Can a Layman earn more than bank return ? - Knowledge Articles

People have different motives for investment. Some want to secure their future while the others want to multiply their money. Keeping the money in a savings bank account fails to beat the inflation also. So, one needs to resort to different forms of investment. One should also understand that risk is an inherent part of investment. Generally, greater returns are associated with greater risk, e.g. stock markets, which are associated with higher risk over shorter periods have provided the highest long-term returns as compared to short-term cash investments that have provided the lowest long-term returns. Thus, it is crucial to be aware of different forms of investment and the risk associated with each class. One cannot eliminate the risk to achieve greater returns, but with careful research and systematic investment, one can minimize the risk. The broader asset classes of investment are:

Bank Deposits: These can be long term or short term. Here, the returns are low as compared to other investments but risk is minimal as the returns are guaranteed by the bank. 

Bonds: These are issued by a government or a company. They pay a certain interest rate periodically and re-pay the money that one pays to them on maturity. These lock the money for a certain period of time and the risk here is the credibility associated with the corporate or the government that issues the bond.

Gold: This asset class is generally looked upon as an inflation hedge and investment demand for gold generally increases in times of crisis. Although this asset class seems very lucrative given the recent returns; however, given the current prices, the risk-return ratio is unfavorable.

Stocks: By investing in the shares of a listed company, one gets the ownership of the company in proportion to the amount of the investment. Here, the returns can come in two ways: the dividends received out of the profits of the company and the capital gains made if one sells the shares at a higher price than his buy price. This asset class is associated with high risk in the short term but they have historically provided higher returns than any other asset class in the long term.

Stocks as an asset class is highly alluring, however, many have burned their hands as they ignore the basic principles of investing. Most people either invest in the wrong stock or at the wrong time. Moreover, they end up "Buying High and Selling Low" when it should actually be the reverse. Identifying the "Low" and the "High" of the market is not possible always, however, one can definitely make money if one has a strategic approach towards investment.

Benjamin Graham

Benjamin Graham, the father of value investing principle talks about formula investing i.e. Dollar cost Averaging principle in his famous book “The Intelligent Investor” which is considered as a  bible for Value Investors. He says that “dollar-cost averaging” enables one to put a fixed amount of money into an investment at regular intervals. Every week, month, or calendar quarter, one has to buy more—whether the markets have gone (or are about to go) up, down, or sideways. It’s all out of sight, out of mind. That way, one does not have to guess where the market is going.

The advantages of this type of investment are as follows:

1. One does not need to predict the movement of the market

2. One does not need to identify stocks which removes the risk of investing in wrong stock

3. One does not need to time the investment which removes the risk of entering at the wrong time

4. One gets the benefit of diversification, by investing in an index which represents the broader market

Thus one needs to follow a simple strategy of "regular investment" in a well-diversified portfolio. Investment in a range of different companies from blue chip to tech stocks removes the stock specific risk and leaves only the market risk. However, it is not possible to invest in a whole lot of companies for a retail investor. Thus, to avail of the opportunity of investing in top blue chip firms, one can invest in S&P CNX Nifty which is a well diversified index of 50 stocks accounting for 24 sectors of the economy. We have devised a strategy on Nifty to capture the cycles in the market over the medium term based on this concept of systematic investment discussed above. Our strategy is based on the simple premise to gain from the market volatility as we buy on dips and sell on highs.

Let us set the rules for our strategy:

Rule 1: Wait for the market to make a high

Rule 1: Do not start investing until the market falls 13% from its high

Rule 2: Start investing Rs. 5000 every month as soon as Nifty falls 13% from this high

Rule 3: Double your investment every month to Rs. 10000 once the market falls 21% from the high

Rule 4: If the market recovers its losses and rises above 21% from the high, again reduce your investment to Rs. 5000

Rule 5: If market gains further and rises above 13% mark, stop investing.

Rule 6: Once the previous high is achieved again, sell off all your investments.

