December 20, 2017

The futility of asking how the market will fare

...The real reason why I don’t divulge what I actually do is because of the question that follows:

“Market kya lagta hai (what does the market look like)?”

This question has been my nemesis—at interviews as well as social gatherings. I really don’t think in terms of market levels and normally I don’t have a strong view on where the market is headed, but under societal pressure I regurgitate something about earnings and liquidity and macro and head straight for the buffet.

On a serious note, “Market kya lagta hai?”, at least in the Indian context, is a futile preoccupation. Sample this: MSCI India barely produced any return in dollar terms for 10 years between November 2007 and November 2017. If, in November 2007, one had gazed at the crystal ball and said that the market would yield nothing for the next 10 years, the statement would have been apocalyptic, but that’s what actually happened. And not even the staunchest bear would describe the last 10 years in Indian equity markets as apocalyptic.

That’s because over longer time horizons, money is made or lost in individual stocks whose performance does not have much to do with what the broad market does. Despite the lost decade for the headline index, 86 stocks, with market capitalization in excess of $500 million, quintupled over that time frame (multiplying five times in 10 years implies a healthy compound annual growth rate, or CAGR, of over 17%) (Chart 1). We keep reiterating that our basic unit of thinking is stocks and not market averages. Like all investors, we own stocks in our portfolio and not index futures, which is why we do not obsess too much about broad market earnings and broad market valuations.


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