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

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Kostolany’s Analogy

Posted by Muthu on November 9, 2014

Andre Kostolany (1906 – 1999) is considered as the guru of stock market in Germany. He is respected for his insights and wisdom. Unfortunately not much about him is available in English. I want to share one of his analogies with you.

The relation between stock market and economy is like a man walking his dog. The man walks slowly, the dog runs back and forth.”

Whether it is Warren Buffett or Prashant Jain, they explain how growth in the economy and stock markets are inter- connected over long run. This is true for markets as a whole though some companies or sectors may be an exception.

Growth in our economy impacts the earnings of Sensex which impacts its price levels.

As per Kostolany’s analogy, economy is like a man who walks slowly and steadily. Stock market is like his dog with which he is walking with. The dog would run some time ahead of him and some time behind him. But they travel and reach the destination together.

Samir Arora (https://twitter.com/Iamsamirarora) in one his tweets has mentioned that between financial year ending 2002 and 2014, the earnings of Sensex have grown at a CAGR of 15.40%. During the same period, Sensex has delivered investors a return of 16.98% (including dividends). Though he has not mentioned it, our nominal GDP growth rate during the above period is also around 15%+.

I’m bullish on the future of our country. We would reach 8% growth rate in next few years and may even touch double digit growth rate before end of this decade. We are expected to overtake China (in terms of growth rate) in next few years.

Our nominal GDP growth would continue to be around 15% to 16%. So Sensex earnings and growth rate would closely follow this. As I’ve mentioned earlier, good funds and quality stocks would do much better than these numbers.

We tend to focus on the dog more than the man. Look at economic growth and Sensex earnings instead of constantly worrying about Sensex levels. As Buffett says, to win the game one has to play well and not keep looking at the score board.

The man would go a long distance in next 2 decades. The dog has to follow him. Don’t keep wondering why it is running ahead or behind. That is the nature of the dog. The control is with the man. It has to follow him.

Thanks to Kostolany. I had something to share with you today:-)

2 Responses to “Kostolany’s Analogy”

  1. JAWAHAR said


  2. Prashant Babber said

    very well written, hope you are not some company’s agent. Kidding :P..love reading your writings.

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