If you took a poll among analysts about where the market will be in “March 2020” the chances are you will get answers like “43000” – with a small standard deviation and say a median of 42900 or something like that. However the market could end up at 47000 with as much ease as at 38500. The only honest answer is “I do not know”. I find it funny that people laugh at analysts, and then go to ask “where do you think the market will be ..say over one year”. Even worse they tell me “market will be at 55000 over next 4 years” or something like that. If you have ever done any fundamental research in a big, good company, you know how difficult to predict the next 2 quarter earnings – so predicting market returns is more about humor, not about science. Far more importantly, you do not need to predict the markets, just participate.

The Market is an extremely boring person and has amazing precise tools and GPS. It does nothing for long periods of time. Suddenly one day it wakes up and decides to price risk or liquidity. So we anchor around 18% (TRI on the Index, got it from Ashish Chauhan’s tweet. Or we can anchor on 13% return (without dividends), or we can anchor on 10% – which is what we “hope” to get. I have seen advisers climb down from 21 a few years ago to 18, and then 15. Their logic? “Back testing shows us that 18% is sustainable”.

However the market decides that returns should be 17, 0, -5%, 34%, 14%, -14%. I recently met an investor who was talking brave 5 months earlier but seeing that he has got “nothing” shift to debt schemes. Great. The market does nothing for long periods of time. Market return is not a number that you pick from a series of numbers – or even a bunch of numbers thrown in a hat or a magician’s bowl. There is data to prove that just missing 10 days you would have missed 65% of the returns over the past 120 years on the Dow Jones. I mean what is the probability that you would have ‘timed’ the market with that kinda accuracy? Impossible.

This is like saying that Anil Kumble wasted his energy bowling 40,850 balls – he took only 614 wickets! Imagine he wasted 40,236 balls!! Even AK could not have predicted his wicket taking deliveries!!

Even worse is extrapolating the recent past. It was in 2009 or thereabouts when one fund manager and I were talking to a bunch of journalists from a dais. That manager said “Subra and I were sitting on a round object, holding tight…only in 2007 did we realize it was a rocket..and in 2008 we saw it coming down so fast”. Another fund manager in 2007 end told me “the steepest market that we have seen in our life times over 4 years is over”. So true. In 2008, we were all bullish, no doubt. Market surely taught us a lesson in “regression to the mean”. No doubt about that too.

Market has its quirks, but largely it is a function of EPS, sustainable Eps, growth, interest costs (aka inflation), – and over long periods of time,  it is a slave to all these things. Of course good management is a sine qua non for even looking at a company.

So if you wanted to predict (I don’t see any reason why you should) you should use the following formula:

Look at the Return from the equity markets from the previous say 40 years. Let us say the TRI says 18%. Let us assume that the return can be broken into “growth of 13% and dividends of 5%”. So the market will continue to give 18% return. Again one assumption is that Interest rates would be high -say 8% p.a. If this were to drop to say 4%, return would be 14%.

Then there is the “speculation” return. If the current pe of the market (another funny concept, but useful here) is 26. If the pe goes up from this, you will get higher returns, but if the pe was currently is high, and IT GOES NOWHERE – YOU will get the 18% return that we spoke of! However if the pe was to come down, and inflation is 4%, Your return would be less than the 14%. Simple math. Works over very long periods of time.

After this you need to provide for political risk, some black swan event, etc. This you can ignore if you do have adequate capacity to “buy right and sit tight”.