One of the best advices you'll get on stockmarkets is to hold your investment long term. The idea being that short-term upheavals tend to even out on the higher side over a longer period of time. The difficult part about this investing strategy is figuring out just how long term. Take the Sensex, for example. If you are one of those who succumbed to your stock-broker's advice and bought Sensex shares when the index hit a low of 1,980.06 on April 27, 1993 (in the wake of Harshad Mehta's securities scam), and have held on to them, woe unto you.

At the current level of 2,985, Sensex's annual return works out to a measly 4.19 per cent. Throw in the average 10-year inflation rate of 7.28 per cent, and your money today is worth less than what it was 10 years ago. And in case you didn't buy at the low, your losses would be higher.

A cardinal rule of investing is that return should be proportionate to the risk involved. And stock is relatively a risky investment vehicle. Consider Sensex's own course past decade. After hitting the Big Bull-low, the Sensex climbed to the 2,700-level over the next four months. But since it has stayed between a wide range of 2,700 and 4,600, only once breaching the limit during the ice rally in 2000 when it touched a dizzying 6,151 points. Since May 1995, it has been intermittently dipping below the 3,000-mark. Clearly, investors who are taking high risks aren't getting high returns. Does that mean Indian investors should eschew stock? No.

Apparently, that's how stockmarkets the world over have behaved past decade and in other times. The Japanese Nikkei, for example, is very close to its 20-year low. The London Footsie has gained only 38 per cent in the last 10 years. The exceptions, thanks to tech and telecom boom, are the American Dow and Nasdaq. Going back in time too, we have instances of markets going into long phases of lull. After the Great Depression in the US, when the Dow fell from 380.30 in August 1929 to 41.60 in November 1932, the stockmarket did rally. But for 20 years, between 1963 and 1983, it stayed caught in the 570-1,070 range. During these years, the American investor was asking the question that we are: How long is long term?

Why is the Sensex hovering around a 10-year low? The answer to that lies in the "irrational exuberance" of the early 90s. Between April 1990 and April 1992, the Sensex soared from 793 to 4,400 points. So when the index fell to 1980 post the Mehta Scam, it was still more than double of the 1990 level. As it happened in the US between 1963 and '83, markets need a phase of consolidation after a huge rally before rising to higher levels. That's what is happening in India today. The last 10 years saw consolidation not just of the stockmarket, but of corporate India. Diversified companies shed unrelated businesses, right-sized workforce, and improved efficiencies.

The most important aspect of long-term investing is finding the gap between value and price. Value is what you get, price is what you pay for it. With each passing year, this gap is only widening. For example, the P/E multiple of Sensex has gone down from 27.36 in April 1993 to 13.49 now. The fall in P/B (price to book value) is more profound (from 4.69 to 2.11). The dividend yield has also gone up from 1.06 per cent in April 1993 to 2.32 per cent. To get a clearer picture, this change has to be compared with the prevailing interest rates. For example, the dividend yield was very small in 1993 (1.06 per cent against FD rates of around 12 per cent). Not any more. It is now 2.32 per cent, against the bank FD rates of around 6 per cent.

In other words, valuation parameters are just right for another major rally. What's missing is the trigger. And nobody know how long before one comes along.