[email protected],000 points and Some Basic 5th Standard Maths That Some Journalists Still Need to Learn

Early morning today, the BSE Sensex, India’s most popular stock market index crossed 50,000 points during intra day trading.

Not surprisingly, this led to the bubbly being opened on the social media and business TV. These are celebrations which will be carried into the newspapers appearing tomorrow morning. This is hardly surprising given that every time the Sensex has crossed one of these major landmarks, the media has gone crazy celebrating it.

And I don’t have a problem with it, given that the media is in the business of cashing in on good sentiment or to put it more precisely, creating good sentiment and then cashing in on it. The days of what bleeds that leads, are long gone.

One of the ways of celebrating is through graphics and data. One such graphic was shared by the Twitter handle of Business Today. It basically plots the number of days the Sensex has taken over the years to move 10,000 points in the upward direction.

Hence, it plots the number of days, the Sensex took to cross the first 10,000 points, then move from 10,000 points to cross 20,000 points and so on, and finally, to move from 40,000 points to cross 50,000 points.

This is how it looks like.


Looking at the above chart, Business Today concludes that the Sensex moving from 40,000 points to crossing 50,000 points has been the fastest, as it has happened in just 415 days. This, as we can see, is the least number of days. The next fastest was between 10,000 points and crossing 20,000 points, which took 432 days, which is seventeen days more.

Yay, and that is a cause for huge celebration. Okay, Business Today, didn’t say that, I added it.

During the course of my nearly 18 years of writing for the business media, I have seen a lot of stupid charts and data being used to make a point, but this takes the cake.

Why? Simply because it doesn’t take fifth standard percentages into account.

The BSE Sensex is an index. Every index has a base value. The base value of the BSE Sensex is 100. So, when the BSE Sensex first rose from 100 points to 10,000 points in 5,942 days, it meant a rise of 9,900 points or 99 times the original value of 100 or 9900%.

In comparison, the rise between 40,000 points and 50,000 points is just 25%. So, what are we really comparing? Who are the editors clearing such graphics? Why are people being misled on such simple data points?

The question is how do we analyse this properly. The right way to do this is look at the average jump in percentage terms per trading session, in each bracket. So how do we calculate this? The Sensex moved up 9,900% in 5,942 sessions, when it crossed the first 10,000 points. Hence, it moved around 1.67% per trading session on an average (9,900% divided by 5,942 trading sessions), during the period .

Further, the Sensex moved 25% in 415 sessions, when it moved from 40,000 points to cross 50,000 points. Hence, it moved 0.06% on average per trading day (25% divided by 415 trading sessions), during the period. So, the movement of the Sensex between 40,000 points to crossing 50,000 points has been much slower than crossing the first 10,000 points.

Here is how the proper chart looks like.


What does this tell us? It tells us that the first 10,000 points were achieved the fastest. This was followed by the movement between 10,000 points and 20,000 points, where the average gain was 0.23% per trading session. The movement between 40,000 points and 50,000 points at 0.06% per trading session comes third.

Sorry for belabouring on this rather basic point but I get really irritated when people use mathematics and data to mislead, sometimes not even knowing that they are misleading.

[email protected],000 – How RBI Played a Part in Creating the Stock Market Bubble

The BSE Sensex, India’s premier stock market index, crossed 50,000 points today in intra day trading. It has risen by more than 80% from around the end of March, when it had fallen to 27,591 points, in the aftermath of the covid pandemic hitting India.

This astonishing rise has now got the Reserve Bank of India (RBI) worried. The RBI Governor Shaktikanta Das, writing in the foreword to the latest Financial Stability Report, pointed out:

“The disconnect between certain segments of financial markets and the real economy has been accentuating in recent times, both globally and in India.”

People who run central banks are not always known to talk in simple English. Das is only following tradition here. The statement basically refers to stock prices. Das feels they have risen too fast in the recent past and have become disconnected from the overall economy.

