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Last 5 Years, Next 5 Years – A small study on Indian Stock Markets

Everyone interested in stock markets these days has following perception:–
Markets have not done anything in last 5 years. The index has not moved anywhere at all!!
And that is true. Numerically speaking, markets seem to have done almost nothing in last 5 years (2008-2013).
Now it seems sensible & obvious that one should buy low and sell high. But what should one do when markets have not done anything substantial in last few years? And we are not talking about individual stocks here. We are talking about broader markets. The indices. Individual stocks can take an altogether opposite trajectory than the market.
To answer this question, we decided to look back into the past. We analysed Nifty’s data for last 22+ years (1990-2013). We checked this data for two things:
  • Returns during last 5 years (for everyday since 1995)
  • Returns during next 5 years (for everyday till 2008)

And what we found is summarized in table below –
 

Returns in last 5 Year – Returns in Next 5 Years – Correlation

What the above table means is that – “If returns of last 5 years are not great, chances of having great returns in next 5 years are pretty high.”
Now that should bring a smile on faces of those who keep cribbing about poor returns in last 5 years. 🙂
So will the market give stellar returns in next 5 years (2013-2018)? The answer is that we don’t know. But as per historical data, chances are quite high.

So, will you take chances now? Will you go ahead and invest for next 5 years? What will you do?

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Large Cap Nifty Stocks – Returns since our call in December 2011

Important: Don’t miss the last paragraph.


When we wrote Large Cap Nifty Stocks available at deep discounts in December 2011, we were very excited to find a number of great companies available at very cheap prices. And since the world as well as Indian economy hadn’t fully recovered, it was really common sense that one stuck with businesses which could weather the economic turmoil. We advised and bought a few of these large caps for our personal portfolios.

So after an year, when index has given 25% returns, we checked the performance of individual stocks. And we must say that we are more than happy to see around 15 stocks giving 40% + returns. But there are a fair number of duds too. There are 10 stocks which trade at discounts compared to December 2011 prices.

Large Cap Nifty Stocks Returns One Year
Nifty Stocks: One Year Returns (Dec 2011 – Dec 2012)
As of now, markets are trading at a PE of close to 19 and since markets have run up around 800 points in last 4 sessions, we are not sure if it’s a good time to pick stocks. We would rather wait and watch for the time being.

Caution: Our post might make you believe that we have good predictive capabilities. The fact is that we don’t. Why? Markets have risen 25% in last one year. So have all stocks representing the market. And as Warren Buffett said: A rising tide lifts each and every boat. You only find out who is swimming naked when the tide goes out.

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Nifty Dividend Yields – A Long Term Analysis of relation between dividend yields and returns

Dividend Yield is a ratio of dividend paid last year to current market price. A further reading on Dividend Yields can be found here.
 
One of the two metrics used to evaluate over- or under-valuation of markets is Dividend Yield (Other is P/E Ratio). At present (Mid January 2012), Nifty has a dividend yield of 1.6 (find latest data here).
 
So is this a right time to invest? We at Stable Investor decided to look into index’s history to answer this question.
 
Analysis of Nifty’s last 13 years data (from 1st Jan 1999 onwards) reveals a few interesting points –
  • Returns during last 13 years, when segregated on basis of Dividend Yields are –
 
  • This clearly indicates that at current Dividend Yield of 1.6, chances of earning around 20% per annum for next 3 years are quite high! (Caution – The statement is made on basis of historical data. Past performance is no guarantee of future performance.)
  • A graph between Dividend Yields and 3-Year-Returns (CAGR) also shows that there is a high (positive) correlation between the two. Higher the dividend yield, higher the returns over 3 year periods.
Dividend Yield & Return Since 1991 [Click to Enlarge]
  • But one must understand that market does not give enough chances at higher levels. Our analysis shows that out of 2500 trading sessions in last 13 years, markets spent less than 5% (127 days) at dividend yields of more than 2.5 (which offers maximum returns over 3 year periods).
Days Spent on various Dividend Yields
 
So after this analysis, Stable Investor understands that though history shows that investing in markets offering high dividend yields makes more sense, one should never rely on just one mathematical tool to arrive at any investment decision. Any number should be taken with a pinch of salt and should always be looked in conjunction with other ratios and numbers.
We did a similar analysis of PE Ratios and Returns over 3 and 5 year periods and arrived at some remarkably useful results which can be found in the post Relation between PE Ratios and Returns.
If you are interested in further exploring slightly advanced topic of Effective Dividend Yield, please read our post on Dividend Investing in Indian Stocks.

