In THIS post, Morgan Housel mentions about how Ralph Wagner explained the market to Bill Bernstein:
“He likens the market to an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog’s owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum. At any one moment, there is no predicting which way the dog will lurch. But in the long run, you know he’s heading northeast at an average speed of three miles per hour. What is astonishing is that almost all of the market players, big and small, seem to have their eye on the dog, and not the owner.”
If you recollect, I shared a similar analogy from the respected German economist Andre Kostolany three years back:
“The relation between stock market and economy is like a man walking his dog. The man walks slowly, the dog runs back and forth. Both reach the destination in time.”
The explanation I gave for Kostolany’s quote holds equally good for what Ralph Wagner has mentioned. So I reproduce the same.
Whether it is Warren Buffett or Sankar Naren , they explain how growth in the economy and stock markets are inter- connected over long run. This is true for markets as a whole though some companies or sectors may be an exception.
Growth in our economy impacts the earnings of Sensex which impacts its price levels.
As per Kostolany’s analogy, economy is like a man who walks slowly and steadily. Stock market is like his dog with which he is walking with. The dog would run some time ahead of him and some time behind him. But they travel and reach the destination together.
Samir Arora (https://twitter.com/Iamsamirarora) in one his tweets has mentioned that between financial year ending 2002 and 2014, the earnings of Sensex have grown at a CAGR of 15.40%. During the same period, Sensex has delivered investors a return of 16.98% (including dividends). Though he has not mentioned it, our nominal GDP growth rate during the above period is also around 15%+.
I’m bullish on the future of our country. We are expected to grow around 8% for next few years and may even touch double digit growth rate before end of this decade. We are on the verge of overtaking China in terms of growth rate.
Our long term nominal GDP growth would continue to be around 15%. So Sensex earnings and growth rate would closely follow this. As I’ve mentioned earlier, good funds would do much better than these numbers.
We tend to focus on the dog more than the man. Look at economic growth and Sensex earnings instead of constantly worrying about Sensex levels. As Buffett says, to win the game one has to play well and not keep looking at the score board.
The man would go a long distance in next 2 decades. The dog has to follow him. Don’t keep wondering why it is running ahead or behind. That is the nature of the dog. The control is with the man. It has to follow him.