“Sensex will touch 10 lakh points in my lifetime.”

At 11% per year from here on, the BSE Sensex will cross 1,000,000 points in a little over 24 years. So, by 2048, the Sensex should have crossed that level.
At 11% per year from here on, the BSE Sensex will cross 1,000,000 points in a little over 24 years. So, by 2048, the Sensex should have crossed that level.

Summary

  • In 2007, a senior mutual fund executive predicted the Sensex would hit 100,000 points in 'our lifetime'. Earlier this month the stock market index breached 80,000 points. Even if the Sensex is hurtling towards that prediction, are investors in the stock market really making a killing? Maybe not!

On 3 July, the BSE Sensex, India’s most famous stock market index, crossed 80,000 points for the first time during the course of a day’s trading. On 4 July, the Sensex closed above 80,000 points for the first time.

When you have followed the Sensex for as long as I have, such occasions lead to random thoughts—or what in slightly technical terms can be referred to as the benefits of experience. The Sensex crossing 80,000 points reminded me of a gentleman called Ved Prakash Chaturvedi.

In mid-August 2007, Chaturvedi, who at that point of time was heading Tata Mutual Fund, said on TV that the Sensex would cross 100,000 points in “our lifetime". Now, this was one of those classic forecasts where the forecast of the Sensex achieving a big round number was made, without providing a date or the year it would get there.

Or as Ruchir Sharma writes in Breakout Nations: “The old rule of forecasting was to make as many forecasts as possible and publicize the ones you got right. The new rule is to forecast so far into the future that no one will know you got it wrong." And saying that something will happen in our lifetimes is exactly like that given that death remains the only truth in life.

So, on 4 July, I remembered Mr Chaturvedi and put out a tweet where I asked as to why the business press hadn’t reached out to him and given him some publicity and dragged him out of his current anonymity. Of course, 80,000 points wasn’t as juicy a big round number as 100,000 points, but it was a big round number nonetheless. Also, 80,000 points is only 20% lower than 100,000 points, and we need just a 25% rise to get there (yeah, just a 25% rise, we live in that kind of day and age.)

So, how well has the Sensex done from the time Chaturvedi made the 1,00,000 forecast and up until 4 July. Now, to be honest, I don’t remember the exact date on which the forecast was made and Google also didn’t throw up anything. Nonetheless, there are two news reports, one which says that the forecast was made in August 2007, and another which says that it was made in mid-August 2007.

Let’s look at the returns from end of July 2007 to 4 July 2024. On 31 July 2007, the BSE Sensex closed at 15,551 points. On 4 July, it closed at around 80,050 points. So, dear reader, what kind of returns have been generated during this period of nearly 17 years? Would you like to take a guess? Well, if you have ever heard those in the business of managing other people’s money (OPM), they often talk about the Sensex having given a return of 17-18% or even 19% per year.

The BSE Sensex data is available in public domain from 3 April 1979 onwards, which is a little over 45 years. If we look at the numbers, the Sensex has gone from 124.15 to 80,050 during the period. This works out to a return of 15.4% per year, implying that the money invested in stocks that have constituted the Sensex over the years, in the same weight that they had in the index, would have kept doubling in five years on average.

Now, this return of 15.4% does not include the dividends given by these stocks. If these dividends were reinvested in these stocks, they would have amounted to another 1-1.5% per year, essentially implying that the Sensex has given a return of around 17% per year since April 1979, which is what those in the business of OPM keep incessantly pointing out.

But what they don’t tell us is that a bulk of these returns was earned from 1979 to 1992, when it wasn’t very easy to buy and sell stocks, and that most of us weren’t around at that point of time or not old enough to be investing in stocks.

Now, what was the per-year return on the Sensex from 3 April 1979 to 22 April 1992, when it reached its then all-time high of 4,467 points? It was 31.6% per year. So, all the OPM wallahs who give us gyan on how the Sensex has given a return of 17-19% per year since inception, almost always forget to point this out. Much of this return was front-loaded.

From 22 April 1992 to 4 July 2024, the return on the Sensex has been 9.4% per year, without taking dividends into account. If we do that returns will be 10-11% a year. Of course, we are considering returns from one peak to another peak. But what this clearly tells us is that the story of Sensex returns being 17-19% per year is basically bunkum, given that a bulk of it was earned in the 1980s and early 1990s, when most of us weren’t around or weren’t investing.

Now, back to the question I had asked, and almost forgotten to answer. On 31 July 2007, the BSE Sensex closed at 15,551 points. On 4 July, it closed at around 80,050 points. So, what kind of returns have been generated during this period of nearly 17 years? The answer might just surprise you. During this period of nearly 17 years, the Sensex has given a return of 10.2% per year.

A bull run was on in 2007 and stock prices were going from strength to strength. In a matter of months, from 31 July 2007 to 8 January 2008, the Sensex would rise by 34% and touch its then all-time high of 20,873 points. How do per-year returns of the Sensex look from 8 January 2008 to 4 July 2024? The average return during the period works out to 8.5% per year. This, even after the massive increase in the value of the Sensex in recent days, months and years.

