The Hindu Business Line : Average returns lag for most Sensex stocks

THE BSE Sensex shot up 42 per cent in 2005, to close at 9398. Does it mean that the community of investors who had invested in a portfolio of Sensex stocks during the year, would have gained that much?

Certainly not. For, that would be like saying, consumers paid on average 5.5 per cent more this year than the previous one because prices rose by that much between the start and close of a year. The truth is, prices of consumer goods go up and down all the time and consumers too buy them at various points of time.

So too with retail investors. For them, the gains/losses do not depend on how the market (or any particular basket of stocks) fares.

Instead, their fortunes depend on the time at which they buy into the market, and the point at which they decide to call it a day.

For instance, individuals who bought the M&M shares on December 31, 2004 and sold them on December 30, 2005, would have clocked gains of 88 per cent. Yet the average investor in M&M stock - some one who had entered the stock sometime during the year and exited a year later - would have gained only 40 per cent.

That is the quantum of increase in M&M shares between the average daily prices in 2004 and 2005. It is much the same across many other Sensex stocks.

Thus while Satyam, on a point-to-point basis (January 1, 2005 to December 31, 2005) , went up 80 per cent, the average return on this share was only 44 per cent.

For Reliance Industries, the corresponding figures were 67 per cent and 29 per cent. None of these is bad, but not one of them is nearly as good.

The picture was somewhat more bleak for investors in Hindustan Lever and Maruti. Both gained 38 per cent on a point-to-point basis; apparently doing about as well as the Sensex and the Nifty. Yet average investors in the two companies gained only 10 per cent and 15 per cent respectively.

The reverse is also true, though there are a few cases of this. While Punjab National Bank registered a relatively disappointing point-to-point gain of 15 per cent, the average investor was able to walk away with a tidy return of 43 per cent.

Similarly, SAIL lost 14 per cent on a point-to-point basis. But the average investor gained a comfortable 40 per cent. This is a bit odd.

Tata Steel, which has been so much in the news lately on account of its dynamic expansion plans, lost one per cent point-to-point, and as much as 13 per cent on average.

Ranbaxy lost, whichever way you look at it. But, while point-to-point losses were 22 per cent, the average investor took a hit of only 5 per cent.

In conclusion, we need to take the volatility (or unpredictability) of various stocks on board.

Going by the experience of the year that has just ended, it would seem that, despite their high average returns (of 63 per cent and 80 per cent respectively), VSNL and Dabur are best avoided by risk-averse retail investors who are in a tearing hurry to cash in their chips.