Let’s see how our strategy works during the period of 2008 and 2010. Market made its high on 8^th of January 2008 at 6287.85. We decided to start our systematic investment in Nifty Bees with an investment of Rs. 5000 as soon as the market falls 13% from the high. Thus we start our journey with an investment of Rs. 5000 on 21^st January,2008 at Nifty of 5208.8. Once we start investing, we decide to invest Rs. 5000 at the beginning of every month, if on that date Nifty is below 13% from the high of 6287 observed on 8^th of January,2008 and Rs. 10000 if the market falls down 21% or more. We decide to wind up our position, once Nifty reaches its previous high of 6287. Thus the strategy can be summarized as under:

Nifty Range                                          Investment

>5470                                                    Rs. 0

5470 to 4967                                          Rs. 5000

< 4967                                                   Rs. 10000

 The table below details our investment and the status of the portfolio at the end of each month:

DATE	NIFTY CLOSE	INVEST-MENT	SHARES BOUGHT	TOTAL SHARES (Units)	CUM. INVESTMENT	AVG PRICE	MKT. VALUE	P/L
21-Jan-08	5,209	5,000	0.96	0.96	5,000	5209	5,000	-
1-Feb-08	5,317	5,000	0.94	1.90	10,000	5262	10,104	104
3-Mar-08	4,953	10,000	2.02	3.92	20,000	5103	19,412	(588)
1-Apr-08	4,740	10,000	2.11	6.03	30,000	4976	28,575	(1,425)
2-May-08	5,228	5,000	0.96	6.99	35,000	5010	36,522	1,522
2-Jun-08	4,740	10,000	2.11	9.10	45,000	4948	43,108	(1,892)
1-Jul-08	3,897	10,000	2.57	11.66	55,000	4716	45,442	(9,558)
1-Aug-08	4,414	10,000	2.27	13.93	65,000	4667	61,469	(3,531)
1-Sep-08	4,349	10,000	2.30	16.23	75,000	4622	70,565	(4,435)
1-Oct-08	3,951	10,000	2.53	18.76	85,000	4531	74,109	(10,891)
3-Nov-08	3,044	10,000	3.29	22.04	95,000	4310	67,097	(27,903)
1-Dec-08	2,683	10,000	3.73	25.77	105,000	4074	69,140	(35,860)
1-Jan-09	3,033	10,000	3.30	29.07	115,000	3956	88,174	(26,826)
2-Feb-09	2,767	10,000	3.61	32.68	125,000	3825	90,419	(34,581)
2-Mar-09	2,675	10,000	3.74	36.42	135,000	3707	97,411	(37,589)
1-Apr-09	3,060	10,000	3.27	39.69	145,000	3653	121,460	(23,540)
4-May-09	3,654	10,000	2.74	42.42	155,000	3654	155,021	21
1-Jun-09	4,530	10,000	2.21	44.63	165,000	3697	202,181	37,181
1-Jul-09	4,341	10,000	2.30	46.94	175,000	3728	203,745	28,745
3-Aug-09	4,711	10,000	2.12	49.06	185,000	3771	231,135	46,135
1-Sep-09	4,625	10,000	2.16	51.22	195,000	3807	236,914	41,914
1-Oct-09	5,083	5,000	0.98	52.20	200,000	3831	265,375	65,375
3-Nov-09	4,564	10,000	2.19	54.40	210,000	3861	248,255	38,255
1-Dec-09	5,122	5,000	0.98	55.37	215,000	3883	283,613	68,613
4-Jan-10	5,232	5,000	0.96	56.33	220,000	3906	294,715	74,715
1-Feb-10	4,900	10,000	2.04	58.37	230,000	3941	285,986	55,986
2-Mar-10	5,017	5,000	1.00	59.36	235,000	3959	297,833	62,833
1-Apr-10	5,291	5,000	0.95	60.31	240,000	3979	319,069	79,069
3-May-10	5,223	5,000	0.96	61.27	245,000	3999	319,983	74,983
1-Jun-10	4,970	5,000	1.01	62.27	250,000	4015	309,510	59,510
1-Jul-10	5,251	5,000	0.95	63.23	255,000	4033	332,021	77,021
2-Aug-10	5,432	5,000	0.92	64.15	260,000	4053	348,418	88,418
1-Sep-10	5,472	-	0.00	64.15	260,000	4053	350,996	90,996
1-Oct-10	6,143	-	0.00	64.15	260,000	4053	394,074	134,074
1-Nov-10	6,118	-	0.00	64.15	260,000	4053	392,415	132,415
5-Nov-10	6,312	-	-	64.15	260,000	4053	404,918	144,918

