Real rewards come only with regularity
by Vivek Kaul/Mumbai/DNA Money/December 16th, 2005
Regular investments do not call for a pile of cash
The happiness of those who want to be popular depends on others; the happiness of those who seek pleasure fluctuates with moods outside their control; but the happiness of the wise grows out of their own free acts
— Marcus Aurelius
Ganesh Sharma had just finished watching a late-night show on one of the business channels. And he came to the conclusion that with so many channels coming up, each one of them was facing a shortage of experts.
"The trick is to time your entry point and exit point right, buy low and sell high", the expert had said.
The expert, Sharma felt, had said something for the sake of it. Timing the market is very difficult. Even professional investors have a tough time doing it. A lot of experts have been shouting from the rooftops since the Sensex touched 6000 that the market is overvalued.
If you believe them, you would have to wait till the market corrects. But then, what's the right correction? None of these experts seem to have an opinion on it. In the meanwhile, the market seems to be singing its own song.
Experts say when the markets are falling, it's time to buy. But when prices are falling, it's psychologically difficult to buy. Vice- versa, when the markets are peaking, a lot of investors enter the market. This leads to a lot of investors buying when the market peaks and selling out when it hits the bottom.
Sharma was just wondering, "How does he protect his investments from the volatility in the stockmarket?" Just as he was about to give up and call up a friend, he remembered what his grandfather had once told him, "Keep investing regularly".
Now that Sharma had some money in life, those words made a lot of sense.
How does regular investing help? The simplest answer is that an investor can keep investing even if he does not have a large amount of money.
Also, regular investments would ensure that money earmarked for investment will not go elsewhere.
Regular investments bring "cost-averaging" into play. Say, Sharma invests Rs 5,000 to buy 100 shares of A Ltd at the rate of Rs 50 per share.
Some time later, the price drops to Rs 25. Now, if Sharma decides to invest Rs 5,000 again in A Ltd, he ends up buying 200 more shares. Now he has 300 shares of A Ltd. His average price per share is Rs 33.33 now. If A Ltd is a fundamentally strong company, the chances are that, in due course, the market will realise its true value and the stock price will rise again.
Now, Sharma will make a profit on his investment as soon as the price of the stock becomes greater than Rs 33.33. Instead, if he had just bought the stock when the price was Rs 50, he would have made a profit on his investment only after the stock price went over Rs 50.
The important point to keep in mind here is that the drop in price could be because of external performance and not due to a dip in the fundamental performance of the company. The beauty of regular investments lie in the fact that an investor buys more when the price is less and vice-versa.
As Benjamin Graham points out in his all-time classic The Intelligent Investor, "The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into his basic disadvantage".
(The example is hypothetical)
