ET Wealth | What does Sensex at 50K really mean? | Economic Times

I would have thought that it goes without saying that round numbers of the Sensex or any other index are meaningless but apparently they aren’t. It looks as if the Sensex hitting 50,000 means a lot to investors. Or perhaps it doesn’t—it’s only the people who write in the media—social and otherwise—who are incessantly talking about the 50,000.There are a number of different points that need to be made about this 50,000 business that are somewhat unrelated but are useful to note. To begin with, larger numbers by themselves do not have any special meaning. The actual level of the index is in relation to an arbitrarily chosen day some 40-plus years ago when the level was deemed to be 100. If a different, later day was chosen then the number would be lower. The Nifty’s starting point was at a 1,000 in 1995 so it’s only at 14,000 right now even though the two indexes move practically in lockstep.What’s more important to understand is what a change in the level of the index means. Mathematically literate investors know that it’s percentages that matter, not the absolute numbers. The move from 45,000 to 50,000 is 11.1% and has the exact same significance as the move from 2,000 to 2,222 had two decades ago. Or, during the days gone by since the beginning of October, the Sensex’ gain of 10,000 points has exactly the same significance as the Nifty’s gain of 2,850 points. In this time, both the indexes gained 25%. For any serious market watcher, that’s the number that matters. A related issue, which will probably be too arcane for most people will be that graphs showing stock prices and indexes should have log and linear scales but that’s probably too much to expect in the mass media. If you, as an individual investor, understand how the power of visualisation can help you understand what’s happening in the markets then you must switch to graphs with log scales simply because they are proportional to percentage changes rather than absolute changes.So are we all convinced that the absolute level of the Sensex does not matter? Not quite. For while the absolute level does not matter, I do like the fact that this big round number gets equity investing talked about more widely than usual. Equity investing in India is still a niche activity and the more ‘outsiders’, including those who are on the verge of dipping their toes in, hear about the better and the big round number definitely helps a lot in that. The 50,000 does make it pretty clear that in 40 years, that number has become 500 times bigger and once you realise that, it’s not something that’s easy to get out of your head, especially if you are at all worried about how much your savingswill grow (or not) in the future.For people who remember the big crashes along the way, this big round number brings home the fact that in time it all gets left behind as the country’s economy and businesses march along. Some 28 years ago, in the Harshad Mehta crash, the market was down from around 4,500 to around 2,300. How quaint and tiny those numbers look now. Twelve years ago, it went down from 20,000 to 8,000 and that’s far behind us. The fact that the big falls of the past were overhauled in short order and now seem irrelevantly small is the most important part of the story.For those who should become equity investors but are waiting to be convinced, this is something that is worth thinking about. Similarly, for those who invest in equity but get a little bit too influenced by the severe ups and downs that happen, the big round number provides some perspective that all things pass, and over a long period, the story is always a cheerful one.(The writer is CEO, Value Research)