Views on Life & on Equity Investing

Wonder, Wealth & Abundance

How your family can own 70% of India, thats right 70% of all listed and unlisted companies

with 12 comments

I recently read about an entry on Kudva’s blog here and reminded me of Jeremy Siegel’s book here which has the most publicised record on stocks over past two centuries. In a nutshell, “If one had invested 1 million US $ in 1830s or so in Dow Jones Index/ equivalent index and held on until 2002” that money would be 8 trillion $ or about 70% of US market cap at the time or thereabouts.

Plenty of business people had that kind of money. It would be roughtly equivalent of 50 Crores in today’s value which many individuals possess.

I have an entry on the case for how much one needs to retire from job one would like to leave here (5 Crores only for those who have 10 lacs INR annual expenses, increasing expenses by inflation will be taken care of by underlying businesses). I hope no wise person would waste all their life and energies on wealth aggrandisation for the lack of any other ambition.

As per following calculation, whether you want it or not, if we become a half decent, average stock picker, even index replicating like SENSEX, then there is a very high probability that we will end up with over 200 Crore INR over next 40 years. (10,000 Rs savings per month at 20% compounding per annum ). Sensex has done better than that over past 30 years. I won’t go into how much your children may end up with if they continue with your investments.

If you can convince your four to five generations to keep money in Nifty fifty/ BSE sensex Β and eventually in top 500 companies, you will control major holding in it in couple of hundred years. One could argue the merit in it or fact that if five families tried to do it in parallel then they all will end up with only 15% of India’s material wealth.

Summary on this topic from Jeremy Siegel’s book:

The returns are computed by investing in the whole market, i.e. all listed stocks,
in weightage of their market caps, whether they survive or not. If one had invested in all listed stocks in proportion of their market cap, certainly not the best way, returns by equities would eclipse every other asset class.

Years of return computed : 1802 through 2001 for US markets

Real post inflation yield on stocks 6.7% to 7% over this 200 year period

Its dramatic if you factor in changes that happened, agri to industrial, to service to technology based economy. Change from gold to paper money standard, world wars..

Rate of real rise between 1946-1965 – 10%
Rate of real rise between 1966-1981 – -0.4%
Rate of real rise between 1982-1999 – 13.6%
Rate of real rise between 1982-2001 – 10.5%

Stocks have taken on average 10 years to double your purchasing power compared to 100 years for T Bills.

LT Govt. bonds have 3.5% real returns from 1802 – 2001.

In 1958 yields for the first time in 60 years were lower in stocks than LT Govt. bonds and stayed that way for next 50 years, person who wanted to be conservative would have just waited.

Above is true for German, US, Japan and UK market in terms of returns in Govt Bonds vs. Stocks from 1920s

In 1871 two actively traded stocks were Bank of New York and Bank of United States, Alexander Hamilton and his secretary at Treasury manipulated the price, thus was born antecedent to NYSE circa 1892.

By 1802, 300 companies had listed stock but less than 10 had frequent trading. Initial listings being transportation, canals, wharves, bridges, then financial companies.

Stocks always beat bonds if holding period is more than 20 years even if you buy at peak.

Best % / Worst % returns if Holding Period is 1 Year
Stocks 66 / -38
Bonds 35 / -21
T Bills 23 / -15

Best % / Worst % returns if Holding Period is 2 Year
Stocks 41 / -31
Bonds 24 / -15
T Bills 21 / -15

Best % / Worst % returns if Holding Period is 5 Year
Stocks 26 / -11
Bonds 17 / -10
T Bills 15 / -8

Best % / Worst % returns if Holding Period is 10 Year
Stocks 17 / -4.1
Bonds 12 / -5.4
T Bills 11.6 / -5

Best % / Worst % returns if Holding Period is 20 Year
Stocks 12.6 / +1
Bonds 8.8 / -3.1
T Bills 8.3 / -3.0

Best % / Worst % returns if Holding Period is 30 Year
Stocks 10.6 / + 2.6
Bonds 7.4 / -2.0
T Bills 7.6 / -1.8

Coming to original answer:

Investing in whole market from 1802 to 2001

Stocks 1 $ ==> 8.8 Million $
Bonds 1 $ ==> 13,975 $
Bills 1 $ ==> 4,455 $
Gold 1 $ ==> 14.6 $

Thus, 1 million $ is equal to 8.8 trillion $ i.e. 70% of entire market cap of US.

1 million $ in 1802 is equivalent to 15 Million $ in 2001 US money buying power.

