Why We Stand by Our Sensex 40,000 Prediction - The 5 Minute WrapUp by Equitymaster
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Why We Stand by Our Sensex 40,000 Prediction

Nov 22, 2016
In this issue:
» The transaction cost of demonetization
» A proven strategy to earn profits without taking undue risks
» ...and more!
00:00
Kunal Thanvi, Research analyst

It's 8 September 2016. Two friends, Ramu and Shamu are having a conversation. The topic of money comes up. Their otherwise boring conversation livens up.

Ramu: Look Shamu, I know you are worried about your finances. I can empathise. Most people worry about money too much. But not me. I have figured it out. All my savings are invested in the stock market.

Shamu: What? The stock market. That's risky.

Ramu: No, it's not. People only say that because they don't have enough experience.

Shamu: What do you mean?

Ramu: I started trading in February this year and I've already made good money. The Sensex was at 23,000 back then. The Union Budget really changed things around. The Sensex is at 29,000 today. Some of the stocks I bought have doubled. In fact, Manappuram Finance has tripled! I bought it at 30 and now it's at 90. Sure, I took some minor losses here and there. But it's a great learning experience.

Shamu: Hmm...sounds nice. But I just don't understand the stock market.

Ramu: Oh, it's not difficult. I used to think the same way. But when I started trading, I understood how it works. My broker tells me his top trading tips every morning. I check out those stock on the internet. If I see that it's going up, I buy. When I see that it has stopped rising, I sell.

Shamu: Okay. But does this work all the time?

Ramu: Most of the time. You see, if you sell quickly, then you can limit the losses. Like I said, it's not difficult. In fact, the good times have just begun. My broker says the Sensex will hit 30,000 by Diwali and 35,000 by Budget day next year. I think I have solved my financial problems. Now I am thinking of trying my hand in the futures market where I can make much more money.

Shamu: (Now interested) What is the futures market?

...

It would be easy to dismiss this as a hypothetical conversation. But I assure you, conversations like this were common until recently. While the characters above are fictional, the scenario in not.

The Sensex has been falling since 8 September. As per yesterday's close, it's down 11.3%. 30,000 seems very far away. People are wondering if a bear market has begun. Trump and demonetisation have negatively impacted sentiment on the street.

What should you do?

First, put things in context. Think about the time you have spent in the markets. If you have been investing for many years, this correction should not scare you at all.

If you are new to the markets, you may need to take a few deep breaths. Understand that stocks don't move in a straight line.

Second, look at your portfolio. Is it full of overvalued stocks with high PE ratios? If yes, then you may want to think about dumping some of them.

Which ones?

The answer, as always, lies in the fundamentals. If the financial numbers look bad, you many have made a mistake buying those stocks. Revisit the reasons you bought them in the first place. It is likely those reasons had nothing to do with the fundamentals.

Third, never lose sight of the big picture. In the long run, stock prices will follow earnings growth. If corporate earnings rise over the years, so will stock prices.

This is why we have stuck our necks out and predicted a Sensex level of 40,000 in three to four years. It is not rocket science. If the Sensex hits 40,000, it won't be due to magic. It will be due to earnings growth.

Finally, don't believe Ramu when he says that it is easy to speculate in the markets. Remember this Warren Buffett quote:

  • Speculation is most dangerous when it looks easiest.

Understanding the difference between investing and speculation is the corner stone of investment success. Our Sensex 40,000 prediction is not an act of speculation. It is in fact, backed by a very carefully thought out investment rationale. Read more about Sensex 40,000 here.

03:45 Chart of the Day

Ever since 8th November 2016, when demonetization left Rs 500 and 1000 currency notes bereft of any value, there have been speculations about its real impact on the Indian economy.

Some are of the view this would destruct the discretionary demand, while others believe it to be just a deferral rather than destruction of the demand.

The consensus is that it would hurt things in the short run but the long term impact would be good for the Indian economy with a control over unaccounted money, counterfeit money etc.

