Wednesday, June 1, 2011

What small investors can learn from my trip to the bank

Thanks to the technological innovations of debit cards and credit cards, my trips to the bank have become few and far between. So, on the rare occasions that I do visit a bank, I’m pleased to see lots of eager, young faces looking busy and ready with a smiling ‘Can I help you, Sir?’ welcome.

The initial good feeling soon turns to exasperation. I had gone to get a copy of the account statement for March ‘11 that I had misplaced. A pretty young lady said it would only take a couple of minutes, and would I mind the wait? Not at all, I assured her. That is when things started going wrong.

First, she wanted to know my account number. Since I didn’t remember it, I gave her the April ‘11 statement copy. My daughter’s name appeared as the holder. So, the next question – without even checking that I was the second holder – was, who do you bank with? I mentioned the name of two competing private sector banks.

She had taken a look at the account balance, and came up with: Can we help you with your investments? I said, no thanks. By this time, a bright-looking male colleague came to inform her that the printer was down and the statement will be couriered to me. But he had overheard our conversation and decided to jump into the fray with: Have you thought about a SIP in a mutual fund?

I was already feeling irritated because the trip to the bank had been a waste of time. So I mentioned my preference for investing in stocks and asked him whether he had started a SIP. He proudly announced that he invested 20000 in a SIP every month, and explained how his holding cost will average out over the ups and downs of the market.

Had he thought it through, or was he merely repeating what he had been taught? It was his turn to be irritated. Simple arithmetic, he scoffed. When the market goes up, he gets fewer units, but when the market falls he gets more – so it averages out!

Had he done the arithmetic with real data? Did he know that bull markets tend to last 3 to 4 times longer than bear markets? Therefore his average holding cost is likely to rise over time? Now he didn’t look so confident. So he tried a different tack – not willing to pass up an opportunity to ‘cross-sell’.

Had I thought about investing in a private equity fund? I told him that SIPs and private equity funds are thought up by fund managers to help the fund and their own pockets. They don’t benefit the investor to the same extent.

He made another effort: A competing bank has made a ton of money by floating three private equity funds. I responded with: Does it prove that your fund will make money? Now he played his trump card: How do I make money when the market is down – like now?

I explained that investing is not a job where one had to make money every day. If one invests in good dividend paying stocks, like TISCO or ITC, then one can earn money whether the market is up or down. ‘Every one knows ITC pays good dividends’ – was his parting shot. So how many ITC shares did he own? He had accumulated 70 shares. Instead of his SIP, why didn’t he buy 100 shares of ITC every month? No answer this time – end of debate.

The moral of the story is: Regardless of whether you concur with my antipathy towards SIPs or not, always question investing strategies – whether you have thought it up yourself, or received advice from anyone.

Related Posts

About Cost averaging and Value averaging strategies
If you must SIP, sip good Darjeeling tea


TK said...

Hello Sir,

Its funny to hear that the bank had the printer "down". I have heard it quite frequently when I visit my bank. How can a Bank afford to do that?I suppose a printer is a critical device in a bank. Probably they must be having some agenda behind that too, or I am getting too cynical about it?

Jasi said...

Mr TK,

What is more weird is, do they have just one printer installed in the whole bank? :)

Subhankar said...

Even worse than 'printer down' is 'systems down'! Then you can't even withdraw money from an ATM.

scorpio said...

"bull markets tend to last 3 to 4 times longer than bear markets" Good information, surely kills the SIP bulls :D

Subhankar said...

A value-averaging strategy works better than a cost-averaging strategy like SIP. But the concept of SIP is an easier 'sell' and removes lumpiness from MF investments.