance of states like Sikkim and Uttarakhand. For Uttarakhand, agriculture is the key contributor to growth. However, it is interesting to note that services sector contributed to about 50% of the GDP in FY12. For Sikkim, too, agriculture is the greatest contributor towards growth. Off late, tourism has also started contributing. And for Harayana, manufacturing and services rule the roost. But despite the recent development, agriculture still remains a key contributor. While the role of agriculture is undisputed for these 3 states, which has helped them clock high growth, contribution from other avenues is also noteworthy. Probably, these 4 states are the 4 pillars of India growth story.

Global stock markets may have seen better days in the recently concluded quarter. Partly thanks to surplus liquidity in Western economies and partly due to the hopes of consumption demand reviving in Asian markets. However, the scale of mergers and acquisitions has hardly ever been as puny. As per Bloomberg, global M&A deals slumped this quarter to a level not seen since the aftermath of the financial crisis. That too at a time when companies worldwide are sitting on at least US$ 3.4 trillion in cash! Many remain reluctant to pursue deals as Europe's sovereign-debt crisis drags on.

Having said that Asian companies offered some reprieve to investment bankers. These companies seem keen to take advantage of the fact that globally assets are now relatively cheaper. Further, Asian entities have sound balance sheets and are in a position to pursue international assets. Asia's quest for raw materials to fuel an industrial expansion has also bolstered deals involving natural resources and energy companies. So investment bankers can count their luck until Asia's quest for resources gets satiated.

Barring major Asian markets, the global stock markets witnessed losses this week. The debt crisis in Euro zone weighed heavy on the market sentiments as disagreement continues between France and Germany over the formation of a banking union to overcome the debt burden faced by the euro zone. However, post the announcement by Spain regarding budget cuts to control the rising debt pressure, the market confidence recovered. It was further lifted on hopes that China will soon announce monetary easing measures to boost economic growth.

The Indian equity markets witnessed a decline during the early part of the week. However, with Spain announcing plans for economic reform, the markets recovered on Friday (up 1.0%) and ended the week with a marginal gain of 0.1 %. Boosted by the economic reforms announced by the Government, rupee gain and positive news from Spain, Sensex soared to 14 month closing high this week.

Amongst the other markets, China (up 2.9%) was the biggest gainer followed by Hong Kong (up 0.5%). The others ended the week in the red with market in Brazil (down 3.5%)and France (down 5.0%) leading the losses .

Data source: Yahoo Finance, Kitco

04:50  Weekend Investing Mantra
"Yearly figures, it should be noted, are neither to be ignored nor viewed as all-important. The pace of the earth's movement around the sun is not synchronized with the time required for either investment ideas or operating decisions to bear fruit." - Warren Buffett's 2010 letter to shareholders of Berkshire Hathaway

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    10 Responses to "Can Sensex stocks make you wealthy in 20 years?"

    Ivan Tauro

    Apr 25, 2017




    Jan 5, 2013

    yes,nifty likely to touch 7000 by year end.

    Like (4)

    v k sharma

    Dec 25, 2012

    As per Bassel III norms gold is going to become tier I asset for all central banks from first January 2013. Because of this gold will easily sour beyond $2000 or even US$ 3000 an ounce because for all central banks its asset value will double from 1-1-2013.

    Like (4)

    Ranjit K

    Oct 3, 2012

    Though individual sensex stocks may not have failed, I am sure the Index as a whole has given good returns..So why should we worry about individual stocks if the powers-that-be are changing the Index stocks based on performance? It would be interesting to see how many fund managers have bettered the Index returns..

    Like (5)

    sarat palat

    Sep 30, 2012

    Gold is gold and share is share. Entirely two different things. One should hold both as part of their investment portfolio. The percentage of holding may differ from person to person depending on their risk appettite.

    Like (4)


    Sep 30, 2012

    It should be quite obvious forInvestors that their job does not end once they made the investments.irrespective of whether it is a Blue chip or not one should continuously monitor the performance of the companies in which one invested in.Depending on the time availability and the Money value of equity investments compared to other asset classes,performance monitoring should be done.if one is not prepared for that he ha no business to be in investing directly into the equity markets.such people should look for MFs or reliable portfolio Managers!!

    Like (5)

    lambodar borah

    Sep 29, 2012

    Yes but entirely depends on stock selection.Could everybody
    imagine TTK Prestige(10)price of Rs.54/11(H/L)in 2005 go up
    to Rs.3847on 28/09/2012?

    Like (5)


    Sep 29, 2012

    Gujarat, Haryana, Sikkim and Uttrakhand are the 4 states that have better governance. None of their leaders have been accused of rampant corruption. All 4 states have leaders who are serious in improving the status of their states. They do not waste their time in making noises like the leaders in Bengal, are not corrupt like those in UP, MP, AP and Karnataka and Tamil Nadu. I am sure Bihar would be joining the four progressive states because it has a sensible leader.

    Like (5)


    Sep 29, 2012

    The examples of Sensex companies that failed to generate wealth quoted by you were all family run companies and not professionally managed ones. Fiat was a Doshi family affair that disintegrated when the older generation was no more, Mukund declined after Bharat Shah's political connections declined,Hind Motors, Birla Corp and Century were Birla Group companies that declined due to ageing doyens dying away and in case they were not very investor friendly. The ugly fight over succession when Lodha the family lawyer was given charge of many companies by Sarla Kumari Birla also took its toll. Aditya Birla group of companies has professional management as the old fogies have gone and may improve over the next few years. Hindustan Motors was a company that thrived only on Govt largesse and never kept pace with tech advances in motor industry. Bulk of their sales were to Govt. The obsolesence killed that blue chip (if ever it was one!)Ceat was another Marwari family company - was it Chabarias? Bombay Dyeing was weakened by its fight with Ambani and after Nusli Wadia grew old and lost his political leverage the company did not thrive as it was a family run company. With Maureen Wadia busy with fashion events (Mr Glad Rags) and Younger Wadia romancing Preity Zinta they never had the time to grow out of textile industry. Downcycle in textiles also contributed to it.

    You have failed to mention Colgate in the list of HUL, ITC, Tata Motors etc even though it has done far better than all of these. Certainly better than Hindalco and Mahindra & Mahindra in the same period. Even companies like Reliance Industries, L&T, Castrol, Bosch, MRF tyres, ACC, SBI, Infosys etc have generated / maintained investor wealth. The difference is stark - a professionally managed company has survived whereas a family enterprise has not. Reliance Industries and other group companies though professionally managed had to suffer due to family disputes that interfered with their functioning.
    Family run blue chips will not survive for long but professionally managed ones will. My humble submission as I am not a qualified business analyst!

    Like (10)

    sunilkumar tejwani

    Sep 29, 2012

    not certainly, gold must be held in one's portfolio from a long term perspective ignoring short term fluctuations.
    Until of course U.S. Fed & the E C B stop printing cheap paper currencies. Equities by nature are highly volatile and mood swings of market participants is a well known fact. Also equities rise on cheap liquidity poured in from across the borders. Gold is inversely co related to equities. Therefore one should wait for the current euphoria in the equity market to halt and buy Gold when the equities appear to topping out.

    Like (4)
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