While the overall Indian economy is expected to contract this year, the stock market has rallied by more than 80%. How is this possible? Or as you often get to hear these days, if the economy is doing badly, why is the stock market doing so well.

Theoretically, a possible explanation is that the stock market discounts the future and the stock market investors think that the future of the Indian economy is bright. Another explanation offered often by the stock market investors is that corporate profits this year have been at never seen before levels.

But even after taking these reasons into account, the current high level is really not justified. As Das put it in his foreword: “Stretched valuations of financial assets pose risks to financial stability.” One way to figure out whether valuations are stretched is to look at the price to earnings ratio of the stocks that constitute the Sensex index.

In January 2021, the price to earnings ratio has been at around 34. This means that investors are ready to pay Rs 34 as price, for every rupee of earning of the companies that make up for the Sensex. Such a high level of the price to earnings ratio has never been seen before. Not even in late 2007 and early 2008, when stock prices rallied big time or the first half of 2000, when the dotcom bubble was on.

Clearly, stock prices are in extremely bubbly territory. The current jump in corporate earnings isn’t sustainable for the simple reason that corporates have pushed up earnings by cutting employee costs as well as raw material costs. This means the incomes of those dealing with corporates from employees to suppliers and contractors, have fallen.

This fall in income has limited the ability of these individuals to spend money. This will lead to lower private consumption in the months to come, which, in turn, will impact corporate revenues and eventually profits. A sustainable increase in profits can only happen when people keep buying things and corporate revenues keep going up.

This brings us back to the question as to why stock prices are going up, when the overall economy is not doing well. A part of the reason is the RBI, though the central bank, rather expectedly, glosses over this totally in the latest edition of the Financial Stability Report.

Since February 2020, the RBI has pumped in a massive amount of money into the financial system through various measures, some of which involve the printing of money. By flooding the financial system with money, or what central banks refer to as liquidity, the RBI has ensured that interest rates in general and bank deposits in particular, have fallen.

The idea here is threefold. A drop in interest rates allows the government to borrow at lower interest rates. This became necessary because thanks to the pandemic, the tax collections of the government have dropped during this financial year. Between April and November 2020, the gross tax revenue stood at Rs 10.26 lakh crore, a drop of 12.6% in comparison to the same period in 2019.

Secondly, lower interest rates ensured that the interest costs of corporates on their outstanding loans, came down. Also, the hope was that at lower interest rates, corporates will borrow and expand.

Thirdly, at lower interest rates, the hope always is that people will borrow and spend more, and all these factors will lead to a faster economic recovery.

But there is a flip side to all this as well. A fall in interest rates has got people looking for a higher return. This has led to many individuals buying stocks, in the hope of a higher return and thus driving up prices to astonishingly high levels.

This can be gauged from the fact that in 2020, the number of demat accounts, which are necessary to buy and sell stocks, went up by nearly a fourth to 4.86 crore accounts. One of the reasons for this is the rise of Robinhood investing in India. This term comes from the American stock brokerage firm Robinhood which offers free online trading in stocks. India has seen the rise of similar stock brokerages offering free trading.

What has added to this is the fact that many unemployed individuals have turned to stock trading to make a quick buck. All it needs is a smartphone, a cheap internet connection and a low-cost brokerage account.

Of course, this search for a higher return isn’t local, it’s global. Hence, foreign institutional investors have invested a whopping $31.6 billion in Indian stocks during this financial year, the highest ever. This stems from the fact that Western central banks, like the RBI, have printed a huge amount of money to drive down interest rates.

This has pushed more and more investors into buying stocks despite the fact that the global economy isn’t doing well either.

A slightly different version of this column appeared in the Deccan Herald on January 17, 2021. It was updated after the Sensex first crossed 50,000 points during intra day trading on January 21, 2021.

Why is the stock market going up when the economy is going down?

The total collections of the goods and services tax (GST) between March and July stood at Rs 2.73 lakh crore. This is 34.5% lower than what the government earned during the same period in 2019.