Dow Jones does not include dividends. Β Wilshire 5000 is broadest index available with 6200 firm (NYSE has 10,000 stocks if you exclude 20,000 penny stocks)

S & P 500 has 84% of market cap of WILSHIRE 5000

S & P 500 in 1957 had roughly 90% value of all NYSE shares

S & P 500 in 2001 had roughly 80% value of all NYSE shares

Conclusion: Stocks are more conservative than bonds, person investing in bond is speculating with purchasing power of money. Stocks have power to turn 1$ into millions by forbearance of generations.

Gold is a sure fire formula for buy and hold investor to get poor unless one is using dangerous leverage. This is what Buffett has to say about Gold

“You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what that’s worth at current gold prices, you could buy all — not some — all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?”

You can make an impact on the world with your will through this avenue, you can make India, USA, World take the direction of your desire in a few hundred years from now, hoping that your family will continue to uphold your wish. Certainly it would be idiotic to accumulate so much suffocating wealth. Let us also not forget that all this material wealth is on that small particle of dust on cosmic scale.


Written by amitdipsite

December 2, 2010 at 6:57 am

Posted in Uncategorized

12 Responses

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  1. The toughest part is stay the course.20% CAGR for 20 years seems very much do-able but will we make sure we don't get stupid along the way,who can tell πŸ™‚

    Also interesting but often overlooked is the fact that one mistake at the top and you can erase years of compounding because it only takes a 100% fall to nullify any amount of wealth.


    December 2, 2010 at 5:03 pm

  2. Personally we are taking way too much risk by investing in handful of stocks, since we want financial independence next year if possible.

    Stupidity, ours or decendants another issue. Thats why meritocracy is better…unless human race itself becomes stupid.

    We can only presume, but we can 'Will' for 25% allocation in 4 economically biggest countries, with top 500 companies in each of them. Hopefully will avoid wipeout..


    December 2, 2010 at 6:54 pm

  3. Think over this:

    Businesses as a universe in World will always outperform real estate universe or gold, commodity universe etc. Reason is that if real estate rises @ 15% for a century and business earns only 12% ROE then all busineeses will have to close down, and no new business will be able to buy real estate. no individual will be able to buy house coz business earns 12% ROE, individuals universe cannot get more than this rate, and mortgage will never be paid off.

    True, there will be pockets of excellence in real estate, business, gold, commodities etc but this calculation is for whole universe. One would have to buy all the 6000 stocks traded on BSE irrespective of which go bankrupt, and next year revise the list to include new IPO participants…so one holds all shares. That is what Jeremy Siegel's book is based on – buy all stocks listed on stock exchange. Should take out stupidity πŸ˜‰ or it is greater tomfoolery to buy everything


    December 2, 2010 at 10:32 pm

  4. I want to add that those who cannot save 10,000 Rs per month for next 40 years but infact can save Zero, however can invest 6.5 lacs Rs today end result will be same 200 crores with 20% compounding over 40 years.


    December 3, 2010 at 9:27 pm

  5. These numbers are really mind-boggling aren't they! Wonder why so few of us manage to do it.I mean it would be interesting to figure out what goes wrong.All it takes is to put some money in an index fund and wait.Simple and yet very few people do this.Some people i know own shares of Hero honda,HLL etc from the 80s because they forgot they even owned them and are worth crores.I wonder how many ppl consciously plan it and get there?I think the need for excitement and fast money is an extremely strong sentiment.


    December 4, 2010 at 6:52 am

  6. As you rightly said, excitement, enthusiasm works against us in stocks. Best stock could be the one you already have which we sell after 100% gain.

    I don't think everyone planned it, it happens over time. But its more fun to do it consciously and actively. Its same as people sleepwalking through life just making 10s of crores. We are far better placed than those who are lucky and have been able to understand other successful investors and have a mental framework on how to think about markets.

    Compound interest is mind boggling indeed ! Especially what has happened in India over past 30 years+ and likely to continue next few decades. Amazing.

    Actually in Delhi, Mumbai real estate has also returned 5000+ times in last 50 years, from 8,000 Rs to 5 crores for 200 square metre land.
    You have very few stocks in world returning that.

    In our family the problem was stock market was considered risky, so middle class mentality of FDs was the safe way to go, I've been trying to change that for the last 3 years to convince others.

