How to Make Money in Stock Markets?

The idea of making money overnight is what brings most people to stock markets. However, its easier said than done. Making money in markets is not easy. No matter what anybody (me included) tells you, it is not easy. But it is also not impossible if you have the common sense to understand one simple concept.
I know the title of this post sounds spam-like. But its not, I swear. 🙂

Make Money in Stocks

Now stock market is a volatile place. If you have been in markets for last few years, then you will agree with me on this. And if you are new in market, then you will agree with me pretty soon. 🙂
Many people believe that just because they can easily calculate CAGRs using excel calculators, markets will respect their efforts and only move up or down in straight lines. But I am sorry to disappoint. This notion is as wrong as the idea of Sun rising in West. Markets never go up or down in straight lines. Never.
So then why are stock markets volatile?
Why is it that many times, markets suddenly fall by 5% or maybe 10%?
Think of it like this…
All companies exist to make money for their owners (investors). So a company needs to make money to exist. But nobody actually knows how much money a company can make in future. And all those who claim to know are only referring to their opinions and projections about it. Now everyday, on basis of these opinions and projections, lacs of people buy and sell stocks of these companies. Those buying feel that they have got a good deal and those selling feel that they have got a good deal. But in real world, both cannot be right simultaneously. 🙂
This constant buying and selling is what makes the market do up and down… When either of two (buying/selling) increases many times of other, markets either crash or go through the roof. This is what makes markets volatile.
This volatility is exactly what makes market, an ideal place to make truckloads of money. But only if you have the patience to wait and the courage to invest when things are worth investing.
You may ask…
When are markets worth investing?
The answer, atleast for long term investors is that when markets are cheap.
You might feel that it is quite easy then. After all, there are many indicators that tell when markets are overvalued or undervalued. Isn’t it?
True. But as Buffett famously said, Investing is simple, but not easy.

So the right question to ask here is…
When are markets reallyworth investing?
Ofcourse, you won’t get such opportunities regularly. May be you will get such chances only 3 or 4 times in your life. But that is what real successful investing is all about.
Talking of volatility reminds me of an interview held in India, where Warren Buffett said:
If you look at the typical stock on the New York Stock Exchange, its high perhaps, for the last 12 months will be 150% of its low. So they’re bobbing all over the place. All you have to do is sit there and wait until something is really attractive that you understand.
Now this quote made me curious.
I know that individual stocks do ‘bob around’ a lot and can be quite volatile. But even if we were to consider broader markets, it can be quite volatile within short periods like 1 year.
This short-term volatility offers tremendous opportunities to investors to build long-term positions, even at broader market levels.
Now I tried to evaluate Indian markets from the lens of Buffett’s High/Low wisdom. Also, instead of choosing individual stocks and complicating this analysis, I picked our bellwether index Sensex, whose data was easily available here.
And this is what I found…

India Stock Market Volatility
Buffett is right. Even for Indian markets. As you can see, even indices are volatile in line with his statement. Though high/low volatility seems to have decreased since 2010, stock markets are still volatile enough for us to contemplate about it with all seriousness.
Volatility is not just important for long term investors. Even short-term traders understand its importance and make a career (and at times, fortune) out of it!
Have a look at the High/Low gaps in table above. Its clear that markets give numerous opportunities, even on an annual basis. You just need to have the patience to wait for the right opportunity. You can use market’s volatility as your friend.
John Huber of Saber Capital Management (Base Hit Investing) says,