The stock market index Nifty 50 has rallied by 53% to 11,648 points between March 23 and August 28. It had touched this year’s low of 7,610 points on March 23.

So, what’s the point in comparing the Nifty 50 with GST collections? The GST is basically a tax on consumption. If the GST collections are down by more than a third, what that basically means is that private consumption is down majorly.

When consumption is down, the company earnings are bound to take a beating. Take the case of two-wheelers and cars. When people don’t buy as many of them as they used to, their production takes a beating. When that happens, it has an impact right down the value chain. It means lower production of steel, steering, glass, tyres, etc. A lower production of tyres means a lower demand for rubber.

A lower production on the whole means lower demand for power. Industrial power largely subsidises farm power and home power (where power is stolen). If industrial power consumption goes down, the losses of state electricity boards go up. When this happens, their ability to keep paying power generation companies goes down. When these companies don’t get paid, they are in no position to repay loans they have taken from banks. So, the cycle works.

Many people buy two-wheelers and cars on loans from banks and non-banking finance companies. When the buying falls, the total amount of loans given by banks also comes down. When banks don’t get enough loans, they need to cut the interest rate on their fixed deposits.

When this happens, people who are saving towards a goal, need to save more. This means they need to cut down on their consumption. Further, people who are largely dependent on interest from bank deposits will see their incomes fall. This means they need to cut down on their consumption as well.

This cycle will also lead to a fall company earnings. A Business Standard results tracker for 1,946 companies reveals that the sales of these companies for April to June 2020 were down 23.1% in comparison to the same period in 2019. The net profit for these companies was down 60.8%.

The stock market does not wait for things to happen. It discounted for this possibility and the Nifty fell by 32.1% between end February and March 23. The market was adjusting for an era of falling company earnings. But it didn’t stay at those low levels and has rallied by more than 50% since then.

The trouble now is that the valuations are way off the chart. The price to earnings ratio of the Nifty 50 index, as of August 28, stood at 32.92. This means that investors are ready to pay close to Rs 33 for every rupee of earning for stocks that make up the Nifty 50 index. Such a level has never been seen before. Not during the dotcom bubble era and not even during early 2008 when the stock market rallied to its then highest level.

Why has the stock market jumped as much as it has? Does this mean that the company earnings will jump big time in the near future? Not at all. The covid-induced recession is not going to go anytime quickly. Also, the pandemic is now gradually making its way into rural India.

So, why is the stock market rallying? The Western central banks led by the Federal Reserve of the United States, the American central bank, have printed a lot of money post February, in order to drive down interest rates and get people and businesses to borrow and spend. The Federal Reserve has printed more than $2.8 trillion between February 26 and August 5. Some of this money has made it into India.

During this financial year, the foreign institutional investors have net invested a total of Rs 83,682 crore into Indian stocks, after going easy on investing in India over the last few years. This is clearly an impact of the easy money policies being run in much of the Western world.

Further, the participation of the retail investors in the stock market has increased during the course of this year. Between December 2019 and June 2020, the number of demat accounts has gone up by 39 lakhs or 10% to 4.32 crore accounts. In fact, between March end, after a physical lockdown to tackle covid was introduced, and up to June, the number of demat accounts has gone up by 24 lakhs.

The latest monthly bulletin of Securities and Exchange Board of India, the stock market regulator, points out: “We have seen a huge surge in participation of retail investors in the equity market in the last few months. The fact that there is also a surge in opening up of demat accounts suggests that many of these retail investors are perhaps first time investors in the stock market.”

With after tax return on bank fixed deposits down to 4-5% when inflation is close to 7%, these investors are coming to the stock market, in search of higher returns.

The question is, with the stock market at all time high valuations, will their good times continue? Or once the dust has settled, is another generation of investors ready to equate stock market investing to gambling? On that your guess is as good as mine.

This article originally appeared in the Deccan Herald on August 30, 2020.

