Stock market indices — such as the Sensex, Nifty, Dow Jones, Nasdaq — are one of the most hotly discussed and debated numbers.
This is indeed unfortunate:
Because, these numbers are utterly useless. They add absolutely NO VALUE to one's decision making - when to buy (or sell) shares. As such, a serious investor is well advised to 'totally' ignore them.
In fact, almost every day I am asked this question "What do you think of the markets?". And, as you would have rightly guessed, my typical reply is "I don't follow the markets."
No, its not as if I don't buy equity. In fact, 70% of my total portfolio is invested in the stock markets. Yet, I don't follow the markets... At All. [Don't Miss: Historic crash in stock markets? Oh, I didn't know that.]
Frankly speaking, these indices are merely an average of some numbers (i.e. the individual stock prices). The real story lies in these underlying prices and not the averages. The averages are often quite deceptive, leading to wrong conclusions; and some really (really) bad decisions.
A simple illustration would prove this point:
On Sept 22, 2014 the BSE Sensex was quoting at 27,207. Two years later, on Sept 21, 2016, it had barely moved to 28,507.
A mere 2.36% annualized returns. Hugely Disappointing! Isn't it?
Even the Bank Savings Account, would have given almost double the returns at 4%.
But wait! Is this inference correct?
Unless you are investing in the mutual funds (we will come to this later), you would normally buy individual stocks.
So, what were the stocks doing in these two years?
Infosys was UP (from 913 to 1057) : +7.60%
HDFC Bank was UP (from 857 to 1293) : +22.83% (unbelievable)
ONGC was DOWN (from 419 to 256) : -21.84% (shocking)
Dr. Reddy's was STAGNANT (3212 and 3160) : -0.81%
Axis Bank was UP (from 408 to 598) : +21.03%
Tata Steel was DOWN (from 501 to 369) : -14.14% (Oops!)
Maruti Suzuki was UP (from 3063 to 5502) : +34.02% (again, unbelievable)
ITC was STAGNANT (247 and 254): +1.35%
Bajaj Auto was UP (from 2413 to 2903) : +9.69%
L&T was STAGNANT (1534 and 1471) : -2.06%
Bharti Airtel as DOWN (from 415 to 322) : -11.93%
Asian Paints was UP (from 653 to 1169) : +33.84% (again, unbelievable)
In short, life at the level of individual stocks was
- thoroughly exciting (if you were in the 'right' stocks) or
- extremely depressing (if you were in the 'wrong' stocks).
(This, of course, is just a very small sample. The market is simply overflowing with stocks, that display such wide variety in their performance.)
One thing is certain... it was definitely not boring and fruitless, as it appears from the perspective of BSE Sensex.
One (more) thing is certain... if you have to make money, you have to be in the 'right' stocks.
One (more) thing is certain... most of you DO NOT have the expertise and experience to identify (and more importantly, stay invested in) the 'right' stocks.
As I often exclaim, when someone wants to invest directly into stocks - You think you can beat Roger Federer!.
Therefore, I strongly advise everyone to invest in the stock markets through the mutual funds. (Even my money is almost entirely in the mutual funds.)
If that be so, how was the story unfolding for the mutual funds in these two years?
Axis Equity Fund: +6.99% (NAV up from Rs.17.97 to Rs.20.57)
Birla Sun Life Frontline Equity Fund: +11.90% (NAV up from Rs.146.37 to Rs.183.29)
Franklin India Bluechip Fund: +10.81% (NAV up from Rs.317.482 to Rs.389.832)
HDFC Top 200 Fund: +6.50% (NAV up from Rs.326.001 to Rs.369.745)
ICICI Prudential Top 100 Fund: +8.89% (NAV up from Rs.227.39 to Rs.269.64)
IDFC Equity Fund: +4.67% (NAV up from Rs.23.388 to Rs.25.623)
Kotak 50 Fund: +11.42% (NAV up from Rs.152.394 to Rs.189.187)
L&T Equity Fund: +10.30% (NAV up from Rs.55.176 to Rs.67.129)
SBI Bluechip Fund: +14.47% (NAV up from Rs.24.662 to Rs.32.314)
Tata Equity Opportunities Fund: +12.62% (NAV up from Rs.131.211 to Rs.166.412)
UTI Equity Fund: +9.69% (NAV up from Rs.92.404 to Rs.111.179)
HDFC Index Fund - Sensex Plan: +4.41% (NAV up from Rs.227.229 to Rs.247.728)
Wow!