Sensex Annual Returns – 20+ Years Historical Analysis (Updated 2019-2020)

[Updated – January 2019]

What have been Sensex annual returns?

What have been stock markets annual return given in last 1 year?

What have been Sensex returns since inception?

What have been Sensex returns in last 20 years?

What have been Sensex returns in last 10 years?

What has been Sensex CAGR or the average Sensex returns till now?

These are some questions that gain popularity as the year comes to an end.

During this time, we all have this uncontrollable urge to ‘know’ how markets have done in last one year. And how it compares to annual returns of the last few years.

Ofcourse, one should be interested more in how their portfolio is performing and whether they are on track to achieve the returns (%) required to achieve their financial goals.

But still, we do get attracted to things like Sensex yearly return figures. Isn’t it?

So as we have completed another year, I have decided to analyse Sensex historical returns of widely tracked market index Sensex – a widely tracked index of the Indian stock markets, which is made up of shares of 30 largest Indian companies.

Sensex closed 2018 with gains of about 5.9%.

After a lot of upheavals and volatility, 2018 did not turn out to be a very great year for the markets. But this comes on the back of a good 2017 – where making money wasn’t difficult.

But how does this compare with the longer Sensex return history and the averages?

Nifty has a CAGR of 13.1% in the last 20 years (since 1998) and 14.1% in the last 10 years (since 2008).

But that is the nature of markets. The average figures will not be achieved every year. Also for SIP investors, it is important to understand that these returns will be different from your rolling SIP returns (but we will discuss that some other day).

So below is the Sensex historical chart showing annual Sensex returns since 1991 (i.e. 2+ decades):

Sensex Annual Yearly Returns 2018 2019

To see this from another perspective, have a look at the table below.

It gives you the current value of Rs 1 lac invested in Sensex every year since 1995-96:

Sensex Annual Investment Performance 2018 2019

As already mentioned, looking at average figures has its own pitfalls. An average of 12% annual returns might sound great on paper. But it requires you to witness -30%, +20%, 5%, -15%, 13%, etc. for few years. You won’t get that 12% fixed returns, no matter how much you want it. 🙂

So obviously, the 2+ decades-long journey has been a volatile one. In the last 28 years, we have had:

  • 20 years with positive returns
  • 8 years with negative returns

You might draw out the conclusion that more often than not, markets will give positive returns.

That is true. But how much of that return will be captured in your portfolio is another matter.

So if you had invested somewhere in 2002-2003, the annual index returns after that have been 3.5%, 72.9%, 13.1%, 42.3%, 46.7%, 47.1%.

And this is not normal. This was unprecedented and chances are high that such a sequence of high positive returns, might not get repeated again for many years if not decades. So do not have such expectations of multi-year high returns from stock markets.

Infact, we should be ready to face ugly years like 2008-2009 – when index itself fell by more than 50% and individual stocks crashed by 80-90%. I have said countless times that one should invest more in market crashes or when everyone else is giving your reasons to not invest. But that is easier said than done. When a crisis like the one in 2008-2009 comes, it is not easy to combine your cash with courage.

Suggested Reading:

But that is what separates poor investors from good ones and, good ones from great ones.

Now we have seen Sensex historical returns for the last 25+ years. But that gives us only 28 data points to look at. And that is not sufficient to draw out any meaningful conclusions.

Ofcourse it is interesting to look at annual return figures. These give us a benchmark to compare our own portfolio’s performance.

But it is very important to understand what these annual figures won’t tell you. We can pick and choose data to prove almost anything – as it has been rightly said – “Torture numbers, and they’ll confess to anything.”

You might find people telling you that markets can give you 15-20% returns. And they might even show you data to prove it. But just picking one particular Sensex 5-year return period or even a 10-year period will never give you the complete picture. You need to see how markets have behaved in ‘all’ such 5-year and 10-year periods.

So when talking about Sensex yearly returns, lets not just evaluate year-end figures. Instead, let’s analyse rolling 1-year returns. That will give us a better picture.

I have used monthly Sensex historical data since January 1990. So that is where we start.

Now to calculate one-year rolling returns, we pick every possible 1-year period between January 1990 and December 2018 (on a monthly basis).

