Moneysights blog and my quirky behavior

So, I have started to bataofy gyaan to the folks over at the wonderful retail investing site for Stocks and Mutual Funds called Moneysights.

This week I try to explain the fundamental concept of ‘Time in the Market is of much greater importance than timing the market’. I explain this concept through my personal experience in the Mutual Funds I was invested in for the past 5 years. Here is a brief – (Full length article here)

I will rather talk about what starting SIPs in top Mutual Funds & then sitting tight on them has done for me since 2005.With a view that I would stay invested for the next 25-30 years or so in the stock markets (if I live that long, that is :)), here are the mutual funds that I started my SIP in –

  1. HDFC Top 200
  2. UTI Dividend Yield
  3. IDFC Premier Equity Plan A
  4. Birla Sun Life Dividend Yield

That’s it. Just four funds. I am doing a SIP of a fixed amount per month in these funds for roughly an average of 5 years now. So, what are the typical returns over a 5 year period, vis-à-vis SENSEX?

Here is a 5-year return comparison of all the above funds with SENSEX –

1. HDFC Top 200

2. UTI Dividend Yield

3. IDFC Premier Equity Plan A

4. Birla Sun Life Dividend Yield

As you can observe from each of the graphs, almost all Mutual funds beat the SENSEX quite handsomely.

Every Rs. 100 invested in

1. HDFC Top 200 will result in Rs. 56/- more than the SENSEX

2. UTI Dividend Yield will result in Rs. 60/- more than the SENSEX

3. IDFC Premier Equity A will result in Rs. 83/- more than the SENSEX

4. Birla Sun Life Dividend Yield Plus will result in Rs. 44/- more than SENSEX

That is, Rs. 100/- invested in each of these funds will result in Rs. 243/- more than just investing in SENSEX, inspite of the boom (2006-07), the bust (2008-2009) and a relative boom (2010-current).

Imagine this extra Rs. 243/- invested in each of these funds again and so on and so forth. Compounding is so much fun. The only long term wealth creator is ‘compounding effect’ and nothing else.

………

Over the past 5 years, we have had a boom, a horrible bust and a boom again. Unless you were a fantastic stock/mutual fund picker or someone who could spend hours together on the stock market gyrations, you could not have timed a perfect entry and a perfect exit time from the markets. Since I, as a retail investor also have a day job to do and don’t have time to track every move of the stock market, I take comfort in mutual funds. And I have to stay invested for a longer period of time to take care of all these stock market movements. Over a longer period of time, the returns are very good compared to what you get for a fixed deposit (pre-tax and post-tax: which is a different post altogether, but take it at face value for now). And hence the adage ‘Time in the market is much more important than timing the market’.

And to illustrate that human behavior is very monkey-like, jumping from thought to thought, especially if you have that bit of extra time to track the markets on a daily basis, I do the exact opposite of what I proposed in that article. Here’s my little story in brief (and basically highlights the flaw of tracking the market on a daily basis).

Smartlink Networks was a very interesting company at Rs. 52/- in the February lows, when mid-caps were butchered. It was in a fast growing business and they had a substantial customer base. I bought into the story (first mistake, although I was thoroughly convinced of the story, I did not load up). It steadily rose up and when the stock was oscillating between Rs. 75/- to Rs. 79/- during March-end/start-of-April, Smartlink announced that they were selling their major business (which contributed to 80% of its revenues) to Schneider Electric for Rs. 500 crore (4 times the entire Smartlink marketcap). This was an asset sale clearly, much like Riddhi Siddhi’s asset sale back in Jan-Feb. I freaked out at the prospect of the promoter siphoning money from this huge asset sale, rather than reward investors (and as you read this, do note that I knew all this detail because my workload was a little light, and hence had a lot of time to track the markets). I sold out at Rs. 79/- and patted myself on the back for a good move.

Fast forward a month and a half later, today, Smartlink declared a special dividend of Rs. 30/- (along with a regular dividend of Rs. 2/-). The stock price has shot up to Rs. 99/- and may even go higher. That’s a straight 25% notional loss just because I didn’t have the discipline to be in the market for a while. I was trying to time the market, rather than spend time in the market. And that cost me dearly.

Clearly, the lessons learnt from this mistake are –

1) I better follow my policy very strictly (other than extenuating circumstances) of ‘time in the market’. I think I need to do a jap and tapasya on this 🙂 Easy to preach, immensely difficult to practice. Hope you never make this mistake.

2) I have tried repeating this lesson to myself time and again, but I am not able to implement it. The lesson is ‘If you are convinced of the bloody stock story, you bloody well load up’. I didn’t. Feel free to slap me for this, if you happen to pass me by on the road.

3) Thank god, my mutual funds are not online. Else, I would have been trigger happy trying to time the market even with mutual funds. My SIPs are continuing as usual, without a bother in the world. How pleasant!

4) Busy myself with something very quickly, lest I keep pulling this trigger time and again by watching daily stock market gyrations. I define myself to be one following ‘value investing philosophy’. What the hell am I doing tracking the markets on a daily basis? It’s nuts.

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  1. #1 by Santosh Navlani on May 24, 2011 - 3:53 PM

    Yes, its damn easy to say & preach but most difficult to handle in practice!!! Its either fear or greed all the time & not necessarily fundamentals….but even if one cuts down the behavior half the time than usual, there is lot to gain 🙂

    The reason you mentioned for selling SmartLink was you were doubtful about the promoter’s intent of rewarding the shareholders. Just that one would never know the accuracy of these assumptions, always. Many Indian promoters may be unethical, but there are always an equal number who are probably good as well.

    Santosh

  2. #2 by Sudeep on May 27, 2011 - 3:43 AM

    Your article is excellent and very true. Everybody tries to time the market rather than spending time in the market. Even I used to do the same.. result.. only marginal profit…Now what I am doing is, I have split up the allocations to mutual funds, long term investment and a comparatively less percentage for timing the market(to satisfy the monkey jumping behavior) :). But still I feel that investing in Mutual fund or a good share for very long term in SIP is the best option unless you are really in need of money.

    Once again thanks for the write up.

    Cheers,
    Sudeep

  3. #3 by kdaaku on May 28, 2011 - 11:42 AM

    @Santosh – I agree. And the difficulty is to seperate the good promoters from the bad. I don’t yet know how to effectively do that, although I try to track promoter’s holdings much to no avail.

    I need to figure out a strategy for that soon, as I see more and more asset sales happening than Open Offer triggers in the future (unless the regulation drastically changes). We are gonna get some interesting situation over the next couple of years.

    And to be honest, I am more pissed by not loading up on the stock inspite of being convinced of the story in comparison to guessing on the promoter’s intentions 🙂

    @Sudeep – Thanks for your kind words. I think you’ve got a fairly good strategy going now, taking care of long term as well as trigger happy behavior. The only angle that I’d be careful about is to over-extend the trigger-happy fund, rationalizing ‘It’s just one more time/it’s only 1% of my total investable funds’ etc. If you can avoid that, I think you can certainly generate alpha from that strategy.

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