That's interesting! Really interesting!!
Not a single mutual fund scheme, among the most popular and highly rated ones, made a loss. And, this list covers schemes, spread across different mutual fund companies. In fact, most of them delivered great returns in this limited period of two years. Isn't that what we all want?
Important: Index funds mimic the index. But, as we have often seen, actively managed funds have done quite well vis-a-vis the index funds. Therefore, I guess we should ignore the index funds.
Very Important: Did you notice one significant aspect? The NAV of the fund has absolutely no relation whatsoever to the performance of the fund. NAV too is all meaningless all misleading.
Concluding, if you are tracking the BSE Sensex or NSE Nifty, you are making a terrible mistake. (And, if you are looking at NAV when investing in mutual funds, again you are making a terrible mistake.)
Concluding, my sincere request... don't ask me about the stock markets... ever again. (And, my sincere request... don't ask me about the mutual fund NAVs... ever again.)
NOTE:
There are thousands of companies listed on the Bombay Stock Exchange. BSE Sensex is formed out of the 30 large companies among these listed stocks. Therefore, for like-to-like comparison, the 12 stocks that I have illustrated above are from the Sensex list of companies. Further, even the mutual funds illustrated are those, whose objective is to invest in large companies (known as Large-Cap Funds).
The same story will unfold, when you look at BSE Midcap Index, and compare it with the Mid-sized Companies and Mid-Cap Mutual Funds.
This is indeed unfortunate:
Because, these numbers are utterly useless. They add absolutely NO VALUE to one's decision making - when to buy (or sell) shares. As such, a serious investor is well advised to 'totally' ignore them.
In fact, almost every day I am asked this question "What do you think of the markets?". And, as you would have rightly guessed, my typical reply is "I don't follow the markets."
No, its not as if I don't buy equity. In fact, 70% of my total portfolio is invested in the stock markets. Yet, I don't follow the markets... At All. [Don't Miss: Historic crash in stock markets? Oh, I didn't know that.]
Frankly speaking, these indices are merely an average of some numbers (i.e. the individual stock prices). The real story lies in these underlying prices and not the averages. The averages are often quite deceptive, leading to wrong conclusions; and some really (really) bad decisions.
A simple illustration would prove this point:
On Sept 22, 2014 the BSE Sensex was quoting at 27,207. Two years later, on Sept 21, 2016, it had barely moved to 28,507.
A mere 2.36% annualized returns. Hugely Disappointing! Isn't it?
Even the Bank Savings Account, would have given almost double the returns at 4%.
But wait! Is this inference correct?
 |
| There's something REALLY EXCITING happening behind this crying face. |
Unless you are investing in the mutual funds (we will come to this later), you would normally buy individual stocks.
So, what were the stocks doing in these two years?
Infosys was UP (from 913 to 1057) : +7.60%
HDFC Bank was UP (from 857 to 1293) : +22.83% (unbelievable)
ONGC was DOWN (from 419 to 256) : -21.84% (shocking)
Dr. Reddy's was STAGNANT (3212 and 3160) : -0.81%
Axis Bank was UP (from 408 to 598) : +21.03%
Tata Steel was DOWN (from 501 to 369) : -14.14% (Oops!)
