SIP creates wealth in the long run, however it gives no immediate gratification. Equity trading (what the common man thinks is investing) gives immediate gratification and does not create wealth for the client. The broker wants him to trade so that broker’s wealth goes up.

So what is the solution?

Sell SIP in equities as a fantastic product. The call goes something like this – “Sir in volatile markets you should be investing in small lots instead of lump-sum, so we have an EQUITY SIP …it works like this. Every month you invest Rs. 5k in a scrip that we choose, thus you create a portfolio”

Some over enthusiastic ‘investors’ take it to the extreme and think that they can buy 1 share of a company per day (which means they will acquire about 200 shares of NTPC – value Rs. 26,000 in ONE YEARS time.

Sounds good, well it is not. Averaging works only in a portfolio – rupee (dollar) cost averaging – which is what SIP helps you do DOES NOT WORK IN CASE OF A SINGLE SCRIP. Imagine if you had bought silverline at Rs. 1300 ….and you are still averaging, you would have been wiped out. In case of a large cap mutual fund, the ups and downs are not so steep, so you can do an SIP.

Imagine what would have happened in case of IDBI bank, or a few shares that just went into oblivion. What about Lupin laboratories? I think it had a high of about 10x of its low. The question is  WHEN would you have panicked and thrown in the towel?

Which broker in the world will allow you to do 20 transactions of say Rs. 200 a day and not charge you minimum BROKERAGE per transaction? Kotak? Hdfc securities? Icici direct? No way.

What about research costs? Who can afford to buy a research report if you are going to invest Rs. 26000 in ONE SHARE – even assuming over 5 years you invest Rs. 130,000 can you really afford a research report on NTPC – if the report were to cost just a piddly Rs. 50k? No way the report cannot cost you 50% of your investment amount!!

Also some advocates could do a back testing over 3 years and come to a dramatic conclusion that SIP works. It could completely fail if one back tested it for 4 years. Also if one were to do an honest back testing one has to pick up all shares of the sensex from 1979 and see what kind of SIP works. Does averaging over a 3 year period work or a 5 year period work?

You have just finished putting in a lot of money and the market tanks say 30% – and wipes out all your gains. What will you do? Continue averaging? I have not found too many contrarians in my life. And as a broker I have dealt with some of the finest investors in the COUNTRY. Forget the small guy who buys 200 shares at a time – I have seen guys buying 20k shares of RIL at a time, and they too do chicken out. It is not easy to buy with clock work precision – it happens ONLY and only in excel sheets and lab experiments.

The average cost of doing a transaction – telephone call, minimum brokerage, demat transaction charges, – does not allow you to do transactions as small as Rs. 350 – like buying 1 ITC. I would be surprised by a broker who can afford such transactions – print the contract, sign it and courier it. What about the admin costs?

With a single scrip you can average, but requires tremendous amount of information, and skill. Do not fall for such sales pitches. You will be red in 3 years time!

This actually reminds me of a Ben Graham quote:” The individual investor should consistently act as an investor and not as a speculator”

Anyway the market is full of people who like to experiment. There is of course no law in the world which says that the equity markets should not be treated as a school. Sadly the bill is paid later. Much later. 

I was also amused by one person in an animated discussion about this. He has about 15% of his money in equities. What difference in the world will a 1% or 2% greater return make in his LIFE? zilch.