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.
Stockmarkets: Tone down those expectations.. - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Mar 31, 2005

    Stockmarkets: Tone down those expectations..

    73%, 13% and -4% These are the returns provided by the BSE-Sensex in the years 2003, 2004 and 2005 (to date) respectively. Thus, contradictory to the bull runs witnessed in 2003 and 2004, the Indian indices have had a rather volatile and weak start to the current calendar year. However, what the bull runs have done is that they have raised the expectations of investors, who are now very much used to (if we may say it) seeing returns in excess of 25%. We know that this is a low return considering the two years prior to 2005, a period wherein even large-cap and index stocks emitted a mid-cap type behaviour, appreciating by the hour (!) Thus, in the backdrop of the recent weakness in the markets, we conducted a poll on our website to gauge what are investors' expectations in terms of returns with respect to their investments in the stock market.

    The poll conducted on our website asked our readers, "What is your desired rate of return from equity investments over the next 3 years?" A significant number of people (62%) who took the poll expected returns of over 20% p.a. over the next 3 years, while 34% expected returns between 10% to 20% p.a. However, there were a few (4%) who seemed satisfied with less than 10% p.a. returns. Let us look at each of this in a little detail in the reverse order.

    Below 10% p.a.: Well, while we did expect to get some hits on this option, 4% beats our expectations! Investors must note that equities by their very nature are a risky investment option and this is what justifies a higher return on these. If an investor were satisfied with less than 10% p.a. returns, then our sincere advise to him would be that it would be better off to invest in government instruments like NSCs or PPF, the returns on which though somewhat less than 10% p.a., they do provide absolute safety of their invested capital unlike an equity investment, wherein erosion of capital is very much a possibility. It must be noted that this option and these kind of expected returns are suitable for a retired/aged person for whom safety of capital is of critical importance.

    Between 10% to 20% p.a.: It must be noted that the Indian stock markets have usually commanded a P/E valuation of 16x to 17x, a fact justified by the CAGR earnings growth of approximately similar levels delivered by India Inc. over the last decade. Thus, going forward, it would not be inappropriate to expect returns in this region but only over the longer-term, as annual returns from equities tend to be volatile and may be negative in some years. Of course, while the story of triple digit returns is over, considering the developments in the form of reforms that have taken place in our economy, equities would continue to deliver decent returns. The only caveat here for an investor is the detection of an investment candidate with good management and business model that would reward the investor.

    Above 20% p.a.: We would like to say only one thing to people who expect such kind of returns - tone down your expectations. We believe that such returns are not possible on a sustainable basis over a long period of time, as returns have to move in tandem with the earnings momentum, which are unlikely to register such growth rates due to inherent problems at the macro level like lack of political will, poor infrastructure, slow reforms, etc. Further, considering the fact that competition - both within the domestic market and also from international entrants - has been on the rise, it is likely that margins would trend downwards or at the most stabilise at the current levels, thus capping the growth in profitability.

    To conclude, it would be advisable for investors to curtail the high expectations, as there is a greater chance of disappointment. However, considering the various positives working in favour of Indian equities at the current juncture, we do believe that a long-term investment horizon and systematic investment in fundamentally sound companies is a reasonably foolproof method of mitigating risks and creating wealth. We also believe that over the long-term, money flow into equities will rise. One needs to practice patience and give time for investments to grow.



    Equitymaster requests your view! Post a comment on "Stockmarkets: Tone down those expectations..". 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.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working (Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    The Key Factor Pushing Gold Up These Days (Outside View)

    Aug 21, 2017

    PersonalFN explains the chief factor pushing gold prices up of late.

    How Unique Are the Companies You Invest In? (The 5 Minute Wrapup)

    Aug 21, 2017

    One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 19, 2017

    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

    Aug 8, 2017

    'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

    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.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    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


    Aug 21, 2017 (Close)