There is no logical way to explain why large, mature businesses can fluctuate in value by 50% on average in any given year. It makes no sense that the intrinsic values of large mature businesses can change by tens of billions of dollars in a matter of months—and this dramatic price fluctuation occurs on a regular basis—in fact, every year.
Lets take an example of the year 2014. The high and low for Sensex in that year were 28,822 and 19,963 respectively. So that means that yearly-high of Sensex was 44% higher than its yearly-low.
This begs the question:
Are the 30 largest Indian businesses really 44% more valuable than they were just few months earlier?
Unlikely.
Though in hindsight, its obvious that due to the euphoria around installation of new government at centre, government’s underestimation of economic problems and people’s overestimation of new government’s ability to solve those problems, market behaved in such an irresponsible (!) manner.
But this is how markets function – they first overestimate and then underestimate.
Pick data for any year and trend remains same. And so does our question:
Are the 30 largest Indian businesses really XX% more valuable than they were just few months earlier/later?
Answer this time too, remains same – Unlikely.
And mind you, we are talking about (averages of) 30 largest Indian companies and not even small companies having comparatively unpredictable businesses. If we were to choose smaller companies, my guess is that their values will fluctuate even more.
Again quoting John Huber here, greater volatility brings greater opportunity for investors as the more a stock fluctuates around its true value, the larger the potential gaps are between price and intrinsic value.
Obviously this list [above] tells us nothing about the intrinsic value —only that the prices fluctuate widely. But it should be fairly obvious that prices are fluctuating much more than intrinsic values—which provides us with opportunity.
So be sure of this – markets are volatile and will remain so. This is the nature of market. It will not change. And understanding the nature of market is the key to have the confidence that you are not doing anything stupid. This confidence will allow you to invest large amounts when markets are down and others are selling out. This is when you will make some real money.
Talking of building confidence, I leave you with words of a financial blogger Pete (of MMM) that exactly voices my thoughts about stock markets:
It’s worth gaining this confidence, because investing knowledgeably in stocks has always been the single best thing to do with your money in terms of getting lifetime income with absolutely no effort on your part.

Where else can you hire people to work for you and you own their companies.

🙂

So embrace volatility and make money in stock markets.
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No. Stock Markets Never go Up Straight.

Stocks Markets Never go Up Straight
If you think you are a long-term investor, then here is the truth – Its not easy.

Just calling yourself a long-term investor is easy. But being one, year after year, for a decade or two, is not easy. Period.
The problem with markets is that it does not know that you are investing your hard earned money in it. It does what it does best. And that is – be volatile.
Just look at the following graphs:
Period 1: A fall of 20%-25% in about 6 months
Indian Markets 2003 2004
Period 2: A fall of more than 20% in less than 2 months
Indian Markets 2006 Fall
Period 3: A fall of more than 50% in less than 15 months

Indian Markets 2008 Crash

Period 4: This is recent one. A fall of about 15% in less than 6 months.

Indian Markets 2015 Fall

This is how the markets operate. There can be some really volatile moves that can throw everyone off balance.

At times, falls are small – 10%, 15% – types.

But at times, these falls can be as much as 30% or even 50%!
Just think about it. How would you have felt when your portfolio was worth Rs 50 lac at the end of 2007 and fell to almost Rs 25 lacs by early 2009?
Horrible might be an understatement. Seeing your hard earned money evaporating in front of your eyes is not easy. It’s painful.
Your faith in equities would have been shaken.
It’s even possible that your family might have turned against investing after such a fall in your portfolio.
This is real long term investing my friend.
It comes with its share of unbearable pains and temporary losses in short term. It will test your patience. It wants to test your mettle. It wants to see if you have the heart* to follow through when the going gets tough.
* I would have used the word ‘need’ here. But thats an obvious thing. There is ofcourse a need to invest for almost everybody.
But in long term, the general trend remains up.
Combine all the above graphs and this is what you get:
Indian Stock Markets Long Term
Looks like a decent upmove in last 15 years. Isn’t it?
But it’s easy to look at above graph and say that markets ‘will definitely’ move up in long term. It’s a different ball game altogether to remain invested during severe falls and be brave enough to buy more.
So if you feel that Dev is saying that 12% CAGR for next 15 years will make you a Crorepati, then you need to be cautioned a little.

This 12% is the AVERAGE. It does not mean that you money will grow exactly by 12% every year. That is how averages work.
In fact, a very successful long-term investor Howard Marks once quoted:
Never forget the 6-foot tall man who drowned crossing the river that was 5 feet deep on average.
Do not forget that the range of depth of the river can be between 2 and 10 feet. 🙂
Same is the case with markets.

A 12% average expected returns means that there might be a sequence of returns like one below:
+20% : -15% : +7% : -35% : + 20% : +40% : + 15% …..and so on.
The average of such a sequence might mathematically result in a CAGR of 12%.
Markets will never do something like this:
+12% : +12% : +12% : +12% : +12% : +12% : +12%…..
So just because markets have been doing great in recent past, don’t start thinking that it will go up in a straight line in future too. It will fall and it will rise.
The markets overestimate and then underestimate. This leads to over-reactions and then to reversion back to means.
It is very important to understand that markets don’t just go about in straight lines. Neither up nor down. Every calendar year cannot be an UP year. Infact at the start of 2015, I am sure that given a 30% rise in 2014, most experts and common investors would have felt that markets (Sensex) will be at 30,000 or 35,000 at end of 2015. The same doesn’t seem to be happening.