The impact on the economy will be seen in the to come. Interestingly, there are some other factors one should look at.

The transaction cost involved in replacing the currency notes is worth considering.

The total outstanding value of the demonetised currency is expected to be around Rs 14.2 trillion as of 31st March 2016. Of this, Government expects Rs 4-5 trillion to be unaccounted cash. However, economists believe it to be ~Rs 2.5-5 trillion.

Now, this whole exercise would involve some transaction cost. As per CMIE, the total transaction cost during 50-day window till 30th December, 2016 would be ~Rs1.28 trillion.

Transactional Cost of Demonetisation


If we assume government is able to unearth Rs 4 trillion unaccounted cash, then the transaction cost would be ~26%. If the unearthed cash is Rs 3 trillion, then the transaction cost would ~43%.

As per CMIE estimates, the households standing in long queues for exchanging their illegal tenders are expected to bear 12% of the total cost. This would be due to foregone wages during 50 day wages.

The recalibration of ATMs, overtime salary to bank employees, extra overheads are likely to cost banks a lot. It is expected the whole 50-day exercise will cost banks Rs 351 billion.

RBI & Government taking care of printing new currency, transportation of new currency lead to a hit of Rs 168 billion.

The Enterprises (businesses) are already facing subdued offtakes. The whole exercise is expected to cost them Rs 615 billion or 48% of the total transaction cost.

If these numbers turn out to be true, then the benefits of demonetization will lose their punch.

04:30

After months of research and back testing, Asad Dossani at Daily Profit Hunter is finally ready to share an interesting idea about an additional source of income. Here is what he wrote to us...

  • I've always said that trading is a terrible primary income. Sure, you can make big profits. But trading is risky. And you should never risk money that you need to pay your bills and feed your family.

    However, trading is possibly the best secondary income you can find. Once you're able to take some risk, the potential rewards are enormous.

    Yesterday I made a big announcement. The launch of my VMS system for trading success. But before that, how do you get started trading? Let me explain the three ingredients for a successful trading strategy:

    First, it should be profitable without taking undue risk. It's no use making regular profits if one big loss can wipe you out.

    The VMS strategy has risk management at its core. It's designed to protect your capital first, and generate profits on top of that. Now that doesn't mean there's no risk involved. And you should never trade with money you aren't willing to lose. But as long you're willing to take a bit of managed risk, you've got the potential for solid returns.

    Second, it should make sense. It's not enough to be told that a particular indicator predicts the market. We need to understand why that indicator works. If we don't, we can't be confident it'll keep working.

    The VMS strategy has been thoroughly research and backtested. It's got a good track record in the live market. It uses a proprietary three indicator system: I call it the VMS system. V is for volatility, M is for momentum, and S is for spread. We use a unique combination of these indicators to recommend profitable trades.

    Third, it should be easy to execute. Trading shouldn't be a struggle. It should be simple, and should fit easily into your life.

    The VMS requires just five minutes of your time each morning. The night before a trade is to be made, you'll get an alert. In the morning, log on and place you trade. Then you can forget about it until the next day. Just five minutes in the morning. It really is that easy.

You must be wondering; how do I get access to this? Well, you can learn more here

04:45

After the volatile day, the Indian stock markets ended in green. At the time of writing, the BSE-Sensex was trading higher by about 229 points (up 0.89%), while the NSE Nifty was trading higher by 78 points (up 0.99%). Most sectoral indices were trading higher with consumer discretionary stocks leading the gainers.

04:55 Today's Investing Mantra

"Be fearful when others are greedy, be greedy when others are fearful" - Warren Buffett.

This edition of The 5 Minute WrapUp is authored by Kunal Thanvi (Research Analyst).

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1 Responses to "Why We Stand by Our Sensex 40,000 Prediction"

Malay Chaudhury

Apr 27, 2017

Forecast of sensex next 2years

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