X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Do equities always give you 20% returns per year? - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Feb 24, 2010

    Do equities always give you 20% returns per year?

    How often have you heard statements that go something like 'Stocks have returned a fabulous x% per annum over the last x years'. 'Stocks' in the above sentence is at various times readily replaced by any other asset class like gold, real estate, silver etc. Specific companies too find themselves a part of such descriptions about the returns their stocks have given over the last 1, 3 or 5 years.

    Yes, this is one very ubiquitous exercise that is used across financial markets to calculate the 'returns of an asset class', or the 'returns of a stock'. More so, what is tacitly implied is that these returns are cast in stone and one can reasonably expect it to produce similar returns in the future too.

    Lest we fall prey to Bertrand Russell's wise quote "Most people would rather die than think: many do", let's give the above popular methodology of calculating the general 'returns' inherent in an asset class some thought.

    The calculation of your return on an investment, especially when it comes to various asset classes, is a tricky affair. More specifically, returns are calculated by dividing the current price (numerator) by the price when we made the investment (denominator).

    Thus, what happens is that in many situations, the factors affecting the price of that investment at those two different points in time have an overriding impact on the performance of the investment. To the extent that the particular asset class by itself (the actual change in its intrinsic worth) is sometimes rendered almost irrelevant.

    An example should make things more clearer -

      Absolute Return Compounded Annual Return
    Over last 1 year 218% 218%
    Over last 2 years 54% 24%
    Over last 3 years 8% 3%
    Over last 4 years 30% 7%
    Over last 5 years 99% 15%
    Over last 6 years 176% 18%
    Over last 7 years 183% 16%
    Over last 8 years 146% 12%
    Over last 9 years 62% 6%
    Over last 10 years -46% -6%
    Over last 11 years 513% 18%
    Over last 12 years 3596% 35%

    Data Source: Prowess

    The above is a tabulation of the returns that you would be fetching today if you would have bought the stock of India's third largest IT company Wipro at different points of time in the past.

    So if you were told that the stock of Wipro would have fetched you a return of 99% over the last 5 years, of what relevance would that piece of information be to you? Does it symbolise the returns one can expect from Wipro over the next 5 years? Does it reflect the inherent strength of the company Wipro? Does it reflect how business has been for Wipro over the last 5 years? Does it reflect the quality of Wipro as an investment?

    The answer to all of the above questions would be an emphatic NO. The more alert amongst you might have noticed from the table that depending on whether one is calculating returns for the last 1, 5 or ever 10 years, the 'returns' that Wipro will have given you as an investor will vary greatly.

    A similar parallel can be drawn for the calculation of the returns of any asset class. The ultimate point being that there are no returns that are 'inherent' in any asset class (implying returns which can be automatically expected to be achieved in future too). They are more a factor of the valuations that are prevalent at the time of investment and the long term fundamentals of the asset class under consideration. Hence, the next time someone tells you that equities have returned so-and-so percent returns over the last 5 years, you know what to make out of it.

     

     

    Equitymaster requests your view! Post a comment on "Do equities always give you 20% returns per year?". Click here!

    2 Responses to "Do equities always give you 20% returns per year?"

    VLR

    Mar 2, 2010

    Spot on Manu

    Like 

    Manu

    Feb 24, 2010

    Moral of the story
    1. To make any asset class look under or over valued, all you need to do is to take an appropriate start and end year (like you guys do so often when talking about gold).
    2. The best times to buy are the ones that were filled with the most pessimism - like the tech bubble bursting and the aftermath of the 9/11 event, or the 2009 financial meltdown. ANY asset class bought at that time, with reasonably good management and cash flow, would do quite fine.
    3. Analysts and recommendation websites like yours, without fail, do well on ALL their recommendations made at the time of a depression/pessimism, and not-so-well on recos made at a high time.

    And finally, Buffett has had a 20%+ record for over 40 years with Berkshire. Moreover, he had a 30%+ record for his initial 10+ years prior to the Berkshire chapter of his life.

    Ergo, the best asset in the world is an A or B class share of Berkshire Hathaway. That way, you will make the best money-maker in the world work for you. Buy it as a SIP at some regularity.

    Like 
      
    Equitymaster requests your view! Post a comment on "Do equities always give you 20% returns per year?". Click here!
     

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Will They Haul Off Trump's Statue, Too? (Vivek Kaul's Diary)

    Aug 16, 2017

    All across the country, the old gods become devils. New, gluten-free gods take their places...

    This Company Beat the Business World's 'Three Killer Cs' (The 5 Minute Wrapup)

    Aug 16, 2017

    And what it has in common with beating the stock market too.

    5 Steps To Become Financially Independent (Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Let's Hope This Correction Continues (The 5 Minute Wrapup)

    Aug 14, 2017

    Last week's correction is making a number of Super Investor stocks look a lot more attractive...

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    Proxy Plays: A Smart Way to Bet on 'Off Limits' Companies(The 5 Minute Wrapup)

    Aug 4, 2017

    The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Aug 17, 2017 12:14 PM

    MARKET STATS