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Sensex @ 40,000 is Here!

“You’ve got to be careful if you don’t know where you’re going, ‘cause you might not get there.” ~ Yogi Berra

“The Golden Era Begins. Sensex target – 40000 by March 2017.”

This is not my prediction but one from a leading private sector bank’s investment advisory group. I received this report in my email yesterday, and haven’t stopped giggling reading the headline and the report’s conclusions again and again.

The author of the report states (emphasis mine)…

No no, we are not being very bullish, but are trying to value Sensex on the average multiple of 17x (which was seen in the previous bull run, the highest multiple being 25x 1 yr forward).

As per the Bloomberg consensus estimates the FY17 EPS stands at Rs 2000, we think that the FY18 earnings could grow at 20% for the larger companies if the GDP growth moves towards the 8%-9% mark. Hence, the FY18E EPS is projected at Rs.2400. At 17x FY18E EPS, we get a target of 40800 by March 2017, which we think could be a reasonable target to look for by the investors.

We think that the earnings growth would largely be led by the strong developmental focus of the new government and the multiple rerating would be primarily led by the under ownership of equities by the retail investors.

Sensex Nonsense is Back!
If you read Chapter 3 of Ben Graham’s The Intelligent Investor (which is one book you must read now, in these times of euphoria), the heart of Graham’s argument is that the intelligent investor must never forecast the future exclusively by extrapolating the past.

Unfortunately, that’s exactly the mistake people have made often in the past – whether it was the late 1990s, late 2007, or like we are starting to see now.

Jason Zweig wrote this in his commentary to Graham’s Chapter 3 of The Intelligent Investor

A stream of bullish books followed Wharton finance pro­fessor Jeremy Siegel’s Stocks for the Long Run (1994)—culminating, in a wild crescendo, with James Glassman and Kevin Hassett’s Dow 36,000, David Elias’ Dow 40,000, and Charles Kadlec’s Dow 100,000 (all published in 1999). Forecasters argued that stocks had returned an annual average of 7% after inflation ever since 1802. Therefore, they concluded, that’s what investors should expect in the future.

Some bulls went further. Since stocks had “always” beaten bonds over any period of at least 30 years, stocks must be less risky than bonds or even cash in the bank. And if you can eliminate all the risk of owning stocks simply by hanging on to them long enough, then why quibble over how much you pay for them in the first place?

      

The Sensex @ 40,000 baloney that we are being fed now stinks of the same rot among financial forecasters that got them (and people who bought their predictions) into trouble several times in the past.

Believe me, this time it isn’t any different.

Is the stock market riskier today than 6-12 months ago because prices are higher? The answer is yes. It always has been. It always will be.

Graham warns…

Focusing on the market’s recent returns when they have been rosy will lead to a quite illogical and dangerous conclusion that equally marvellous results could be expected for common stocks in the future.

He adds…

By the rule of opposites, the more enthusiastic investors become about the stock market in the long run, the more certain they are to be proved wrong in the short run.

Thus, beware of this Sensex @ 40,000 nonsense! This has been repeated in the past as well, and you know what it resulted into.

The “Equity Under-Ownership” Joke
One rationale I hear for the Sensex @ 40,000 predictions floating around is that “equity is under owned by retail investors in India”, like what the above-mentioned report also states.

I agree with that statement because equity ownership in India constitutes just about 6% of the total household financial wealth, excluding real estate. This, when compared to the US levels of 45% is very low.

So yes, I agree that equity is under-owned in India compared to its potential as a long-term wealth creation tool.

But this “equity is under-owned and therefore stock markets will rise in the next 2-3 years as more retail investors invest” is a joke.

Ask the experts making such predictions why more individuals and households have not invested in the stock market in the past, and you can expect a blank stare.

The reason more individuals and households in India have stayed away from the stock market is because they have seen their near and dear ones (who ventured into the markets) suffer by way of bad financial advice.

They have seen their friends and relatives lose big time due to trading in and out of stocks, because they were forced by their expert advisors into doing so.

And if history is any proof, retail investors have always entered the stock market when the stock prices were at or near their peak – whether it was 1992, 1999, or 2007 – attracted by the shameless, salesy pitches of brokers and money managers – of “making quick money like others are doing”.

Be forewarned that such people – who are selling you the Sensex @ 40,000 and other similar junk – are out there to steal your wallet…and peace.

What to Expect?
I may be wrong here and the Sensex may actually reach 40,000 or similar such levels. After all, a 15-16% annual rise over the next 3 years will take it there.

A 14-15% growth in real corporate earnings plus a 1-2% dividend yield can cause this annual growth, which can take the index to its predicted number.

Now the big question is – can Indian companies grow their earnings at 14-15% over the next three years?

Of course an increase in infrastructure spending can lead to a higher GDP growth (the reason they have started selling you infra funds!), but this may not necessarily lead to higher corporate profits.

The reason – most Indian industries and companies suffer from excess capacity owing to weak demand in the past few years, and thus only a sharp rise in consumer and corporate demand can wipe out this excess capacity and bring higher profits to companies.

What is more, led by high inflation, a large number of Indian companies are suffering on the debt repayment front. So, they would require a sustainable increase in demand and operating profits to erase their sins from the past.

With inflation unlikely to decline and interest rates unlikely to fall in the near term, the 15% annual rise in corporate profits seems like a distant dream and not something that is easily achievable in the next three years, as the Sensex @ 40,000 predictors are claiming.

