Kya hukm hai mere Aaka…
What would you wish for if an Investment Genie came to you and granted you a wish. No prizes for guessing—You would like to be told when a stock was at a bottom so that you could buy and make a lot of money when it went up. With this knowledge, you reckon, you can make a fortune without the risk of any loss.
But then, you are not Aladdin…and do you really believe that the Investment Genie exists?
Back to reality my friend. Don’t lose heart. You can still make money in the market. Want to know how? It’s simple actually…Invest steadily!
Steady investments need little timing
In January 1991, Mr. Orderly developed a habit of investing Rs100 in Hindustan Lever Ltd. (HLL) stock on the 5th, 15th and 25th of every month. By September 1999, his investment amount added up to Rs31,500. He decided to sell his shares on September 30, 1999. The sale netted him Rs170,708. An impressive 441.93% return on his investment.
Why 5-15-25? Because Orderly likes the number 5. What if he was obsessed with the number 3 instead? He would then have invested on 3rd, 13th and 23rd of every month. And, surprise! surprise! His returns would have been much the same—444.89% to be exact!
There’s a lesson here: If you’re planning to invest steadily, don’t worry too much about the timing.
Timing does earn a premium, but it’s not much…
Mr. Timer is somewhat of a genius. He has this uncanny ability of identifying the lowest level of any stock during a month (“he’s got it made..”, say friends). Timer also started buying HLL shares worth Rs300 every month starting January 1991. The edge he had over Orderly was that he could pick the stock at its lowest level every month. Timer also sold all his stock (worth Rs31,500) on September 30, 1999. He received Rs180,730. His return? A whopping 473.75%. Impressive! But wait a minute…didn’t that 5-fixated Orderly earn a 441.9% return on the same investment? That means, for all his genius, Timer earned only a 31.8% higher return than Orderly. Considering that we’re talking of returns in excess of 400% here, and that the investment period was over 9 years, it doesn’t sound all that impressive now, does it?
…requires a lot of effort and experience…
Mr. Follower is a former employee of Timer. He learnt a lot (he thought so at least!) about the market and identifying the bottoms and peaks of stocks from his boss. In December 1990, Follower felt confident enough to quit his job and start out on his own. He also started buying HLL shares worth Rs300 every month. He applied the rules learnt from Timer to identify the stock’s lowest level for a month. But, the stock market is not governed by a perfect science. Experience plays an important role in successfully applying any rules. Due to his lack of experience, Follower managed to identify the monthly bottoms in HLL for only 6 months in a year. For the other 6 months, he ended up investing at the average monthly price. When he sold his stock on September 30, 1999, he received sum of Rs171,640. His return—457.67%.
…and may not really be worth it
Follower earned a 15% higher return than Orderly. And for that, he took the pains of following the HLL price movement all the time—trying to identify the monthly bottom levels (and as we read above, he didn’t do a very good job of that anyway!).
Compare that to Orderly’s effort. All he did was call up his broker on the 5th, 15th and 25th of every month and ask him to buy HLL shares worth Rs100.
Now, was the 15% higher return earned by Follower really worth the effort?
Tomorrow never comes
Mr. Waiter is not really an investor (though he does have pretensions). He spends 5 minutes every morning pouring over the market pages in the newspaper and noting down the stock prices. He wants to wait for the stock prices to fall to a bottom before buying. With this kind of mindset, more often than not he never actually buys a stock.…all money-making opportunities pass him by.
How our investors rank
| | Orderly | Timer | Follower | Waiter |
| Investment Strategy | Steady Investment on 5th, 15th, 25th | Investment at lowest Index level | Same as Martin but with lower success | Always waits for lower level Index |
| Return on Investment | 441.93 | 473.75 | 457.67 | ? |
| Time involved | Minimal | A lot of time | Even more time | Does it matter? |
| Effort involved | Low | High | High | Way too much |
Year-wise Returns on Investment
| Period | Closing | Price Return on Investment | ||
| | | Timer | Orderly | Follower |
| Jan'91-Dec'91 | 171 | 14.96 | 8.92 | 13.55 |
| Jan'91-Dec'92 | 365 | 86.14 | 74.64 | 80.75 |
| Jan'91-Dec'93 | 550 | 134.79 | 120.71 | 128.28 |
| Jan'91-Dec'94 | 590 | 111.57 | 99.31 | 105.61 |
| Jan'91-Dec'95 | 624 | 100.91 | 89.74 | 95.47 |
| Jan'91-Dec'96 | 808 | 135.11 | 122.27 | 128.79 |
| Jan'91-Dec'97 | 1366 | 258.89 | 238.90 | 248.79 |
| Jan'91-Dec'98 | 1681 | 300.43 | 278.20 | 289.22 |
| Jan'91-Sep'99 | 2585 | 473.75 | 441.93 | 457.67 |
There is no real cause for concern if your investment philosophy matches that of Orderly or Timer (or even Follower, for that matter). As long as you pick the right stocks, you will end up making money.
But if Mr. Waiter reminds you of yourself…now, that is an ominous sign. It’s time to wake up. If you need guidance, look no further than this very issue of ‘Taking Stock’. Scrips like Infosys, HLL, Wipro, Indian Shaving, Pfizer & Dr Reddy beckon.
You don’t need an Investment Genie. And you may not be able to identify the bottoms and peaks…but you’ll make money anyway. Happy investing!
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