Sensex and Economy

S&P BSE SENSEX is the primary stock market index to measure the performance of India's major companies traded on the Bombay Stock Exchange (BSE). 

Why do we need an index?

A Stock Exchange Index is a quick shorthand to measure & compare the performance of various markets. Using the indices for various markets, we can reduce each country to a single aggregated number and then look at how these numbers move. For instance, here is a tool that we have built to compare the performance of different stock markets in the world using indices such as the Sensex. (Red is bad, green is good). You can decipher quickly that India, Brazil and Europe have performed poorly in the past 5 years, while US, Australia and Chile have been among the best performance - by this measure.

International Markets

How is the Sensex Computed?

The Sensex is computed from the stock market prices of 30 of the biggest companies in India (including ICICI Bank, Reliance, Infosys Limited, Oil and Natural Gas Corporation (ONGC), TCS, State Bank, Tata Motors (company), Maruti Suzuki India Limited). When the prices of the stocks of these top 30 companies go up by 1%, then the Sensex number goes up 1%. For instance, if the Sensex number was 10000 yesterday, then today's number will be 10100 if India's top 30 companies grow by 1%. In the same way, if India's top 30 companies drop by 1%, then Sensex would drop to 9900 from 10000. 

Like most indices, the Sensex was started with an arbitrary number of 100 on Jan 1, 1979. The number and the number at any point in time is almost irrelevant. What is interesting is how much the number changes over a period of time. Thus, if Sensex grows from 10,000 to 15000 over a period of 1 year, it would mean that the wealth of Indian shareholders grew 50% in 1 year. 

The relationship between Sensex and Economy:
Sensex is quick shorthand for Indian stock market. It is an indicator of how good Indian economy is performing and is generally seen as a "leading indicator". A leading indicator means that the Sensex movement will tell about the future performance of the overall economy. Thus, if Sensex is growing, the Indian economy has a high probability of growth in the near future. 

Here is the 13-year performance of the Sensex. You can quickly see that the fortunes of our country go parallel with the market. 

Thank you,

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Balaji Viswanathan.

Few tips to be a good value investor

I believe Sir John Templeton's 16 rules serve very well in achieving success as a stock market investor.

Here are those rules, along with my description: 

1. If you begin with a prayer, you can think more clearly and make fewer mistakes
Prayer can help you think clearly and make fewer mistakes. It reduces anxiety and stress – two of the biggest killers of investment returns. Reduced stress can help you make better-investing decisions.

2. Outperforming the market is a difficult task
The challenge is not simply making better investment decisions than the average investor. Given that inflation eats into your returns, the real challenge is making investment decisions that are better than the rate of inflation over the long term.

3. Invest – don’t trade or speculate
The stock market is not a casino! However, if you treat it like one – like most people were doing in 2007 and 2008, and move in or out of stocks rapidly, the market will be your casino. And like what happens in a casino, you will lose eventually.

4. Buy value, not market trends or the economic outlook
There’s no point in worrying about economic or stock market forecasts that don’t matter at all. Instead, you should spend your precious time trying to know what’s happening on the ground – with the companies whose stock you own or want to own.

Ultimately, it is the individual stocks that determine the market, not vice-versa. Individual stocks can rise in a bear market and fall in a bull market. So buy individual stocks, not the market trend or economic outlook.

5. When buying stocks, search for bargains among quality stocks
Determining quality in a stock is like reviewing a restaurant. You don’t expect it to be 100% perfect, but before it gets three or four stars you want it to be superior.

6. Buy low
Now, this is a very simple concept to preach, but very difficult to execute. When prices are high, a lot of investors are buying a lot of stocks as we saw in the heydays of 2007 and early 2008. And when the markets crashed and had reached their multi-year lows in late 2008, there weren’t any buyers.

I still remember that period post the Lehman Brothers bankruptcy when each and every expert appearing on CNBC or other business channels were pronouncing the death of equities. When the Sensex was at 8,000, these experts were predicting the 5,000 levels.

Such are the times that provide a very good hunting ground for small investors. If you buy quality stocks when no one else is buying, you’ll get things cheap. Only then will you do a lot better than other investors over the long term.

7. There’s no free lunch
A ‘hot tip’ isn’t usually one that makes you a lot of money. Instead, it’s often so hot that it burns your hands and pockets. So never invest solely in a tip. You would be surprised how many investors do exactly this. But a ‘tip’ isn’t a way to fast profit. It’s the shortest way to financial ruin.

8. Do your homework or hire wise experts to help you
People will tell you: Investigate before you invest. It’s important that you listen to them. It’s important that you study companies to learn what makes them successful or failures.

9. Diversify
In stock markets, there is some safety in numbers. No matter how careful you are, you can neither predict nor control the future. So you must diversify. But don’t ‘di-worse-if’ by adding stocks in unfamiliar sectors for the sake of diversification.

It is important to make sure that you don’t spread yourself too thin. Or it would get difficult for you to manage what’s happening to your money. Like what happened to a friend recently who came to know after his father’s death how the financial advisor had advised him (the father) to invest across almost 200 mutual fund schemes…and most of them were worthless!

10. Invest for maximum total real return
This means the return after taxes and inflation. This is the only rational objective for most long-term investors.

11. Learn from your mistakes
The only way to avoid mistakes is not to invest—which is the biggest mistake of all. So forgive yourself for your errors and certainly do not try to recoup your losses by taking bigger risks. Instead, turn each mistake into a learning experience.

12. Aggressively monitor your investments
Remember, no investment is forever. ‘Buy and hold’ doesn’t mean ‘buy and forget’. Expect and react to change.

