Here's a sentence from an email that an investor sent me recently, seeking advice about his investments: "I can manage to save Rs 15,000 monthly, but I don't have time to be in front of TV and check stocks and their prices, so I need an SIP sort of investment." This is from a young man in his 20s. That he can save Rs 15,000 a month at this young age is commendable and his focus on savings doubly so. However, he has somehow picked up the idea that sitting in front of the TV all day and watching business channels is the best way of earning returns from equity. Since he doesn't have the time to do that, he is willing to consider what he believes to be the inferior option, which is to start an SIP in an equity fund.
It's truly unfortunate that somewhere in our investment milieu, dedicated young savers are given the idea that watching stock tickers and listening to trading advice on TV is the superior way to save. Without exception, the kind of equity investing that is talked about on TV is short-term trading. Long-term, in the context of TV's equity experts, is often defined explicitly as anything above six or so months. That whole world of investing is about speed, in which the quicker you move, the better it is. If there is some news event or some move in the market, then making money is all about moving the fastest finger first, to use a phrase from famous television series Kaun Banega Crorepati, a show whose title sums up the investors' goal.
The goal is great, because becoming richer is what all investment is about. However, there's a problem with the timescale. There may, in theory, be traders in the world who sustainably make money by watching TV but the average chances of doing so are close to zero. Equity investing is an activity that actually belongs to the other end of the time scale -- if you want to earn great returns with a minimum of risk then you have to think on a scale of a decade.
Lately, many equity investors have found this hard to do. Another email I got recently is from an investor who has been doing an SIP in a top-rated fund for 4 years and now finds that the total returns are barely 3 per cent p.a. Naturally, the investor is peeved because people think 4 years is a very long time and these returns are pathetic. However, 4 years is not the scale to measure equity returns on. If the same SIP had started 6 years ago instead of four, it would have had returns of 8.5 per cent p.a. instead of 3. Eight years would have got 11 per cent and 10 years, would have got 16 per cent p.a. This corresponds to 440 per cent total growth over a decade. Twelve years would have brought returns of 22 per cent p.a. These are not absurdly long periods of time -- I know many investors who have sustained uninterrupted SIPs in equity funds for more than a decade and have actually generated such returns.
During the 2004-2007 period equities gave abnormal returns to investors and what's more many advisors and brokers built great reputations because practically every stock was shooting up. But the fact remains that those were abnormal times and they come only once in a while. The rest of the time, this is a game of patience, cool-headedness and using your TV to watch movies and cricket.