So we have the following:

  • Jan-1990 to Jan-1991 – 1st one-year period
  • Feb-1990 to Feb-1991 – 2nd one-year period
  • Dec-2017 to Dec-2018 – Last one-year period

In all, there were about 336 rolling one-year periods.

And this is what Sensex did in these one-year periods:

Sensex Rolling 1 Year Returns 2018

And here is the graph of these returns (since 1997):

Sensex Rolling 1 Year performance 1997 2018

If you study the graph carefully, you will find interesting things.

Some 1-year periods have seen returns of more than 75%. But there are also periods of major cuts (like the early 2000s and 2008-2009).

Now one obvious thing to note here is that when rolling returns are low for some time, then chances are high that rolling returns will increase in near future (as can be seen in sharp up moves after low returns in the above graph).

You might see it from the PE-lens of investing more at lower PEs or investing more when Returns in last few years haven’t been good.

I leave it up to you to draw out your own conclusions.

Another important point to note here is that these graphs and tables are based on Sensex levels. It does not reflect the impact of dividend reinvestments. The index that captures ‘dividend reinvestments’ is called the Total Returns Index (TRI). So basically, Total Returns Index or TRI is Sensex including Dividends.

Now 2018 didn’t turn out to be a very good year for most market participants (after 2017 being a really good one).

But for long-term investors, a year of low returns would bring in a lot of opportunities if we are observant enough. And I am not just talking about index levels here. Even individual stocks offer various opportunities by oscillating between their 52-week highs and lows.

As for 2019, there is no point in predicting what will happen.

So let’s not rush and instead, wait for another 365 days to see how next year’s Sensex annual returns turn out to be. I am sure we will have interesting data to add to the Sensex return history soon.

Note – If you want a similar analysis for Nifty annual returns, then do check out Nifty 50 Annual Returns Analysis (20+ years).

Large cap Nifty Stocks available at deep discounts

On 25thNovember 2011, Nifty closed at 4710 – A level 26% lower than highs of 2007-2008 and 2011. So does it mean that all 50 stocks that make the index are following a similar trend?
Before answering this question, I would like you all to know that Nifty is made up of stocks of 50 companies representing 24 important sectors of Indian economy. All these stocks have different weights. And for all practical purposes, the index can be considered to be a good enough representative of stock markets.
NSE itself provides a lot of information about Nifty like Full list of constituents, calculation methodologies, etc. for retail investors.
I did some quick calculations to see how individual Nifty stocks were placed with respect to their 2007-2008 & 2011 highs –
Nifty Stocks 2008 2009 Lows
Nifty Stocks – Discounts to their 2008 & 2011 highs
As evident, shares of companies like RCom (Reliance Communications) are down 92% & 66% from their highs of 2008 & 2011. RCom, because of various negative reasons may not be the best stock to evaluate. But this small analysis also throws up some interesting insights about other large caps –
  • Sterlite Industries – According to a few, another Reliance in making, is down 68% & 58% 
  • Tata Steel is down 64% and 50% 
  • BHEL is down 54% & 50% 
  • Reliance Industries – Bellwether of Indian stock markets, sitting on a cash pile of more than 16 Billion Dollars, generating cash of around a Billion Dollar every quarter is down a staggering 54% from its 2008 highs and 35% from its 2011 highs! 
So what should an average investor do after witnessing shares of mighty and blue chip companies fall like nine pins?
  • Long term investors should understand that though index is down around 25%, good individual stocks like Reliance Industries, Tata Steel, SAIL & State Bank of India are down more than 60%. And these are not small or mid caps; these are full-fledged large caps!
  • This analysis does not suggest that there won’t be any further fall in these scrips. 
  • It makes sense for long term investors to continue with their SIPs in good mutual funds or index funds. Also investor should start selectively buying these large cap stocks, which score high on sustainability parameter and have visibility in revenues/profits.



