When we come across a data point that Nifty or Sensex has touched all-time high, it provokes multiple reactions. One is of positivity, as the term “all-time high” has positive psychological connotations. It also leads to certain apprehensions, that if it is already at all-time high, what is the scope going forward. Let us look at this objectively.

BSE Sensex had an initial value of 100 as in April 1979. As of April 5, it is at 74,248. The journey from April 1979 to April 2024 has not been as smooth as a straight line; it has been undulating, bull rallies and bear corrections.

You can imagine, over these 45 years, how many times the index touched a level which was the highest at that point of time, went down and sometime later touched a level that was relatively higher.

Similarly, Nifty had an initial value of 1,000 as in November 1995. As of April 5, Nifty 50 is at 22,513. Over these 28-odd years, the index had gone through so many all-time highs. Fact is, an index has no defined limit or terminal value.

Growth via constituents

The growth of the index is driven by the constituents. As long as there is fundamental strength in the growth drivers, the value of the index will grow. The index level at a given point of time is relevant only at that point of time.

While our economy will keep growing, not all firms grow at the same pace. Sensex comprises 30 firms and the growth from 100 to 74,248 represents the growth in the market price of these 30 firms.

Today’s 30 in the index are not the same as the initial 30 in April 1979. Only six of the initial 30 components of Sensex still remain in the index. The other 24 firms are no more part of the index. Market capitalisation, which is the total value given by the stock market to a firm, has eroded for the 24 firms. On the other hand, new industries, new business houses and new firms gained in market capitalisation. Hence, the journey from 100 to 74,248 represents the growth of top 30 firms as per market capitalisation, but not the same 30. The six which are still there have grown to compete with the new entities. With Nifty50, of the 50 firms, only 12 that were part of it in 1995, still remain there.

When you see a headline that a market indicator touched all-time high, you need not read much into it. For all you know, the day’s market closing level could be only a few hundred points higher than previous day’s close, thereby overtaking the previous recorded high. That is just an arithmetical number, and you will see another arithmetically higher number in sometime.

Hypothetically, if it does not happen, you will not get any return at all i.e. for you to get returns from your investment in equity stocks or equity funds, the index has to touch all-time high from time to time. The same concept holds true for other investments as well. Take gold. Nowadays, you would see headlines gold has touched all-time high. Here as well, you have to look at it in perspective. For the return gold has given over the ages, the price has come to today’s level, which is $2,288 a troy ounce as on April 5/ ₹71,720 per 10 gm. From now on, depending on the demand-supply, price will touch all-time high from time to time.

Our currency was at 83.3 against the dollar as on April 5. In 1947, it was about 1:1. It is stated even before, say 50 years prior to independence, the ratio was tilted in favour of our currency. From 1 to 83.3 over the 76-odd years, the rupee has weakened. From now on, we expect a gradual weakening of the rupee, depending on demand and supply. Every other day, you will see headlines the currency has touched all-time low. This is a number which does not mean much about the future pace of weakening.

Conclusion

For the investment portfolio, on one hand, there are certain drivers of the investments and on the other, there are certain objectives. For equity, there is growth in the underlying firms, which would drive future price movements. The current price of the stock is relevant, but is not the be-all and end-all. Value and price are different. Price is what you pay, value is what you get. Value is the future potential of the firm. If you are doing it through funds, you need not worry about valuations, as there is a professional management team taking care of portfolio construct and stock selection. To track portfolio performance, you follow news and events. In that context, you have to look at news and events in perspective. Something may have an attractive “headline value”. You have to gauge the implications on the portfolio.

(The writer is a corporate trainer (financial markets) and author)

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