Maruti Suzuki was UP (from 3063 to 5502) : +34.02% (again, unbelievable)
ITC was STAGNANT (247 and 254): +1.35%
Bajaj Auto was UP (from 2413 to 2903) : +9.69%
L&T was STAGNANT (1534 and 1471) : -2.06%
Bharti Airtel as DOWN (from 415 to 322) : -11.93%
Asian Paints was UP (from 653 to 1169) : +33.84% (again, unbelievable)
In short, life at the level of individual stocks was
- thoroughly exciting (if you were in the 'right' stocks) or
- extremely depressing (if you were in the 'wrong' stocks).
(This, of course, is just a very small sample. The market is simply overflowing with stocks, that display such wide variety in their performance.)
One thing is certain... it was definitely not boring and fruitless, as it appears from the perspective of BSE Sensex.
One (more) thing is certain... if you have to make money, you have to be in the 'right' stocks.
One (more) thing is certain... most of you DO NOT have the expertise and experience to identify (and more importantly, stay invested in) the 'right' stocks.
As I often exclaim, when someone wants to invest directly into stocks - You think you can beat Roger Federer!.
Therefore, I strongly advise everyone to invest in the stock markets through the mutual funds. (Even my money is almost entirely in the mutual funds.)
If that be so, how was the story unfolding for the mutual funds in these two years?
Axis Equity Fund: +6.99% (NAV up from Rs.17.97 to Rs.20.57)
Birla Sun Life Frontline Equity Fund: +11.90% (NAV up from Rs.146.37 to Rs.183.29)
Franklin India Bluechip Fund: +10.81% (NAV up from Rs.317.482 to Rs.389.832)
HDFC Top 200 Fund: +6.50% (NAV up from Rs.326.001 to Rs.369.745)
ICICI Prudential Top 100 Fund: +8.89% (NAV up from Rs.227.39 to Rs.269.64)
IDFC Equity Fund: +4.67% (NAV up from Rs.23.388 to Rs.25.623)
Kotak 50 Fund: +11.42% (NAV up from Rs.152.394 to Rs.189.187)
L&T Equity Fund: +10.30% (NAV up from Rs.55.176 to Rs.67.129)
SBI Bluechip Fund: +14.47% (NAV up from Rs.24.662 to Rs.32.314)
Tata Equity Opportunities Fund: +12.62% (NAV up from Rs.131.211 to Rs.166.412)
UTI Equity Fund: +9.69% (NAV up from Rs.92.404 to Rs.111.179)
HDFC Index Fund - Sensex Plan: +4.41% (NAV up from Rs.227.229 to Rs.247.728)
Wow!
That's interesting! Really interesting!!
Not a single mutual fund scheme, among the most popular and highly rated ones, made a loss. And, this list covers schemes, spread across different mutual fund companies. In fact, most of them delivered great returns in this limited period of two years. Isn't that what we all want?
Important: Index funds mimic the index. But, as we have often seen, actively managed funds have done quite well vis-a-vis the index funds. Therefore, I guess we should ignore the index funds.
Very Important: Did you notice one significant aspect? The NAV of the fund has absolutely no relation whatsoever to the performance of the fund. NAV too is all meaningless all misleading.
Concluding, if you are tracking the BSE Sensex or NSE Nifty, you are making a terrible mistake. (And, if you are looking at NAV when investing in mutual funds, again you are making a terrible mistake.)
Concluding, my sincere request... don't ask me about the stock markets... ever again. (And, my sincere request... don't ask me about the mutual fund NAVs... ever again.)
NOTE:
There are thousands of companies listed on the Bombay Stock Exchange. BSE Sensex is formed out of the 30 large companies among these listed stocks. Therefore, for like-to-like comparison, the 12 stocks that I have illustrated above are from the Sensex list of companies. Further, even the mutual funds illustrated are those, whose objective is to invest in large companies (known as Large-Cap Funds).
The same story will unfold, when you look at BSE Midcap Index, and compare it with the Mid-sized Companies and Mid-Cap Mutual Funds.