The RISK of RISK of Investing in Stocks, which OPIUM Managers Don’t Talk About

Summary: Just because you have taken on a risk by investing in stocks, doesn’t mean high returns are going to materialise.


The only function of economic forecasting is to make astrology look respectable –
John Kenneth Galbraith.

It was sometime in October-November 2010. I had just joined a weekly personal finance newspaper, which for reasons I did not understand and for reasons above my paygrade, was to be run out of Delhi.

During the course of one editorial meeting, we had to decide what sort of return would systematic investment plans (SIPs) into equity mutual funds generate over the next decade. This was necessary as a part of a regular feature to be published in the newspaper, which would help a featured family come up with an investment-savings plan.

It was assumed that SIPs into equity mutual funds would generate 15% per year return. I protested against the assumption saying that 15% per year return was way too high but was overruled by the Delhi bosses.

At that point of time it had almost become fashionable to say that the stock market generates 15% return per year in the long term (In fact, there are people who still believe in this myth, which I shall write about in detail in the time to come).

Getting back to the point. We are now in 2020. 10 years have gone by. As I pointed out in a piece yesterday, the SIP returns on index funds have been rather subdued over the last decade. The average per year return over the last decade in case of the three Nifty index funds I checked was slightly over 9% (around 9.17% to be very precise). Index funds are funds which have a mandate to invest money in stocks that make up a stock market index, in the same proportion that they do.

The per year return of a little over 9% was nowhere near the assumed 15% per year return. Let’s say an individual had invested Rs 10,000 per month religiously through the SIP route for ten years. On this if he had earned a return of 15% per year, the value of his portfolio at the end of 10 years would be Rs 27.5 lakh.

If the return was 9.2% instead as it actually turned out to be, the value would be around Rs 19.6 lakh or around 29% lower. If the individual was saving towards a certain goal, he would end up way short. But that’s the rather obvious point here.

The question is how did the market narrative of stocks giving 15% return in the long-term come about? The first time I heard this 15% argument being made with a lot of confidence by marketmen was sometime in late 2006 or perhaps early 2007.

This, after the Indian economy had grown by greater than 9% in real terms for three consecutive years, 2004 to 2006. The zeitgeist or the spirit of the times that prevailed was that come what may India will now grow by at least 8% in real terms. Add an inflation of 5-6% on top of that and we will grow at 13-14% in nominal terms, year on year.

Assuming that the earnings of companies which are a part of India’s premier stock market indices would grow a tad faster than the nominal growth, we arrived at 15-16% year on year growth in earnings.

This would be reflected in stock prices growing by 15-16% per year as well. From here came the assumption, the stock market growing at 15% in the long-term. There is a lot more to this assumption including Sensex returns from 1979 on, but I will leave that for another day. For the time being knowing this much is fine.

In fact, over the years, I have seen this logic being offered by people who make their money in the stock market by managing other people’s money or OPM or even better OPIUM, with great conviction. These tend to include fund managers, analysts, traders, salespeople etc. (Oh, if you still didn’t get it, OPM and OPIUM sound the same. Rather childish, but good fun nonetheless). Those in the business of managing OPIUM really believe that stocks give 15% per year return over the long-term (I even wrote a piece on this titled Why Economic Growth Cannot Be Created on an Excel Sheet. You can read it here).

The trouble is that this assumption has turned out to be all wrong. The earnings growth has been nowhere near what the OPIUM managers have been projecting. This is reflected in the 10-year return on stocks, which as of August 20, 2020, stood at 8.7% per year (based on the Nifty 50 Total Return Index, which takes dividends paid by companies into account as well, unlike the normal index).

The funny thing is that the stock market has delivered a return of just 8.7% per year over the last decade, despite the valuations being at all time high levels. The price to earnings ratio of stocks that comprise the Nifty 50 index is around 32 these days. This basically means that for every rupee of earnings for these stocks, the investors are ready to pay thirty-two rupees as price. As I pointed out yesterday, such high valuation has never been seen before.

