“History is written by the winners”
I won’t be writing about the SIP which is already covered in the public domain. You can find one here. The SIP (Systematic Investment Plan) that I am writing here will cover more details and in relation to stocks, mutual funds and the Indian market.
After all the financial weapons of mass destruction engineered by the MBAs from finance, one good financial instrument created by whoever MBA or not, is this SIP. However as usual they screw it up by placing constraints because their primary agenda is to make money for the financial institution. So SIP sucks if you go with the traditional way. Only thing is it can work once or twice and hit hard at one time which will make it seem same thing as traditional investment practice. Just with the exception of reduced % in losses, relatively, which is nonetheless a good thing. Less loss is better than more loss, no questions on that.
In a popular SIP scheme, one would allocate fixed capital per month into a mutual fund for a fixed time period. There are two constraints here. One is mutual fund which is already diversified enough for the only reason of reducing losses. Now it reduces your potential gains as well. Second constraint is imposed on time. “They” say you are not timing the market. But you are putting a time constraint. “They” say you are investing regularly. Then why only for six months, 12 months or 2 years? Is your salary going to stop after six months?
You won’t get anywhere with all these constraints. The brainy MBAs don’t realize the mathematical logic here. Just as you enter the stock market you are already entitled to a loss. And add constraints on top of that. They will get you more losses. Every now and then you get lucky but when luck turns down for an extended period of time, the constraints will make sure the money flows to the middlemen. The bad luck comes more often and occasionally bad squared luck.
Hence we will eliminate these constraints by sticking to stocks and not having any time constraint. Still there is one more point that conventional SIP doesn’t address. They just want to do their business, why would they bother finding out more tricks. It is still important to time the market. Only thing is it is not on the entry side. Even then it is not tough to time the exit owing to the non-linear nature of the markets. You will time your exit just after a sudden surprising positive move happens. This is where my recent SIP becomes a perfect example.
As the last year was turning out to be another bear market, I reduced my exposure to stocks and decided to start SIP on some stable stock. I have seen Hindustan Unilever for a long time. I watched in 2008 carnage as well. It was very stable. After the recession, it started going up. It was a simple Buffet type of stock. As per my capital infusion rate of 10k per month, its market price of about 500 suited to buy at the rate of share a day. However due to some fixed min. charges (STT, service tax on brokerage), after two weeks I had shifted to buying 5 shares a week. By Jan it had already fallen from its high of 580 to 525 and lost favor among short term traders. Even my broker didn’t understand why I am buying it. I told him I am experimenting. At 525 it was already 10% off the peak, it doesn’t swing too much. Its 52 week low was 380. So I expected the further downtrend to be for a short time. However I don’t have time constraints so I was ready for even a year or two. The longer it takes, the larger the exposure and more absolute gain.
I had planned to buy 5 shares on Wednesday of every week. However I had skipped 3 weeks recently as I was out of town and also sometimes I skipped Wednesday to buy for even lower price on Friday. Such situation only tells that the stock is becoming stronger and doesn’t want to fall. The below table shows the details of the transactions with dates and prices and percentage change as of yesterday’s closing price.
Note: if you think I am trading with small capital, read the explanation in this blog post under Note which is in italian.
The same thing on Monday, shows at the closing price of 500, the first few purchases were in loss but still there is an overall 5% gain on total exposure. Even if the stock just moves up and down, there is a chance to see little gain which can be better than interest rate of bank deposit.
I thought once about selling for 5% gain but my initial target was 12%. I wasn’t asking too much when stock swung from 525 to 430. Surprises can’t be expected. But as there is no time constraint, I was in a position to capture the positive surprise of 16% jump yesterday. It is now time to sell.
To summarize, SIP into stocks should be done this way:
1. Find large cap stocks either from Sensex 30, Nifty 50 or A-group stocks. We choose stocks, instead of mutual funds because even in the best bull market times, mutual funds can’t swing much. While stocks can double or triple, MFs gain 30 or 40%. Now if your unconstrained SIP goes on for 3 years and makes just 20% gain, well it can happen more often. With stocks you can vary your target gain to 12% in six months or 30% in 2 year period because stocks can deliver such huge gains given long periods of time. In case they don’t, probably MFs are in even worse situation along with economy. Those are exceptions and you can’t except to make much in those times.
2. Make sure they don’t have debt or debt to networth ratio is less than 1:3. This is very important. You don’t want to SIP a stock that falls by 90%. Debt is a trap that eventually causes 90% loss. This filter will eliminate disasters. However limited falls of bear market are good for SIP to enable rupee cost averaging. Hence gets you average purchase price (not too high, not too low). This will increase profit margins. You can know debt & networth values on their balance sheets. Go to moneycontrol atleast. However this can be deceptive with finance stocks. So avoid finance stocks for SIPs. It need not only be FMCG, even software stocks are fine. Example: HINDUNILVR (0 debt), CMC (0 debt), DIVISLAB (little debt), DABUR (little more debt but still small).
3. Decide your capital infusion rate per month, translate that into per week, and buy how many ever shares for that capital on a fixed day of the week. If that day is holiday or you just missed, shoot for next day. Don’t skip days to get best prices. Occasionally it is fine but not regularly. As you don’t have time constraint, you should decide judiciously. Imagine it can go on for several years if a downtrend started just now. But then you will be doing another SIP after first one. Just be flexible to not run out of capital at any time.
4. Whenever a target gain is reached or the stock goes up like crazy, it is time to sell. This is the only timing we do. We do this because this is the way stocks behave. Most people don’t know this. Only experienced traders who have seen complete market cycles know what kind of surprises happen in the market. Markets move non-linearly. They can move by small %s everyday for a long time and suddenly move in big %s as if they caught fire. That’s the way reality works. Remember Pareto principle. 80% of the movement happens in 20% of the time. This non-linear nature of reality is not easy to understand as we are trained to work like robots from our schools and colleges. But you can get there if you don’t listen too much to other robots showing up on newspapers, tv channels and around you.
This is how I recommend SIP to be done. It takes into account the real nature of markets. It removes time constraints. By SIPping into stocks instead of mutual funds, you won’t be disappointed by the gains. And don’t worry about taxes whether it becomes short term or long term.
Don't forget to read the DISCLAIMER on the right column of this blog. I don't want any headaches.