April 21, 2017

Time to change our Informative Communications!

Amit Trivedi

Owner, Karmayog Knowledge Academy

Time to change our Informative Communications!

Will the Sensex be at 1,29,600 in 2018?

Social media is full of information and one keeps getting some very interesting messages every now and then. A lot of the time, the information is useful, but one cannot say the same at all times. Sometimes, we get half-truths or complete lies. Often, the sender of the information or even the originator of the same does not do so with mala fide intention. It is just that one has not spent enough time to thoroughly go through the same.

Recently, I got one such message containing historical Sensex data in form of a table. Let me share the same with you, as it is:

Interestingly, the sender of the message did not mention the projected Sensex value in 2018, but just left it for the reader to imagine. It is obvious that the sender of the message was trying to indicate (without mentioning as much) that between 2008 and 2018 too, the Sensex should grow six times and hence should quote at around 1,29,600. The trend indicates that the Sensex has grown six times every ten years.

This looks like an opportunity of a lifetime with Sensex at around 30,000 points currently. If the above works out to be true, one would see the investments multiplying more than four times in just about one year.

At the same time, the skeptics would see red flags everywhere.

Experience suggests that it may not be right to brush this aside as rubbish. A prudent approach would be to check whether this could be true.

So we thought of checking the data for accuracy and see if the pattern really exists. We took the daily closing values of Sensex on each of the working days from 2^nd January 1980 till the end of 2016.

We took three numbers of Sensex for all the years – the high, the low and average of all the daily closing values. Let us first check the actual data for the years mentioned in the message:

Having said that, have a look at the numbers more closely and you see that for the year 1978, the beginning number is taken, for 1988 and 1998, a number closer to the average is taken and for 2008, the peak is taken. The data lacks consistency. So, there is no value of Sensex for the calendar year 1978. However, since the inception date is very close, it is fair to assume the base value for the year.

Hence, we took all the data for all the years and as mentioned earlier, we looked at the high for the year, low for the year and average of all daily closing values. Let us look at the data:

This is base data. We now need to check whether Sensex has been going up six times every ten years. For that, we compared the low of the year with the low ten years later; high of the year with the high ten years later and same for average. The results were interesting, to say the least. See the table below:

As can be seen from the table, how much the Sensex multiples over a ten year period is highly uncertain and quite volatile. In the year 1980, if someone invested in Sensex on the day it was the lowest for the year and took the money out in 1990, once again on a day when Sensex was at the lowest for the year, the money would have multiplied 5.58 times. However, if one were to catch the high in both the years, the investment would have multiplied 10.47 times.

The maximum rise over a ten-year period has been 17.67 times. This was obviously in the period 1982-1992. The minimum happened to be 0.83, which means Rs. 100 invested stood at Rs. 83 after ten years. Incidentally, this time the period was 1992-2002. So the year 1992 appeared in both the cases. As we all know, the year 1992 saw a raging bull. We saw all records of a bull run being broken, including valuation of stocks and the average market. (I am not suggesting that this was the last time we saw anything like that).

So, even if we remove that year, considering it as an outlier, the maximum happens to be 16.17 and the minimum 1.12. During the best ten-year period, money multiplied more than 16 times, but in the worst case, it barely grew.

(Note: The above data does not include dividends, transaction costs, and applicable taxes, if any)

What is the conclusion, then?

The conclusions are simple:

1. Equity returns are highly unpredictable. Even over a ten-year period, the uncertainty remains very high.
2. This high uncertainty equals to risk. Whichever way one defines risk, you can see the same in the above numbers.
   1. Are the returns volatile? Yes.
   2. Are the returns unpredictable? Yes.
   3. Is there a probability of loss even after ten years? Yes.
3. Please do not believe social media forwards. Check the data for accuracy.
4. Please do not jump to conclusions based only on a small set of numbers. In fact, what we have presented above also does not have sufficient data. We would love to have data for the much longer period of time. The above can only help disprove a hypothesis, but cannot prove anything conclusively.

In the meantime, enjoy the roller coaster ride of the equity markets.