    Look at myself, I invested some money in Prudential ICICI Technnology Fund in 2000 just before dot com bust and that money lost 70% of its value, I felt so stung that until 2007 all my savings were in Kisan Vikas Patra. I actually lost both job + money in 2000 πŸ™‚ Then I invested everything in one share in UK and it became Zero in 2008. Thankfully I have not given up, and hopefully wont despite portfolio going down by 70% next time. Thanks to Peter Lynch.

    I think those families which bought 10,000 Rs worth of shares every year rather than FDs have crores of Rs now in India. Esp buy and hold ones. Even Senior people in India, including VPs of Banks, try asking, they will not know that Sensex is capable of delivering 20% per annum, I know a few people who have lost enormous amount in F&O just coz they wanted to retire in 10 months instead of 10 years. Less than 2% of Indian citizens' savings go in equities.

    Even though I have lost once in equities and paid tuition fee, I still buy 3-5 shares, now thats risky. I hope to be in 10 stocks someday.
    I have learnt to never buy on leverage which can't be paid off. Loan is fine as long as it can be paid.

    Leverage could work if its one's game.

    Buffett says, 20% of Fortune 500 companies will be earning significantly less in next 10 years, don't know exactly which 20% though.

    Stock market requires active supervision, quarterly annually. HUL did not move much in last 10 years for ex.

    We need to respect market and keep Open mind.

    People fall in trap with their best loved ideas… like I could fall into trap of only small caps, there are others who invest only in small caps even if revenue is moving at 10% per annum.

    Throw emotion out of the window.

    If one has trading mentality, best to have only 30% of money in trading activities, one would lose only 30% in Asian Electronics, IKF Technologies, Compact Disc and the likes..

    What do you think ?

    I motivate myself by projecting the future EPS and PE ratio of my stocks and convincing myself to hold, and I keep that projected 5 year ratio in wallet or diary.


    December 4, 2010 at 7:49 am

  7. Gems really,Amit.And I concur.We are indeed lucky to have understood the dynamics of the market well(atleast that's what we think!).Most people are hardwired for failure in markets and it needs conscious effort to unlearn all that and to figure out how markets work.Very recently my father got some new cash and he said,”lets invest in something new.Why buy the stocks that have already done well?”

    But what I've figured out is it is not easy to make big money with conscious effort.Like lynch says it is more about the stomach than the brain.

    I take everyday as a test and constantly keep asking myself if i am doing anything stupid? What are the chances of permanent loss of capital?I follow Munger when he says,”Invert!”.I keep figuring out what i should avoid doing rather than finding newer ways to get rich.


    December 4, 2010 at 8:57 am

  8. My father is pretty much same as yours. He retired from active work in 2006. I was the one who rigorously opposed him from investing a dime in stock market.

    Now, he is a day trader, he's happy to earn from few 100 to few thousand every day. Infact he considers his day is wasted if he did not earn. He refuses to read any stock market, investing book and has his own style. Needless to say no buy and hold more than 3 months. And pretty much like your dad, he likes to have money split into Stock, FD, Real estate. They are anchored to past price.

    Read the latest newsletter from Absolute return to drink poison on what could go wrong:

    More negative:

    That is the way to think actually, I agree, think what could go wrong, how low share can go.

    Stocks though volatile have proven to beat every investment class when held for 10-20 years even during world wars.

    But there is merit in holding FDs since our holding may fall 70%, it does not seem but Hawkins Cooker can come down to 500, or Venky's to 300 on really bad news.


    December 4, 2010 at 6:36 pm

  9. Yes Hawkins can fall to 500 and Venky's to 300.But most people get scared into selling them near those bottoms.It is important to classify if the fall is because something is wrong with the company(permanent derating) or the broader market has fallen.If it is the latter it is important to make sure one holds on.Because unlike FDs market returns are not linear.Although when we talk about 20% cagr we seem to think intuitively that we are making 20% every year but often it is no movement for years and then a six bagger in one year.So one should avoid selling at precisely the wrong moments which is what ppl do.


    December 5, 2010 at 6:48 am

  10. Sorted, Now we need to live long enough to compound it.. πŸ™‚


    December 5, 2010 at 7:01 am

  11. US GDP in year 1802 was USD 450 Million. Who would have had USD 1 Million back then. You would have to be a warren buffet equivalent to begin with.


    January 12, 2011 at 4:52 pm

  12. Could be, but we get the idea. We may need to add 80 more years (Buffetts life) to 200 years for getting hold of 70% of national assets…


    January 12, 2011 at 8:14 pm

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