And despite such a high valuation the decadal per year return on stocks on an average is less than 9% per year. This is the irony of it all. It also makes me wonder why investors think that the stock market is doing well. Yes, it has done well in comparison to where it was in late March 2020, but clearly not otherwise.

Of course, when the OPIUM managers talk about 15-16% return per year from stocks over the long-term, they also highlight the fact that for higher return a higher risk needs to be taken on by the investor. The higher risk is the risk of investing in stocks for the long-term.

But what they don’t talk about is the fact that just because you are taking the risk of investing in stocks for the long-term, doesn’t mean that higher returns are going to materialise. I would like to call this, the risk of risk of investing in stocks, something which most OPIUM managers don’t seem to talk about.

The question is why does this happen? The answer lies in the fact that OPIUM managers are in the business of driving up assets under management for the firms that they work for. More the money that gets invested in a fund, the higher the fee earned by the firm to manage that money. And in this business of soliciting money, you need to sound confident.

The moment you start getting into nuance about high risk not guaranteeing high returns, you start losing the average prospective investor. Hence, the projection of confidence that the prospective investor is looking out for, leads to simplistic one-line market narratives like stocks will definitely give a 15% per year return, over a decade. Such narratives are easier to sell.

In a world full of complex uncertainties, the prospective investors are looking for certainty and those in the business of managing OPIUM can’t consistently project confidence to tackle the complex uncertainties, unless they believe in stocks giving 15% per year return in the long-term, themselves. This is the con of confidence which fools people on both sides.

The trouble is such narratives hurt. As  economists John Kay and Mervyn King write in Radical Uncertainty – Decision Making For an Unknowable Future: “Markets narratives are occasionally ‘dishonest and manipulative’, but normal people make honest use of narratives to understand their environment and guide decisions under radical uncertainty.” (King and Kay’s book is a terrific read though not a breezy one. Highly recommended).

This is not to say that one should not invest in stocks and invest all our money in bank fixed deposits. Not at all.

All I am trying to say is that just because you have taken on the risk of investing in stocks, doesn’t mean higher returns are going to materialise and which is why it’s called risk in the first place. So, you might end up short on the corpus you were trying to build (assuming you are trying to do this in a systematic way).This is something that needs to be kept in mind while investing in stocks either directly or indirectly through mutual funds. This is the risk of risk of investing in stocks. While all mutual fund ads have a disclaimer at the end saying that mutual fund investments are subject to market risk, nobody really explains to the investor what exactly this market risk is.

The economist Allison Schrager makes this point in the context of saving for retirement in her brilliant book An Economist Walks into a Brothel—And Other Unexpected Places to Understand Risk. The conventional wisdom is that when it comes to saving for retirement it makes immense sense to build up as large a retirement corpus as possible and then spend it at the rate of, say 4%, per year, after retirement.

The problem with this strategy is that 4% per year isn’t really a fixed amount. It depends on the retirement corpus one has been able to build up in the first place. And that in turn depends on how the stock market has been doing. As Schrager writes: “That’s where the strategy goes wrong.”

One way of getting around this problem is that in the years approaching retirement you take your money out of stocks and invest it in fixed income investments, everything from bonds to fixed deposits. This mitigates the risk to some extent but not totally.

What if the stock market is not doing well in the years before retirement? What do you do then? Do you continue staying invested in the stock market in the hope that it recovers, and you build a better corpus? What if it doesn’t?

That’s the risk of it all. At the cost of repeating just because you have invested in stocks and taken on a higher risk doesn’t mean higher returns are automatically going to materialise.

To conclude, it is important that as a stock market investor you realise this, irrespective of whether the OPIUM managers communicate this or not.

Stay safe and enjoy the weekend.

Will see you now on Monday (or perhaps Tuesday, depending on what my brain throws up over the weekend).

Disclaimer: This article is meant for educational purposes only.