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Stock market: Have we gone nowhere?

Jan 5, 2002

Many investors, one would imagine, are disillusioned by the stock market performance over the past ten years. Stock markets, as acquaintances put it, is where they made their millions. If that is the way it really happened, wave it off as the graciousness of lady luck. Many, in their pursuit to beat the street, have burnt their fingers. Forget even spectacular results, earning a consistent reasonable rate of return is challenging, which is why Warren Buffet is revered in the investing community. A common complain among domestic investors is that the nineties has been a very poor decade for equity investments. They argue that point-to-point, at current levels, the index -- BSE Sensex -- has gone nowhere in the past ten years. There is no gainsaying that observation. Currently, the Sensex is trading at levels seen in March '92. But then, over the two years prior to March '92, the Sensex gained a gravity defying 370%. Having said that, we also know the reasons for this meteoric rise. Just as a refresher, over a three month period from February '92 to April '92 the benchmark doubled.

On a consistent basis, it is near to impossible to earn such super-normal returns. In the final analysis, scouting for such opportunities, may not be worth the while. Undertaking a small study we have identified a strategy, which earned a reasonable rate of return even while the markets went nowhere.

Equity market: Not disappointing
Year % returns Investment Profit/loss
Jan-91 27.6% 10,000 2,762
Jan-92 95.9% - 9,588
Jan-93 29.8% - 2,975
Jan-94 36.5% - 3,647
Jan-95 13.5% - 1,345
Jan-96 -20.5% - (2,045)
Jan-97 4.2% - 424
Jan-98 13.3% - 1,331
Jan-99 -17.2% - (1,717)
Jan-00 75.6% - 7,564
Jan-01 -26.4% - (2,642)
Jan-02 -17.9% - (1,792)
Incremental cash flow   21,440
Starting 1990, had a participant invested Rs 10,000 in an equity portfolio replicating the index, and kept that amount invested in every succeeding year i.e. booking any profit or loss, he would have earned a compounded return (CAGR) of 10% year to date (YTD). Being invested in the market would have yielded positive returns. However, on a comparative basis, for lower risk, an investor could have earned as much if not more by investing in fixed income avenues. Interest rates have been declining only in the past couple of years. Over a ten year period -- the previous decade -- a similar strategy would have yielded a CAGR of 13.6%.

If an investor did not book his profit or loss and exited at the start of 2000 the CAGR returns earned would be 21.2%. But if he held on till start of the current year the returns would have dwindled to 12.6% annually. Considering a similar investment pattern over the preceding ten years (from 1992 onwards), the annual returns fall to an even lower 5.3%.

Point-to-point, it does look like the markets have completed a cycle and investors are back at the start line. But if one adopted a more disciplined methodology, not wanting to time the market, the strategy offers a systematic plan.

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