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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Sensex 600,000 – it’s only a number

Posted by Muthu on October 8, 2014

Sensex has provided around 17% (not including dividends) annualized returns over the last 35 years; from the time its base was set as 100 in 1979-80 to around 26,000 now in 2014.

Let us assume, during the next 20 years, as India move from a low per capita country to middle income per capita country, the index continues to grow at the same pace, 17% CAGR.

You or your daughter may be looking at a Sensex of 600,000 in 2034. You read it right- it’s six lakhs or six hundred thousand.

If it happens, Sensex would have multiplied wealth by over 6000 times (six thousand bagger) in 55 years of its existence.

Why I’m saying this?

We get carried away by Sensex numbers.

Sensex earnings for the financial year 2004 (10 years ago) was Rs.348. For this financial year, the earnings are expected to be Rs.1500.

Assuming a multiple of 18, Sensex should have been at 6264 10 years ago and at 27000 now.

Please understand this. It’s very important for you to understand these numbers as an investor.

6264 of 2004 = 27000 of 2014

If earnings grow at 18% for next 5 years, Sensex earnings would be at 3431. Applying a multiple of 18, the Sensex levels can be around 62000 in 2020.

6264 of 2004 = 27000 of 2014 = 62000 of 2020

Market will always continue to scale new highs.

From the base of 100, to current level of 26000, market should have made 25,900 highs! (Like counting 101, 102, till 26000). Considering the closing levels of market each day for last 35 years, someone has mentioned in Twitter (few months ago) there have been 466 new highs during the last 35 years journey of Sensex.

Markets would continue to scale new highs in the years and decades to come as long as earnings keep growing.

Assuming Sensex travels with the same base and earnings grow at 17%, 600,000 also would happen in 20 years.

As you are aware by now, this journey would not be smooth but with ups and downs- some time severe.

Like 2008, there can be instances of 50% fall as well.

In last 5 decades of Berkshire Hathaway history, Buffett has mentioned that there are 4 occasions when his company share price fell by 50%. This happens even to the best investor in the world.

In your 20 year journey, you would also be blessed with such occasions:-) The 6000 bagger in 55 years would have faced many such instances. You’ve to remember that 6000 times multiplication happens despite these.

As long as the earnings continue to grow, Sensex would also continue to grow.

600 or 6,000 or 60,000 or 600,000 are all only numbers in the journey.

Enjoy the journey.

2 Responses to “Sensex 600,000 – it’s only a number”

  1. ajay said

    Dear Mr. Muthu,

    What’s your opinion on diversification into other markets. At present value after the run-up, PE value of the indian stock market is at its fair value (though not very expensive) and If one is sufficiently invested in indian market already as per financial plan and with the real estate market being so expensive and gold at best a portfolio diversifier (may just match US inflation and for indians returns depends solely on USD exchange rate) then why not diversify in to another markets which are at reasonable valautions although with a reason like Russia (sanctions), Europe (deflation/recession is expected), African/Middle East markets (on going unrest) and even some of south east asian countries.

    After all few years before US was in trouble (till last couple of years and not sure if recovered but stocks doubled) and India too was in trouble (and still not out of woods and yet stocks doubled) till last year. Therefore investment made during this fear time fetches the maximum result and therefore, I feel it is best to invest in this market through overseas funds and reap the benefits. This may not suit all, but if one has already invested sufficient amount in Indian markets, the other markets seems more attractive now.

    For that matter Gold Stocks and Mining Sector world wide is going through a rough patch and can give excellent returns after 5 years of bear run.

    Like to have your thought on the above.

    Regards

    Ajay

    • Muthu said

      Thanks for writing in detail. I’ve very limited knowledge about international markets. More over Indian markets offer one of the highest long term returns without any exchange rate risk. So for now, I’m restricting myself only to Indian markets. Someone who understands international markets and companies can definitely take an exposure to the same in addition to Indian equities.

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