{"id":3399,"date":"2020-04-27T09:55:44","date_gmt":"2020-04-27T04:25:44","guid":{"rendered":"http:\/\/bltpindia.com\/wordpress\/?p=3399"},"modified":"2021-08-07T23:56:00","modified_gmt":"2021-08-07T18:26:00","slug":"sip-the-journey-from-laziness-to-active-management-part-1","status":"publish","type":"post","link":"https:\/\/bltpindia.com\/wordpress\/index.php\/2020\/04\/27\/sip-the-journey-from-laziness-to-active-management-part-1\/","title":{"rendered":"SIP – The Journey from Laziness to Active Management part – 1"},"content":{"rendered":"

If you want to finish the creativity of anyone, you don’t need to do anything special like Dronacharya does with Eklavya in Mahabharat, asked him to cut his thumb for GuruDakshina, just teach him how to earn money without pursuing any task.<\/span><\/p>\n

The above line is totally suitable for the MF industry, including AMCs. Since they have learnt how to do SIP, they forget creativity (How to Manage Portfolio Actively). We have learned to do SIPs and gifted our thumb (by leaving the art of Active Portfolio Management) to our GURUs. Everyone is busy with the “FILL IT AND FORGET IT<\/strong>” approach for winning the AUM race. They are less concerned about portfolio risk and potential returns.<\/span><\/p>\n

We have figured out the three most powerful reasons for suggesting SIPs.<\/span><\/p>\n

1. Systematically Investment. (Discipline Investment)<\/em><\/strong><\/span><\/h3>\n

2. Rupee Cost Averaging.<\/em><\/strong><\/span><\/h3>\n

3. Power of Compounding.<\/em><\/strong><\/span><\/h3>\n

<\/p>\n

For us, 1st one is the only valid reason for doing the SIP,<\/strong><\/span> just like building a palace brick by brick. This process is meant for accumulation only.<\/span><\/p>\n

As far as discipline is concerned, it is a relative matter.<\/strong> <\/span>Reaching the office sharp at 9:30 am daily is required discipline, but in the investment field, you need to invest on time, not every time. In SIP, you are paying more for having Discipline.<\/span><\/p>\n

See what Charlie Munger and Waren Buffet mean to say about discipline while investing<\/strong>.<\/p>\n

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What we do at Berkshire is simple. We sit on our ass waiting.
\nThe key is to prepare while you wait with extreme patience and discipline.
\nAnd then act with extreme decisiveness.<\/span><\/strong><\/p>\n


\nYou won’t find this in finance books because these principles are hard to teach<\/span>.
\n— Charlie Munger<\/span><\/strong><\/p>\n<\/blockquote>\n

Stalwarts, like Warren Buffet, have illustrated following rules <\/strong>several times,<\/strong><\/span> and by following the same rules, he became one of the Richest Man in the world.<\/span><\/p>\n

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RULE 1<\/strong><\/span>
\n“In investments, it is more important to time in the market than timing the market<\/em><\/strong>“.<\/span>
\nWhat we are doing in the SIP?<\/span> We are trying to time the market blindly and calling it with fancy name RCA.<\/strong><\/span>
\nWhere is Discipline?<\/span>
\nWhat is the correct method of Timing the market will be discussed letter on this platform.<\/em><\/span><\/p>\n<\/blockquote>\n

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RULE 2<\/strong><\/span>
\n“Buy at Low and Sell at High<\/em><\/strong>“<\/span>
\nWhat we are doing in the SIP?<\/span> Playing the blind game in investment buying at every time regardless of the market risk factors.<\/strong><\/span>
\nWhere is Discipline?<\/span>
\nWhat is Low and what is High will be discussed later on this platform.<\/span><\/p>\n<\/blockquote>\n

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RULE 3<\/strong><\/span>
\n“Buy Right Sit Tight<\/em><\/strong>“<\/span>
\nWhat we are doing in the SIP?<\/span> We are buying at any price.<\/strong><\/span>
\nWhere is Discipline?<\/span>
\nHow to decide What is Right will be discussed later on this platform.<\/span><\/p>\n<\/blockquote>\n

These quotes are used everywhere by us but, SIP is never following any of the above-mentioned rules.<\/span><\/p>\n

What we want to say, either Warren Buffet’s rules or what we believe about the SIP mechanism is wrong<\/strong><\/em>. <\/span><\/h3>\n

We all know that Warren Buffet has made money using the above-mentioned rules.<\/span><\/h4>\n

2nd and 3rd points are just marketing gimmick only.<\/span><\/p>\n

2nd, Rupee Cost Averaging<\/em><\/strong> <\/span>is a half-truth because, in RCA, we don’t bother about the risk involved in the market. We are defying the fundamental of Investment –<\/span> “BUY AT LOW AND SELL AT HIGH<\/strong>“<\/span>, we are buying all the time.<\/span><\/p>\n

The basics of Investment taught us to grab the opportunity when markets are down and encashing benefits of the market by selling when markets are high. In SIP, we are cutting the opportunities by investing a small amount in the lower market, and we are increasing the risk by buying at the higher level of the market. As a result, the margin of safety gets reduced.<\/span><\/p>\n

One more thing is that your average will go up even though the market is correcting. Let me explain this, suppose your average has reached \u20b960\/- and the current NAV is \u20b9120\/-, now the market gets corrected, but your SIP purchases are done at more than \u20b960\/-. This will increase your averaging. As a result, the margin of safety is reduced in two ways, first by reducing the NAV and second by the increased average (RCA), which means that your returns will decrease, and this will be continued until the NAV falls below your average.<\/span> Today we are facing the same problem only.<\/strong><\/span><\/span><\/p>\n

By using RCA(SIP), you will never outperform Factsheet Returns (Buy & Hold style of investing).<\/strong><\/span><\/p>\n

3rd Power of Compounding<\/em><\/strong><\/span>\u00a0is the biggest gimmick in the MF industry.<\/span>
\nThere is nothing like compounding in MF, it is merely a presentation of your returns for understanding the performance of your portfolio.<\/span><\/p>\n

<\/p>\n

As mentioned in the above picture, our returns are volatile during the entire period of holdings.<\/span> Do you know how volatility reduces your potential returns?<\/strong> <\/span>We will discuss this in future on this platform.<\/span><\/p>\n

Real Compounding only exists in interest where you are watching your values increasing year on year<\/strong><\/em><\/span> by the said rate. In Mutual Funds, your value is not increasing every year, which may also be negative in some years. When you see your portfolio’s returns, after a long period which is presented in terms of XIRR \/ CAGR (using CAGR in MF is also the wrong method) is the so-called rate of Compounding. For getting this result, the portfolio travelled so many ups and downs.<\/span> The returns are always the outcome of market movements and the strategy applied for investment.<\/strong><\/span><\/p>\n

The biggest lesson to be learnt is<\/span> SIPs are just an accumulator, not wealth creators.<\/strong><\/em><\/span><\/p>\n

It doesn’t mean that SIPs are bad, but the way we are doing SIP is wrong. Then what is the correct way to do SIP? <\/strong><\/em><\/span><\/p>\n

We will be discussing this in the coming days on the platform<\/span>.<\/strong><\/span><\/p>\n

In the next blog, we are discussing. <\/em><\/span>“How to protect ourselves against – Dragon of Direct Plan”.<\/em><\/strong><\/span><\/p>\n

Stay tuned with us. If you have not subscribed to the blog yet, do it right now.<\/span><\/p>\n

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