How to Outperform the Nifty in 2025 and Beyond

The BSE Sensex is up almost 14x over the last 20 years.

It was around 6,000 back in October 2004 and is close to 84,000 right now. That's a jump of 14x in 20 years, translating into a CAGR of 14%.

Not bad at all in my view.

However, if you would have made one small change, you'd be sitting on 28x returns over 20 years. Yes, that's correct. A 14x return would have turned into 28x returns with one small change.

And what was this small change?

Well, all you had to do was sell all your stocks in December 2007 when the Sensex was at 20,000 levels and then get back in at the end of the year when the Sensex had fallen to 9,600 levels.

Let me repeat that.

Invest in October 2004 when Sensex was at 6,000 then sell in December 2007 when Sensex was at 20,000 and then buy again one year later when Sensex had fallen to 9,600.

And then hold all the way from 9,600 to around 84,000 currently.

This simple approach would have earned you 28x returns as compared to 14x for a buy and hold for 20 years strategy.

Ok, how about adding one more step to this second approach i.e. selling in December 2019 and getting back again in March 2020 right after the Covid crash?

Well, you would have multiplied your money by almost 40x if you would have done this.

So, buy and hold over the last 20 years gave you 14x returns. Selling right before the 2007 crash and buying close to the bottom gave you 28x returns and if you also include selling and buying during Covid top and bottom, then your returns would have gone up to 40x.

Incredible, isn't it?

I know, I know what you are thinking. You are thinking that buying at the bottom and selling at the top is impossible in real life.

It can only happen in imagination and not in reality.

And hence, 28x returns and 40x returns are just a figment of imagination. It is difficult to replicate these returns in real life.

I agree that timing your buy and sell to perfection is impossible in real life. However, I wanted to drive home the advantage of using market volatility to your advantage.

There's no doubt that markets are volatile. And markets are volatile because of us investors.

When times are good, we get carried away by greed and make the Sensex significantly overvalued. When times are bad, we are paralysed by fear and make the Sensex significantly undervalued.

So, if we have to take advantage of this overvaluation and undervaluation, we have to think independently from the crowd, especially during times of significant overvaluation and undervaluation and take the opposite action.

Let me help you with numbers here.

You see, the Sensex has traded at an average PE of close to 20x over the last two decades. This means it becomes undervalued when it goes below 20x.

Also, historically, big crashes have happened at a PE of more than 24x-25x. Thus, a PE of more than 25x has proven to be a good overvaluation point.

From here, it can be concluded that if one wants to earn market beating returns, buying Sensex at PE below 20x and selling at PE above 25x is the way to go.

Doing this simple thing would ensure that an investor ends up earning market beating returns as he is using the volatility to his advantage.

Things are not so simple though. A PE of 20x and 25x is history. It is in the past. But what if history does not repeat itself? What if Sensex stays at 25x and does not go below 20x for the next few years.

Wouldn't you miss out on returns? Wouldn't you look like a fool? Well, you certainly would.

Well, how about partial buying and partial selling? How about investing 75% in stocks when the Sensex is below 20x and bringing the allocation down to only 25% when the Sensex is above 25x? Between 20x and 25x, you can be 50:50 in stocks and bonds.

Let me repeat that. Below 20x, stocks is 75% and bond is 25%. Likewise, bonds is 75% when Sensex PE more than 25x and stocks only 25%. Between 20x and 25x, you can be 50:50.

What should be the composition of the stock component though? How many stocks and which ones? I believe a portfolio of 20 to 30 stocks should be enough.

Besides, I am of the view that as long as you do not have junk stocks or extremely overvalued stocks in your portfolio, you should be fine.

See to it that the stocks are of good quality i.e. consistently profitable, low debt and decent return ratios. And lastly, their valuations should not be exorbitant. They should be trading at decent valuations.

A good thumb rule is that if a stock's valuation is making you reach out for a calculator or an excel sheet then it is not worth buying. It should scream 'good value' by merely looking at it.

Here's a model portfolio that I created using simple rules. This simple portfolio has outperformed the Sensex by a whopping 4x.

It has given 13x returns versus 3.4x returns given by the Sensex. I think one of the reasons it has done so well is because the portfolio had a lot of small caps in it. Still, it is a very good performance.

Well, that's the power of simplicity right there.

Here are the simple rules that I have used while creating this model portfolio.

• Allocation between stocks and bonds based on Sensex PE. If PE less than 20 then 75% in stocks and vice versa if Sensex PE more than 25
• Annual rebalancing
• Portfolio of 20 stocks
• Stocks are selected such that both their quality as well as valuations are decent.
• PE ratio between 5 & 15 and latest year debt to equity less than 1. That’s it. I have used no other criteria.
• Minimum revenue and liquidity criteria were also considered.
• Bond interest rate was assumed at 6% p.a.
• Stocks are sold at the end of every year and new group of 20 stocks selected.

So, there you are. Simple rules and still, a superb performance.

Your best chance at outperformance is to not repeat the mistake that the crowd makes.

The crowd often buys more stocks when the Sensex PE is high and panic sells when the Sensex PE is low. It also often ends up buying junk stocks and momentum stocks with high valuations.

Thus, by avoiding all these mistakes, you are putting yourself in a much better position than the crowd and giving yourself a great chance of outperforming.

Happy Investing.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)