Have Realistic Expectations from Long Term Equity Returns

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It is important for investors to have realistic expectations with regards to long term equity market returns, and the following note should help you form a reasonable basis for setting long term expectations from equity investing.

Over long periods of time, the return from equities would need to necessarily converge to intrinsic value growth of the constituent companies. Intrinsic value growth of companies, which to a large extent is dependent on sales and net profit growth, has been averaging about 15% per annum – in line with India’s nominal GDP growth. Assuming an investor buys a company, which is growing intrinsic value at 15%, at a price that is fair – over time investor returns will converge to that number. Some investors may make more, or less, based on whether they buy these companies at a discount or premium to intrinsic values.

A value investor hopes to buy stocks at a reasonable discount to the intrinsic value. In a typical year, the high grade companies are available, at best, at about a 20-25% discount to their intrinsic values, which over a 3-4 year period, can add another 5% pa, to the value investor’s return, over and above the long term intrinsic value growth of companies.

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https://banyantreeadvisors.com/2015/04/mar-2015-have-realistic-expectations-from-long-term-equity-returns/