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Healthy Economics- An Investment guide for the next trillion dollar economy

On 24th May 2021, a tweet from the official handle of BSE’s CEO Ashish Chauhan announced that the market capitalization of all its listed companies surpassed the $3 Trillion mark for the first time in history.  So what does this mean for investors? Do they invest? Or wait for another peak? Read till the end, to find out.

Firstly let us understand what Market Capitalisation means; for a single company it would mean the Sum total of all the Outstanding Shares* Current Market Price of the Shares.
So the Market Capitalization of BSE would mean Sum of the Market Capitalization of all the Companies in it

Indian Bombay Stock Exchange crosses it $3 Trillion mark, making it a historical feat for the Indian markets. If we look back to see our journey to this $3 Trillion, certain interesting figure pop up; The first trillion mark was crossed by our markets in the year 2007, the second trillion benchmark was crossed in 2017, and the third Trillion in 2021. If we pause and look at the timeline we observe that:

  • The first trillion took around 38 years (at May 2007)
  • The second trillion took just 10 years (2007 to 16th May 2017)
  • The third trillion took only 4 years (2017 to 24th May 2021) 

So how long till the next big benchmark is achieved? Looking at the trend we can assume that the fourth trillion market cap benchmark will meet us in less than 4 years, and yes it can be faster than what we expect it to be. But is there a way to project what the future of the market will look like? Well yes there is.

Looking into the future:

There is a general assumption that the Market Capitalization of a country will usually mirror its GDP (Gross Domestic Product). It can be more or less than the GDP, but the rudimentary assumption is that it has to be at least equal to it. A Stock Market capitalization/GDP Ratio will indicate whether the country’s stock market is overvalued or undervalued as compared to the historical average. For example, if you look at the US stock market capitalization as of 31st March 2021, it was close to $50 trillion whereas it is GDP before COVID-19 was around $20+ trillion. This means the Stock Market Cap /GDP Ratio is 2.5.

There are several studies and projections doing rounds in the market that India is likely to cross the $10 Trillion GDP benchmark by the year 2030. Applying the above assumption that the GDP and Stock Market Capitalization mirror each other and the Stock Market Cap/GDP ratio to be one, the Stock market cap will also the levels of $10 Trillion, which is 3.3 times the current market cap.
So the Sensex levels will be around 59000*3.3 = 194,700

49000 or 59000: Where Should I Ideally Invest?

So the question that arises here is that does it matter that one invests at 59000 or 49000 levels?
The important thing to understand when you ponder over this question is that it doesn’t matter when you invest, or at what level of the market you do, what matters is that you invest and do so with strict consistency.

Let us assume X and Y are two friends, X invested at the 49000 levels and Y invested at the 59000 levels but both of them carried their investment to the level of 194700. Even if they invested at different levels, the difference in their returns was only around 0.7%, which is a very small difference.
One thing that investors try to do is to time the market, which is in itself a futile exercise. Pioneer investor Warren Buffet himself doesn’t believe timing the market. What investors might lose in the process of waiting for the “right-time” to enter the market might be 70% instead of that 0.7%.

Let us face the hard truth, equities tend to fluctuate during investment, and the investors might get flustered while the market prices correct themselves, and decide to take their investment out impulsively. To let the investment show appreciation, one needs to be patient. If the markets are at very high levels and you as an investor are opting to stay out, it means that you indulging in timing the market and price speculation. You think you will be out of the market during its worst days, but you will also miss the best days of the market, which often follow the worst days.
This is because you will want to avoid the emotional pain of being invested during corrections and crashes. However, the wise investor knows that this is the price everyone must pay along the journey from 59000 to 194,700 or from 49000 to 194,700, says Amar Pandit.

 the lessons that are to be learned from the first 3 trillion, which are:

  1. Every subsequent trillion is likely to be faster than the previous one.
  2. This exactly mirrors the compounding curve, and the power of compounding is available for all of us.
  3. No matter what the market corrections or crashes are, the next trillion will happen and so will the next. No matter what the gloom and doom scenarios are, the next trillion and the next several trillion will happen.

While timing the market or waiting for the time to enter the market can be rather difficult tasks what might help you in your journey of investment is to understand your purpose of investing and following some simple steps in this aspect can help you on your path better. 

Basic tips to keep in mind while investing:

  1. Keep a plan:
    Understand the purpose for which you are investing? Is it for retirement, or buying a home or car for educational purposes? Also, keep in mind whether your investment will be one-time or a regular recurring one. Answering these questions will give you a clearer picture of what path you wish to go forward. 
  2. Think long term:
    If you’re investing in the equities market keep in mind that a minor downfall in prices now won’t affect your long-term returns. If you are worried still, there is always the option of investing in a mutual fund scheme that matches your investment criteria and will also give you the benefit of rupee cost averaging. 
  3. Understand volatility:
    Markets are volatile in nature. Some stocks might go up consistently and some may experience sluggish growth. Some stocks may experience sharp rises while some may face sharper downfalls. As an investor, you should be able to assess your risk appetite and then only consider investing.
  4. Diversify:
    One key factor to combat uncertainty is to actively diversify your portfolio so that losses in one sector will be shadowed by profits in another thus managing to safeguard your corpus from the inherent market risks. 

The beauty of investing and the effects of compounding can give amazing return to the investors. But the returns will be futile if you are present just as the observer and not the participant. To just sit and wait for the next trillion and to predict what will happen to the markets is nothing but a wasteful exercise. What truly matters is that you stay in for the ride, and start off for your journey to the next trillion. So, to answer the question that we began with, it doesn’t matter when you start investing or at what levels you do, it’s a journey worth taking and you are always welcome to join anytime!
So, the only question that remains is: When will you start this journey?

Manoj Amarwal

Saarthi Dream
(Saarthi for your financial dream)