200 Day Moving Averages (200DMA) Based Investments – 5 Years CAGR

In the previous post, I analyzed returns on investments based on 200DMA and how such investments performed over 3 year periods. This post is an extension of the thought with only change being the increase in evaluation period from 3 years to 5 years.
Just to remind everyone, 200DMA is calculated by taking the arithmetic mean of all values in consideration (Stock prices, index levels) in last 200 trading sessions (40 weeks). Before going forward, I would recommend that you get a basic understanding of how to calculate 200 Day Moving Average & how to calculate CAGR
You can easily find data for last 20 years on NSE’s or BSE’s website. Similar to that in previous post, a comparison of 5 years compounded annual growth rate (5Y-CAGR) was made against the index’s distance from 200DMA.
200 Day Moving Average Returns 5 Year
Correlation | Investing based on 200DMA & 5 Year Returns (CAGR)
The blue portion indicates index’s level (+/-) from its 200DMA. For example, in region marked P, index was trading at levels 20% lower than its 200DMA.
The red portion indicates returns over a 5 year period on CAGR basis.
A few interesting results that can be seen from the graph are –
  • In regions marked P, Q, R, S, & T, the index was trading 20% lower than its 200DMA. And as red graph in these regions indicates, returns have always been in positive territory.
Possible Deduction: Chances of your investments earning a positive return are more if you invest at times when index is trading at a discount of 20% or more to its 200DMA.

  • Region A (i.e. Year 2000-2004) is a possible outlier in this analysis. During this period, India was in long term secular bull market and as evident from the graph, relation between 5Y-CAGR and distance of index from its 200DMA is not evident. Returns continue to be positive even though Distance from 200DMA continuously switches between positive and negative territories.
This 5-Year analysis and a similar 3 year analysis done previously reveal that if an investor is ready to invest in markets trading at large discounts to their 200DMAs, probability of earning positive returns over long terms is quite high.

Though 200DMA is generally considered as a tool to be used by traders, it can very well be a potent tool in the hands of a long term investor who wants to time his entries in the market.

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200 Day Moving Averages Based Investments – 3 Year CAGR

200 Day Moving Average (or 200DMA) is a popular ‘weapon’ found in every technical analyst’s or a trader’s toolbox. And surprisingly, it is one of the very few technical analysis tools that are easily understood by those who don’t respect technical analysis, i.e. even a fundamental analyst understands the importance of 200DMA


How To Calculate 200DMA

200DMA is calculated by taking arithmetic mean of all values in consideration (Stock prices, index levels) in last 200 trading sessions (40 weeks). 200DMA is generally used to assess long term trends. Another tool regularly used by traders to assess short term trends is 50DMA. Generally, a stock trading above its 200-day moving average is said to be in an uptrend and is being accumulated; one below it is in a downtrend and is being sold. (Learn how to calculate CAGR)

200DMA & 3 Year Returns

To find out whether there is a correlation between Investing based on 200DMA and returns obtained over a period of 3 years, I analysed Nifty’s data of last 20 years.

A comparison between 3 year CAGR and index’s distance from its 200DMA was made.

200 Day Moving Average 3 Year Returns
Correlation | Investing based on 200DMA & 3 Year Returns (CAGR)
The red portion indicates index’s level (+/-) from its 200DMA. For example, in region marked P, index was trading at level which was 20% lower than its 200DMA. The green portion indicates returns over a 3 year period on CAGR basis.

A few observations from above graph are –
  • Regions marked A, B, C, D & E had Nifty trading at level 20% (+) above its 200DMA. And as green graph shows, returns obtained in all 5 regions have been negative. As of now, discussion on region F is being left out intentionally.
Possible Reason: Chances of your investments earning a negative return are more if you invest at times when index is trading at a premium of 20% or more to its 200DMA.
  • In regions marked P, Q, R, S and T, Nifty has been trading at level 20% (-) below its 200DMA. And as green graph shows, returns obtained in all 5 regions have been positive.
Possible Reason: Chances of your investments earning a positive return are more if you invest at times when index is trading at a discount of 20% or more to its 200DMA.
  • It is assumed here that investor is investing in index as a whole using an index fund or something similar. Similar graph drawn for individual stocks may show different results depending on sector’s business cycles.
  • Region F (i.e. Year 2000-2004) is an outlier in this analysis as during this period, India was in long term secular bull market and as evident from graph, relation between 3Y-CAGR and distance of index from its 200DMA is not evident. Returns continue to be positive even though distance from 200DMA oscillates between positive and negative.
This small but interesting analysis shows that though 200DMA is generally used by traders, it can be a handy tool in hands of a long term investor as well. On broad levels, it actually helps investors understand the general direction of overall markets. 

It is therefore advisable that one should always have a look at a stock’s 200DMA before investing in it.

You can read a similar analysis where 5 year returns were investigated for having a correlation with investments based on moving averages.

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