Four Things to Remember about Sensex at 21000

4 things to remember about Sensex at 21000

Four Things to Remember about Sensex at 21000

The benchmark BSE-Sensex is back at 21,000 levels. And suddenly there seems to be a rush of enthusiasm amongst market participants. Just to recall, the first time the Sensex had touched the 21k level was in January 2008. Then as we know, the markets crashed in response to the global financial crisis. Then again in November 2010, Sensex again hit the 21k level. And again the markets tanked after scaling that level…

So the one obvious question on everyone’s mind is ‘ Where will the Sensex go from here? Will it tank? Will it scale new highs?

What is the answer? We beg to differ in our perspective of this entire situation. In our view, the question itself is flawed.

For one, the 21k level denotes nothing more than a mere psychological point. Investors have seen the Sensex scaling this level and then correcting sharply. So there is a collective memory associated with the 21k level and a resultant bias.

In reality, the current 21k level cannot be compared with the 21k mark attained in 2008. Or for that matter even 2010. An article in the Times of India rightly points out this fact. During these six years, inflation has gone up by 70%! So to make a fair comparison between the 2008 21k level and the current one, you have to adjust the current market level for inflation. In that sense, the Sensex is actually around 13k level relative to the 2008 level.
Secondly, it would be wrong to gauge the overall Indian stock markets purely by the Sensex level. Yes true, it is a benchmark index. But it comprises just 30 large cap companies. Moreover, the composition of the index and the weightage of its constituents also changes from time to time.

Thirdly, the performance across sectors and market caps remains highly skewed. Consider this statistic as reported in the said article- Just 133 stocks out of the BSE 500 index of 2008 have surpassed the peak levels achieved then. This means that while some stocks have scaled new highs, a majority of the stocks still continue to underperform.

Fourthly, the Sensex level alone says nothing about the value of the underlying stocks. It has to be seen in conjunction with earnings and other fundamentals factors. The point we are trying to drive across is that making investment decisions looking at the current Sensex level is a flawed approach to start with. This is the reason we do not assign too much importance to index levels.

Instead of focussing on stock prices and predicting their movements, we prefer to focus on finding value. And there is a reason why we see merit in this time-tested approach. Many proponents of this value investing approach, Warren Buffett being the foremost among them, have built immense wealth over the long term. The philosophy is simple but demands discipline. Find great businesses that are well-managed and are available at a fair price. Our experience says you are quite likely to see wealth accruing into your bank account, irrespective of where the Sensex is headed.

 

(Courtesy: http://www.equitymaster.com/5MinWrapUp)

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