Ideal Verge - Your Daily Dose of Knowledge and Inspiration.

The question on every investor's mind is - Can you beat the market? Believe it or not, there's a simple method for getting the market-returns, if not beating the market. And that is so simple many investors would rather not use it because it takes the fun and flavor out of the game. It requires not much of a work, no thinking, and no decisions, and it can be summarized in a single sentence.

What's the catch? After all, most Wall Street investment managers, roughly 70 percent, tend to trail the overall market average over the long term, despite spending a lot of time researching companies, reading extensive reports, tracking the moves of the Dow Jones Index and huge churning of the portfolio. So how does a small investor got any chance of outperforming most of the experts?

Here's how you do it: Buy an index mutual fund and set up a checking account deduction plan that automatically buys additional shares(units) of the index mutual fund each month.Then sit back and watch your money grow. It's that simple !

Termed dollar cost averaging or systematic investment plan, the system relies on the volatility of the market to ensure that the investor automatically buys more units when markets are down and fewer units when markets are up.

And the real kicker is, you can do it automatically through a checking deduction plan, so the process continues to work without any physical, mental, or emotional involvement from you.

The question you may have is, if it's that simple and that reliable, why doesn't everyone do it? Why waste your time reading earnings reports, tracking price/earnings ratios, following the market, and agonizing over when to buy and when to sell, if you can use index fund dollar cost averaging with no effort?

Why? Boring!

Investors play the market because they enjoy it. Trying to beat the market can be fun and exciting. You pit your wits against the market experts, playing your hunches, making some buys and sells, in the process leads you to lots of excitement. But on the other hand, the above mentioned passive investing  provides you no such fun, but you are left with peace of mind and good amount of market-returns. The choice is with the investor !

PSU stocks like MMTC, Hindcopper, STC India, NMDC, Dredging Corporation  etc.,  have gone up anywhere between 30-60% last week. MMTC has rallied from Rs.540 to Rs.900 up 66%, followed by STC India up 53% and Hindustan Copper up 56%.

So, what's the buzz? The government has been thinking of raising funds through the buyback route and under the buyback mode, the government can raise money by selling its equity in the company. After the government's due approval, institutions, banks and companies interested in buying government stake in PSUs will be able to send their proposals and buy these shares.

Recently, SEBI has allowed promoters to offload their stakes through auctions and this move will facilitate the government's efforts to sell these stocks at better prices. With the new window, the government will be in a position to negotiate better prices for the stake sale and hence the huge spurt in stock prices of these companies.

Does buyback move warrant such huge jump in these stocks? No, since most of the companies on the fundamental part do not justify such high price -  for e.g., MMTC is just a trading company and its current EPS stands at Rs.2 and at the current price of Rs.900 the P/E ratio works out to 450, which is abnormal. And similar is the case with other mines and mineral stocks.

This huge rise is entirely driven by the buy-back news and also due to low liquidity of the floating stock (since Government of India holds about 90% each in all of the stocks mentioned above).  We have seen many such hi-fliers before and know what happened to them later. Hence, investors are better off,  if they would stay away from such stocks, even if they fall 30-40% from current prices.

Buyer beware !

We have already seen the historical returns of the BSE Sensex, which indicated an average return of about 20%  per year, despite many yearly returns varying from -20% to +60%. The following table shows BSE Sensex historical data - yearly high,low,close and also the yearly returns of the sensex from 1991 to 2011.


There are some interesting points to note from the above data. Post 2008 crash of about 50%, one can see how the markets have performed differently in each year. In 2009, the markets gave positive returns of about 81%, in 2010 the returns were just 17% and in 2011 the returns were down 24%. The interesting point to here is the average returns are about 20%, even after the 2008 crash and 2009 boom. The lesson is pretty much clear - long term investing pays and one need not bother too much about the ups and downs of the markets.

During the past few years,  the returns from investing in individual stocks are varied,  only few were multi-baggers, while most of them have come down anywhere between 80-90%. The message for retail investors is clear that - index investing is better than individual stocks. Individual or Retail investors are  better of investing in index Exchange Traded Funds (ETFs) like Nifty Bees or Top mutual funds, which have given consistent returns over longer term.

Be a wise investor !