Just because markets did well last year does not mean that this year too will be good. Infact, statistically speaking and using the concept of mean reversion, chances of having a bad year after a good year is quite high. So don’t give too much weightage to short-term fluctuations.

You are a long-term investor and your job is to stay invested. Over the long-term, the markets reward discipline. So keep calm. Don’t start taking action just because you are bored and not getting a 12% return this year. Don’t be fooled into taking unnecessary actions.

Can You Predict Stock Market Movements? The Answer Might Surprise You

Isn’t this we always wanted to do? Correctly predicting stock market movements? Just imagine what would happen if we were able to do so 90% of the time.

We would become part of a really rich community of people.

Till today, and most probably going forward too, I would continue believing that it’s a waste of time to predict market movements. No one has been able to do it. And no one will be able to do it correctly on a regular basis. Warren Buffett has made a lot of money, but that is not because he is good at predictions. It is because he has some very strong mental systems and processes in place.

But I was just reading an article about political forecasting which made me question my prejudice about predictions. Please beware that I myself have made quite a few predictions in the past. Publically (2013, 2014) and privately. Some have helped me make money and others have taken it away from me. 😉

The question now is that is it possible to have a system for learning from market history that is not only programmed to avoid the most recent mistakes by companies, but also adapt the system to include learnings from current situations? Will we ever be able to push stock market forecasting ‘closer to what philosophers might call an optimal forecasting frontier? That an optimal forecasting frontier is a frontier along which you just can’t get any better.’

Predictions & Stock Markets
Predictions || Can You Do It?
Talking of stock market forecasting, there seems to be a systematic and fake overconfidence in the market forecasters. They think they know a lot more about future than they actually do. And the worst part is, when they say they’re 80 or 90 percent confident, the generally end up being 30-40% correct, which anyways is worse than a simple toss of coin.
But if we dig deeply, it is wrong to think that these people are in business of making accurate predictions. They’re in the business of flattering the prejudices of their base audience and they’re in the business of entertaining their base audience and accuracy is a side constraint. They don’t want to be caught in making an overt mistake so they generally are pretty skilful in avoiding being caught by using vague vocabulary to disguise their predictions. Also, these guys are here to make money at your expense. Period. They want you to trade as often as possible so that they can earn their living.
And I always feel that forecasters who are modest about their predictions are generally ones who have higher accuracy rates.
Coming back to the original discussion, we need to understand that to have a system of predicting with acceptable levels of accuracy, the big question is how to go about designing such a system? It would be a bad idea to take the best forecaster and submit his forecast’s as a system’s forecast. The system needs to be statistically more stable. Then the question arises as to how can one combine n number of individual predictions to become a part of an intelligent system? Can crowd’s intelligence be used to predict something as volatile as stock market movements?
A famous story will help you better visualize this concept of crowd intelligence –
There was a country fair in which 500 to 700 fair goers make a prediction about the weight of an ox. The estimated average prediction was 1,100. The individual predictions were between 300 and 8,000. Now when outliers were removed, the average came out to 1,103 and the true answer was 1,102. The average was far more accurate than all of the individuals from whom the average was derived.
Stock Market & Crowd Intelligence
Crowd Intelligence || Can We Predict Something, Together?
Personally, I am quite confident that it is highly unlikely that such a system can be made anytime soon. I have been a proponent of a small system of evaluating overall market valuation by using P/E Ratio, P/BV Ratio and Dividend Yields. But this one particular approach can just be one spoke of a larger ‘complete’ system of predicting. And who knows that the system being discussed might also use some technical indicators like 200 Day Moving Average.
But for now, enough of this academic discussion. I will keep you posted in case I am able to design such a system 🙂
Let’s leave with what father of Value Investing, Benjamin Graham has to say about predictions. And I can bet that after you have read what is written below this sentence, you would feel that whatever you have read till now does not make any sense. 🙂
“The investor can scarcely take seriously the innumerable predictions which appear almost daily and are his for the asking. Yet in many cases he pays attention to them and even acts upon them. Why? Because he has been persuaded that it is important for him to form some opinion of the future course of the stock market…. If you, the reader, expect to get rich over the years by following some system or leadership in market forecasting, you must be expecting to try to do what countless others are aiming at, and to be able to do it better than your numerous competitors in the market. There is no basis either in logic or in experience for assuming that any typical or average investor can anticipate market movements more successfully than the general public, of which he himself is a part.”

Do share your thoughts / predictions…
______

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).