13. An investor who has all the answers doesn’t even understand all the questions
An arrogant approach to investing will lead, probably sooner than later, to disappointment if not outright disaster. The wise investor recognizes that success is a process of continually seeking answers to new questions.

14. Remain flexible and open-minded about types of investment
There are times to buy blue-chip stocks, cyclical stocks, mid and small cap stocks, and there are times to sit on cash. The fact is there is no one kind of investment that is always best. So remain flexible and open to the demands of time and situation.

15. Don’t panic
Sometimes you won’t have sold when everyone else is buying, and you will be caught in a market crash. Don’t rush to sell the next day. Instead, study your portfolio. If you can’t find more attractive stocks, hold on to what you have.

16. Don’t be fearful or negative too often
There will, of course, be corrections, perhaps even crashes. But over time our studies indicate, stocks do go up…and up…and up. In this century or the next, it’s still – “Buy low, sell high.”

I hope this helps.





Special Thanks,
Vishal Khandalwal.
Founder - www.safalniveshak.com

India 2050

India 2050

According to a study by US banking group Citi, India will be the world's largest economy within 39 years. Indian GDP in 2050, measured by purchasing power parity (PPP), will be $85.97 trillion. China, in second place, will have a GDP of $ 80.02 trillion and the US $ 39.07 trillion (see chart).

With an estimated population in 2050 of 1.63 billion, India will thus have a per capita income of over $53,000 - in the range of today's wealthiest countries like Switzerland and Norway. Sounds too good to be true? Of course, it is.
On paper - mathematically - Indian poverty should disappear by 2050. The reason it won't is that huge inequalities in income will persist unless we rapidly implement second-generation economic reforms which deliver real benefits to the bottom of India's socio-economic pyramid.
The first chart in our three-chart collage shows the ranking of the top five countries by GDP in 2050 as per Citi's projections. Indian GDP in 2011 is estimated at $4.45 trillion (PPP). To reach $85.97 trillion in 2050, the Indian economy will have to grow at an average annual rate of 8.1% a year for the next 39 years. Optimistic? Perhaps, but not overly so.
The Citi study relies heavily on India's two dividends - demographic and democratic. The demographic dividend will ensure that India has the largest number of working-age people in the world (over 800 million) between 2015 and 2035 before tapering off as our population reaches a plateau of just over 1.60 billion and starts ageing (as China's already is). Fertility rates of increasingly educated urban and rural Indian women will dip from today's 2.6 to 1.7, which is when a country's birth and death rates equalise.
A large number of working-age Indians between 18 and 60, however, will be less than optimally productive if they remain poorly educated and are therefore unemployable. To gain from our 20-year demographic sweet spot, education reform must clearly top the government's agenda. Infosys mentor N R Narayana Murthy was partly right when he said that the standard of IIT students has fallen. It has. Too many are rote-learners, spewed out by coaching classes, not creative thinkers.
Education reform must start with government-run primary schools. Shockingly, in some villages, primary schools have no teachers, no students and an empty shed that serves as a classroom. The government spends 52,000 crores on education every year. That is less than it spends on fertiliser subsidy alone ( 55,000 crores).
The second dividend Citi banks on to project India's rise to the top of the GDP rankings in 2050 - especially in comparison with China - is a democracy. China's autocratic government, the argument goes, can command 10% GDP growth, build superhighways and create gleaming infrastructure.
But beneath the towers and the maglev bullet train tracks of Shanghai lurks social tension. As China's per capita income rises, its 1.34 billion people will increasingly yearn for real freedom: a free press, an open Internet and, most crucially, democracy.
If the Chinese government can't deliver on these, a "Chinese Spring" a decade hence cannot be ruled out. That could plunge China into years of uncertainty. Throughout history, as countries grew richer, they grew freer. Will China prove an exception? Unlikely. By that token, India's democracy is a double-edged scimitar. Our raucous, open society takes us two steps forward economically and then one step backwards.
But if governance reforms - land, electoral, judicial and police - are implemented quickly, the stage could be set for second-generation economic reforms that will turn our democratic institutions into assets for long-term economic and social growth. We will then move from a culture of high subsidies leaked to corrupt middlemen to a culture of high productivity.
Second-generation economic reforms were stuck in UPA-I because of the Left's ideological opposition and have been derailed in UPA-II because of muddle-headed opposition from within the fractious UPA coalition itself. It is time to cast off the fetters.
We must allow FDI in retail, introduce hybrid agricultural technology to double crop yields within a decade, modernise infrastructure, make land acquisition fairer to farmers, improve healthcare, pass enabling legislation to unleash the entrepreneurial energy of small and medium enterprises - the backbone of our economy - and implement tough, effective regulation to clean up business practice.
India is set to become the world's third-largest economy in the world in 2011 largely because Japan's GDP will shrink by around 2% to $4.42 trillion following the devastating earthquake and tsunami. But if a growing GDP is not to become a cruel irony for India's 445 million still-desperately poor people, the government must begin the second stage of economic liberalisation without losing any further time.
Examine our second and third charts. The one on top is pyramid-shaped, split into three sections. It reflects India's current household income structure: a large base of the poor and relatively poor of over 860 million, a narrow intermediate section of the middle-class around 280 million and a tiny tip of the reasonably well-off of 70 million.
The chart below it is diamond-shaped and reflects the shape of things to come in 2050 if political and economic reforms have their desired effect. The bottom section comprises around 330 million of the poor and relatively poor (down from 860 million today), the top section comprises the well-off, around 300 million, up from 70 million today and the intermediate bulge comprises the expanded middle-class of nearly one billion, up from 280 million today. That is the future. We must lay its foundation today.

Thank You,
Vikash Sharma
Professional Investment Expertise

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