Not to forget the other demons like global issues, monsoons, and geopolitical tensions that can cause a lot of these flawless predictions to come to naught (but who cares about these anymore!).

You see, most of us believe we live in a predictable, controllable world, so we turn to authoritative-sounding people who promise to satisfy that need.

The reality is – We live in an unpredictable world. Predictions give us a false sense of security that causes us to take dumb risks.

Also, considering how calamitously wrong the “experts” were the last time they agreed on something, there is no way on Earth I or you should believe them now.

Taking a long term view, buying stocks of well-managed businesses at right prices is a great idea. But speculating in stocks just because someone said “stock market will zoom” or “Sensex will touch 40,000” is dangerous.

It always has been. It always will be.

Stage Four of Cocktail Party Stock Market Indicator?
I recently wrote a post on Peter Lynch’s Cocktail Party Stock Market Indicator. As I read that post again today, I realize that we have probably reached Stage Four.

The reason I say this is because, yesterday at my Investing Workshop in Mumbai, someone mentioned how he is getting stock tips from his office’s housekeeping guy.

In fact, I got a lot of tips from a few participants on stocks I should buy now. 🙂

It wasn’t a cocktail party but an investment workshop. But you still got my point, right?

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.

Comments

  1. R K Chandrashekar says:

    I think it was Warren Buffet, who said that he wouldn’t be bothered if the stock market is shut for 10 years! It has become fashionable to talk of the sensex since that is what people want and that is what is being dished out. We need to blame ourselves- we get what we want!! So while it could be fun watching the ”experts” sprouting their predictions, do your own homework and not be swayed by catchy slogans like 40,000 on the sensex and ” mother of all bull markets”

  2. Reni George says:

    Dear Vishal

    Good Morning to you

    People like predictions,it gives them a sense of satisfaction .I would like to quote Gerd Gigerenzer here

    “Many of us smile at old-fashioned fortune-tellers. But when the soothsayers work with computer algorithms rather than tarot cards, we take their predictions seriously and are prepared to pay for them. The most astounding part is our collective amnesia: Most of us are still anxious to see stock market predictions even if they have been consistently wrong year after year.”

    You see…with just a little bit of twisting in the figures in an excel sheet I can quote the sensex at 50000,that is 20 % more than the target given by the market pundits.And believe I can also generate some data that can validate my point and people will be more than glad to accept my prophecy.Today morning I wrote something like this on the Facebook page of Equity Desk group…
    “The sudden untimely death of Gopinath Munde…puts emphasis on the question the risk from uncertainty..remember there is always this “Black Swan” event in one form or other lurking dangerously in the background of the market.Just one negative catastrophic event could put the spanner in all the positives that gets prophesied by the market pundits,remember these are the same people who could not gauge the magnitude of the risk of housing and currency in 2008.
    Underestimating the risk of the unknown is a very risky part for the market.”

    Iam a ground worker..Inflation still now is a bigger problem….savings rate of average household is pretty low…you could check out the lifestyle consumption,it is stagnating….Dominos is looking at negative same store sales growth.
    Let us check out some uncertain variables…if this were to really happen how spooked our markets will be and how my 50000 sensex target will be trashed in a matter of months.

    1) Narendra Modi dies in a tragic Air crash (May that not happen).

    2)After Narendra Modi’s Death…fight erupts between two factions of BJP …Third front senses power with the help of a breakaway faction with outside support from congress.

    3) One more bigger terrorist attack on Indian soil in a grand scale.Talks between Pakistan and India fail.Pakistan talks of a nuclear war.India responds in a stronger words (Well here narendra modi our PM is still alive).India attacks the forward post of Pakistan.

    4)Russia attacks on Ukraine…warns of stern action against USA,if it meddles in its foreign policy.

    5)Al Queda Attacks the pentagon,Dow Jones eclipse the previous highest one day fall of October 19 1987,falls by 27 %…world markets rattled….asian markets follows dow.

    So these are some of the headings that can come on as a headline of any damn newspaper and send shock wave jitters across the Investment Market.

    Remember the future is always uncertain.It is one of the biggest risk that everyone carries.No one could have seen the death of Gopinath Munde…nothing is foreseeable.

    Remember this forecasters are the same guys who could not foresee the credit bubble.

    Thanks and Regards

    Safe Investing

    Reni George

  3. Anthony says:

    One joker says it will touch 100k by 2020! (Link)

  4. Vidyanshu Pandey says:

    Hi Vishal,

    40,000 ?!! Wait till you see this article.

    100,000 In the next 6 years!!!

    Vidyanshu.

  5. the guy who says 100k by 2020 will not put a single rupee of his in stock market, rather he will invest in real estate. he wants all of us to buy/sell so that he gets his fee

  6. Vijay Nagarajan says:

    40,000 ??
    Poor Monsoon…as per present indications
    Virulent uncontrollable inflation …what ever the reason..will not help interest rates
    NPA’s…..of PSU banks + farm loan waiver???due to poor monsoon
    Railway finances in a mess..
    Contracting industrial production, most inds operation much below full capacity
    coal , gas mess will take 24 to 36 months to clear up after a sound revival policy is put in place… Extremely long gestation projects.

    ..why is the market shooting up, ??

  7. Hi Vishal,

    As we approach a probable stage 4 scenario, how would you deal with it? Start hoarding cash? Start taking some profits by trimming your positions. Just wanted to know your thoughts.

    Regards,
    Lloyd

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