These are intricacies that are rarely brought out by the OPM wallahs in their marketing pitches, given that many retail investors do tend to invest only after stock prices have run up considerably.

So, when we are talking about investing in the market for the long term, what kind of average returns should we assume? This is a very important question. To answer this I shall consider the Nifty 500 Total Returns Index (TRI). 

The data for this index is available from 2 January 1995 onwards. Also, it takes the dividends given by stocks into account, unlike the BSE Sensex. Further, the Sensex consists of just 30 stocks, whereas this index consists of 500 stocks, and hence, is a much broader representation of the overall Indian stock market.

Between January 1995 and 4 July 2024, the NSE Nifty 500 Total Returns Index has given a return of 13% per year. Of course, specific returns of investors would vary depending on when they entered the stock market, the stocks or mutual funds they bought, and how long did they continue to invest.

But a return of 13% per year is a good number to work with, especially because this is a post 1992 figure. So, we are not taking the go-go years of pre-1992 into account. Further, the calculation is not being carried out from the peak levels in stock prices seen before 1995, during the period of the Harshad Mehta scam, and the vanishing companies scam, when companies launched initial public offerings, collected money from investors, and then disappeared with it.

Also, to be on a slightly conservative side, given that one has no idea of how the future is likely to pan out, and given that stock prices are already at very high levels, let’s work with the assumption of 11% per year. Arre bhai, I am not a finfluencer who has things to peddle, and can be slightly realistic with my assumptions.

So, getting back to the point I was trying to make. My first two pieces as a freelancer appeared on the same day. I think it was 27 December 2003 (the BSE Sensex ended 2003 at 5,839 points). One piece was on a website that was very popular at that point of time, but people seem to have forgotten about now. And the second was in a business paper that is still around, but no one really reads it. The point being that I have now followed the stock market for a little over two decades.

So, let me take this occasion to state that during my remaining lifetime, the Sensex will cross 1,000,000 points (10 lakh points). Now, this might sound like a huge thing to say. But honestly, if you understand basic fifth standard compounding, you will realise it is not.

In the more than two decades that I have been aware of the Sensex, it has gone up from somewhere around 5,800 points to more than 80,000 points. In comparison, the jump from 80,000 points to 1,000,000 points sounds so much more. Actually, it’s not. 

A jump from 5,800 points to 80,000 points is around 13.8 times, whereas a jump from 80,000 points to 1,000,000 points is a lower 12.5 times. The point being that what looks like a bigger jump is not necessarily a bigger jump.

Now, let me make a more specific forecast and not just leave it at saying “during my lifetime". At 11% per year from here on, the BSE Sensex will cross 1,000,000 points in a little over 24 years. So, by 2048, the Sensex should have crossed that level. At least, that’s what running the right formula on the MS excel sheet suggests. 

If you don’t believe me you can try it out. Hopefully, you remember that compound interest thingie that they taught you at school. But then, as I once told an OPM wallah at a literature festival, life is not an excel sheet. So, there are no guarantees—not in life, not in investing.

Hopefully, you and I will be still around. And at the risk of repeating myself, I am no finfluencer nor an OPM wallah, so, I don’t need to put out a clear, crisp and confident forecast out there. I would like to build in my ifs and buts. There are no guarantees when it comes to the stock market. Also, a 11% growth year-on-year will never be linear in nature.

Allow me to explain.

Let’s try to calculate the return an investor who invested in a Sensex stock at their peak in April 1992 and sold when the markets crashed in March 2020 would have made. What kind of return would they have earned? The returns would have averaged 6.5% per year. Of course, this is an extreme example. Nonetheless, there is an important point to be understood here. The stock market goes through up and downs. While 11% per year or higher returns are likely in the long term, that may not be the case at a given point of time.

This basically means that betting all your money on a single investment class, like stocks, can be risky in nature. Returns can vary depending on when you buy and when you sell. And if you buy when prices are high and sell when prices are low, like it tends to happen to many retail investors, then you are likely to end up with lower returns.

Which is why diversification across investment classes is very important. Other than lowering the risk of ending up with lower returns, it also tends to smoothen out returns. The following chart from DSP Mutual Fund clearly shows this:

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So, the Sensex might touch 1,000,000 points by 2048. Or it may not. Honestly, that’s not what you should be bothered about, dear reader. Like many other round numbers it is another big round number that makes for good marketing.

It’s bound to get you excited, but excitement is not how you will end up making money. For that you need to invest in good stocks, directly or indirectly, and stay invested. 

Or if I were to end this with one of the first cliches I learnt when I started interacting with those in the businesses of managing OPM: Time in the market is more important than timing the market. 

But more importantly, what I have learnt in the last two decades is that there are no guarantees.

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