MUSING 40- FINANCIAL LESSONS FROM SENSEX HISTORY: PART 2

MUSING 40

FINANCIAL LESSONS FROM SENSEX HISTORY

PART 2

Good morning friends. In the last post, we had discussed a few interesting facts and financial lessons from the 40 years old history of Sensex. This week we will track the entire journey of Sensex and draw out relevant investing/ financial lessons. But first, let us recount the three financial lessons from the last week’s blog post.

Financial Lesson 1. It is very difficult to bet on individual stocks and had we done so for the Sensex companies (the real blue- chip companies), in the last six months, there was a 50% chance of a loss/gain.

Financial Lesson 2. 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.

Financial Lesson 3. 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 blog post in fact takes off from where we left last week- tracking the journey of Sensex over the last 40 years. But before we do that a bit of update on my both the books. Musings of a Financially Illiterate Father continues its relentless march on Amazon Bestsellers list. My second book, The Millionaire Mechanic, has gone through two rounds of editing and should be in your hands by the end of this month.

Let me first show you the entire journey of the Sensex over the last 40 years.

Serial	Year	Sensex Milestone
1	Jul 1990	1000
2	Dec1999	5000
3	Feb 2006	10000
4	Oct 2007	20000
5	Jun 2014	25000
6	Mar 2015	30000
7	Jan 2018	36000
8	Aug 2018	38000
9	Apr 2019	39000
10	Jun 2019	40000
11	Nov 2019	41000

Remember that we discussed in the last post that though the Sensex was launched in 1986 but its base year to set the index to 100, was decided as 1979. Hence, Sensex took 11 years to reach the mark of 1000 from the initial 100 but then accelerated to next 3000 points within next one year. It reached the mark of 4000 by 1992. The notorious Harshad Mehta scam was also partly responsible for this bull run. Once this bubble burst, the consciousness to tighten the regulations came about. This was also the time when India, on the brink of a debt payment default and about to pledge its sovereign gold, liberalised its markets. This increased the competitiveness and efficiency of the market manifold.

Financial Lesson 4. What seems too good to be true in investments or indeed in life, is generally spurious and should be guarded against.

The journey of the Sensex from 4000 to 5000 was torturous and took nearly eight years and this milestone was reached in 1999 (a historical year; remember Operation Vijay in the Kargil Sector?) This was the phase of the Dot- Com boom and the internet gaining centre stage. Consequently, IT companies like Infosys and TCS made their stockholders rich and replaced old economy stocks.

Financial Lesson 5. Despite all the investing skills and prudence, disruptive technologies and inventions can bring shockwaves, both good and bad. No one can predict the next Infosys, TCS or Apple.

The Sensex journey from 5000 to 10000 took all of nine years and this milestone was reached in 2006 due to global markets booming on the back of the Chinese miracle. The journey from 100 to 5000 had taken 20 years but the next 5000 points took only seven years. The next 10000 points were reached in a record one year with the Sensex reaching 20000 mark in October 2007. The equity boom had set in in the right earnest mainly due to infusion of funds by the FIIs.

Financial Lesson 6. This further reinforces the previous financial lesson. Global markets are interlinked today and happenings in one part of the world can bring untold riches to the investors in the other part. Serendipity, as they say. But the reverse is equally true as we shall shortly see.

The Global markets went in a recession from early 2008 and by October 2008, Sensex had lost 64% of its value and sunk to 8500 points.

Financial Lesson 7. This lesson is a corollary to the previous lesson. The proverbial butterfly fluttering its wings in one part of the world can cause hurricanes in the other part. In this case, the Sensex hit a financial hurricane called the Sub- Prime Crisis.

The investors who were riding the equity bull deserted it for the safe comfort of debt, gold and real estate. A bad move in the long run as we will see. Those who were brave enough to stay put soon reaped handsome rewards.

Over the next five years, the market consolidated and grew steadily on the back of a recovering Indian economy and the second round of reforms in 2012. The Sensex regained 15000 points by July 2009. So, the investors who showed courage to not only hold on to their equity investments but in fact add to it in this bloodbath gained hugely- 8500 to 15000 in a mere nine months. In the five years following the 2008 global financial crisis, the Sensex went up 150%, a CAGR of 20%. It was a bonanza for the braves who chose to show faith in equity markets.

Financial Lesson 8. In Warren Buffet’s words, “Invest in equity when there is blood on the streets.”

Sensex rose to 21000 in November 2010 but could not sustain itself and slid to 15000 again by December 2011 due to global factors. This time the culprits were the European debt crisis due to which FIIs pulled out money and rupee depreciated. The financial lessons we have learnt so far were reinforced in a big way. However, the investors again panicked and exited the equity markets in droves.

Sensex rose to the levels of 20000 again by December 2012 due to the worldwide economic reforms. The FIIs came back to the Indian markets and their buying pushed the Sensex to new heights in the year 2013. Sensex touched the mark of 25000 in Jun 2014 and 30000 in Mar 2015.

In fact, from the year 2014 onwards, the market has been tracking Indian economic reforms and has been aided by abundant global liquidity as central banks around the world maintained an accommodative stance. Over this period, the Sensex has been moving to new heights touching 41000 in November 2019. However, as we saw in the last week’s post, its not that all the 30 stocks of the Sensex are moving up. In fact, about half of them are losing money. The bull run of the Sensex is due to just 4- 5 stocks.

Financial Lesson 9 We must understand the volatile nature of the equity market as well as its ability to appreciate over time as economic cycles turn. Also, that equity is a long- term wealth creator and any period less than five years is likely to give you volatile returns.

Hope you have enjoyed this roller-coaster journey of Sensex with its attendant financial lessons. Sensex or Nifty investing also called Passive Investing, already hugely popular in the developed western markets, is the future of equity investing. So, keep in touch with the emerging trends.

Enjoy your weekend with my book.

https://www.amazon.in/Musings-Financially-Illiterate-Father-Investors-ebook/dp/B07GDNFNMQ