MUSING 39- INVESTING LESSONS FROM THE JOURNEY OF SENSEX: PART 1
MUSING 39
FINANCIAL LESSONS FROM SENSEX HISTORY
PART 1
Good morning friends. For the equity enthusiasts, the
day of 26 November 2019 would have been a special one. On that day, the Sensex
crossed a new milestone- of closing at its highest ever, 41000 mark. It is an
interesting journey which along the way has taught us so many investing
lessons. I thought of writing a series of blogposts on Sensex, and some key
issues which may help us in our future investment journey.
But before that, a bit of update on both my books.
Musings of a Financially Illiterate Father continues its relentless
march on Amazon Bestsellers list. The book was ranked #9 on Kindle on 27
November. My second book, The Millionaire Mechanic, has gone through two
rounds of editing and should be in your hands by end-December.
Bombay Stock Exchange (BSE), established
in 1986, is the world’s 11th
biggest stock exchange with more than 5500 publicly listed companies on it. All
the trading for the stocks of these companies takes place on BSE. The Sensex or the Sensitive Index or BSE 30, was
launched in 1986 but it's base- year to set the index to 100, was decided as
1979. Thus, the Sensex is now 40 years old and has risen from 100 to 41,000 in
these 40 years. Sensex
or BSE 30 is the market index for BSE consisting of 30 well established and
financially sound companies belonging to different sectors of the economy. The
movement of the Sensex reflects the general movement of the companies listed on
the BSE. Please understand that the upward/downward movement of Sensex doesn’t
reflect the similar movement of all the
companies contained in it much less of all the 5500 listed companies. We will
see this point as we move along.
As on
date, the sectors contained in the Sensex are- Banks Private, Banks Public (only
SBI), Paints, Automobiles, Finance NBFC, Telcom, IT Services and consulting,
Finance- housing sector, Household and Personal Products, Cigarettes/Tobacco, Engineering
and Construction, Power generation, Oil exploration and Production, Pharma and
drugs, Iron and Steel, and Metals- Non-Ferrous.
So, the entire spectrum of the economy is represented in Sensex and hence the movement
of it truly reflects the general health of the country’s economy. I made the
point that the movement of the Sensex does not reflect the movement of all the
constituent of it- let me give a few examples. In the last 6 months (the reason
for taking a six-month period will be covered subsequently), 15 out of 30
constituent companies have lost money, the severest being Yes Bank at minus
52.23% If we turn to good news, Asian
Paint has given returns of plus 25.94% followed by Bharti Airtel at plus 24.77%.
The Sensex
overall has risen from 39,765 (28 May 2019) to 41,130 (28 Nov 2019), thus
giving a gain of 3.43% over 6 months or nearly 7% per annum- a very good return
in these choppy markets. The first lesson here is that it is very difficult
to bet on individual stocks and had we done so for the Sensex companies (the
real blue-chip companies), there was a 50% chance of a loss/gain. This
fact, of course, could not have been known in advance. However, by investing in
Sensex, we would have avoided all the palpitations and yet gained handsome
returns. One could argue that while we would have got 7% returns, but that
would have been at the cost of 25% returns (Asian Paints). I would humbly
respond that actually, one would have avoided minus 52% returns (Yes Bank) as it
is only the hindsight which is telling us which company did well.
This
brings us to our second lesson- it is better to invest in broad market indices
like Sensex or Nifty 50, at least 50% of your equity component for steady and
safe returns. This obviates the need for churning your
stock picks and keeping a constant track of their performance. You have a life
to live and enjoy and it is better not to become a slave to the stock market.
Today, mutual funds provide readymade solutions to invest in these indices. The
details I will cover in one of my subsequent posts.
The
methodology of inclusion and exclusion of these 30 companies that form the
Sensex is also very interesting. The exercise is done every Jun and December,
and the next one is due on 23 December. However, it is already known that three
companies are being moved out of Sensex and consequently three being moved in.
The companies exiting are Tata Motors, which is not doing well for a long time
now, Vedanta Ltd, and Yes Bank, which, as I already covered, is down by about 52%
in the last six months.
The three
companies which are being added are- Nestle Ltd, Titan Industries and Ultratech
Cement, which have been good performers over the last six months.
The
third lesson here is that though your equity investments will give good returns
over the long term (Sensex has given nearly 17% returns since inception), but
they will be full of volatility. This fact can be
validated by following the Sensex journey since inception which has been
anything but smooth. It has had its share of rise and fall. We will cover the
same on our next week’s post, where we will track the Sensex journey since its
inception, which is quite fascinating, and learn our financial lessons from it.
I
would leave you to mull over these three financial lessons from Sensex journey and
work out your methodology to invest in equity. Next week I will follow up this
Sensex journey in detail while bringing out the investing lessons.
One of
the readers, Sunil, has this to say about “Musings of a Financially Illiterate
Father” on Amazon, on 18 November- “An eye-opener. While one will feel enriched
after reading the book, the other feeling which is hard to suppress is, “WHY DID
I NOT READ IT EARLIER? Not only a MUST-READ, but an ASAP READ.” Thanks for your
encouraging words, Sunil. A screenshot is below.
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