Thus after making a disciplined investment every month, we observed that Nifty crossed the mark of its high observed earlier on 5^th November,2010 on which date it made a new high of 6312. As decided, we wind up all our positions. As on the liquidation date, on November 5, 2010 we had invested a total of Rs. 2,60,000 and the market value of our portfolio stood at Rs. 404917. Thus we made a gain of Rs. 1,44,917(a gain of 56%) in a period of just 2 years. Instead if we had invested in Nifty at one go, we would have stood at negligible gains. 

A look at the table will raise a question in your mind that the strategy is not a perfect strategy as one also makes a loss to the tune of 34% during the course of investment as on 1st December,2008. However our strategy has the first premise to capture the entire cycle of the market from high to bottoms and back to the highs and to avoid market timing. Had we timed the market, we could have avoided the loss or might have made a bigger loss. However, we wanted our strategy to be unbiased and simple as we had confidence that it will yield results once the cycle is complete. Thus one has to be patient till the cycle completes itself to see the result of a gain of more than 50%.

However what we discussed above is past. If a person wants to invest in the strategy in the current time, he or she can take the market high of 6312 as a highest point and start investing today. He might start with an investment of Rs. 5000 once the market falls below 5491 (down 13% from the high of 6312) and double his/her investment to Rs. 10000 once it slips further below 4987 (down 21% from the high of 6312). We started our fresh journey of investment on February 01, 2011 with Rs. 5000 at the market of 5417 thus procuring 0.92 units. Our current position is detailed in the table below:

DATE	NIFTY CLOSE	INVESTMENT	SHARES BOUGHT	TOTAL SHARES	CUM. INVESTMENT	AVG PRICE	MKT. VALUE	P/L
1-Feb-11	5,417	5,000	0.92	0.92	5,000	5,417	5,000	-
1-Mar-11	5,522	-	0.00	0.92	5,000	5,417	5,097	97
1-Apr-11	5,826	-	0.00	0.92	5,000	5,417	5,378	378
2-May-11	5,701	-	0.00	0.92	5,000	5,417	5,262	262
1-Jun-11	5,592	-	0.00	0.92	5,000	5,417	5,162	162
1-Jul-11	5,627	-	0.00	0.92	5,000	5,417	5,194	194
1-Aug-11	5,517	-	0.00	0.92	5,000	5,417	5,092	92
2-Sep-11	5,040	5,000	0.99	1.92	10,000	5,222	9,652	-348
3-Oct-11	4,850	10,000	2.06	3.98	20,000	5,029	19,288	-712
1-Nov-11	5,258	5,000	0.95	4.93	25,000	5,073	25,911	911
1-Dec-11	4,937	10,000	2.03	6.95	35,000	5,034	34,329	-671

We invested Rs. 5,000 every month when the market fell below 5491 and Rs. 10,000 when it slipped further below the 4987 mark. Thus our strategy ensures that if the market falls further, we would invest even more to sell when the market starts recovering. And if the market rises, we are set to gain on our investment. Currently, with an investment of Rs. 35,000, we are losing something less than 2%. However, once the market starts recovering, we will start making profits. If market falls further, we would invest Rs. 10,000 every month to procure a larger no of units to be sold at a higher price later.

The market makes a high, then bottoms out, and then rises again to the highs reached earlier, or even breaches those highs in a bullish market. Given these market cycles, it becomes very difficult to time the market and most of the people end up losing money. Systematic investment becomes a prerequisite to survive these fluctuations. It brings discipline to a person’s portfolio and eliminates the element of emotions. A person does not get worried whether the market gains or loses as he will always stand to gain from the concept of averaging his portfolio as diversified as Nifty.