Buying “low” vs Buying “systematically”: Surprise, Surprise!

In the second part of the buying "low" vs buying "high" study, I consider return differences for identical investment amounts. And guess what? The results are most surprising!

For those who have not read the first part, I request that you head over to Equity: Buying “High” vs Buying “Low” and then come back.

Some definitions:

1 Buying low (low-SIP): Buying when index (S&P 500 and Nifty total returns indices) has a value lower than its ten-month average. This is checked only once a month - on the first.

2 Buying high (high-SIP): Buying when the index has a value higher than its ten-month average when checked on the first of the month.

3 Buying systematically (normal SIP): Buy on the first of each month.

The investment amounts in the three methods have been kept similar. For example, consider a monthly SIP of Rs. 1000. After eight months the total investment would be Rs. 8000.

If I want to buy low and found that the index went below the 10-month average for the first time in the 9th month, then I will invest the Rs. 8000 saved up + Rs. 1000 = Rs. 9000 in one shot.  This ensures all three methods have the same capital.

In the first part, I had not done this. There I found the difference in return between buying low and buying high was quite small. Now I perform this study for every possible 3Y, 5Y, 7Y 10Y, 15Y, 20Y and 25Y periods between

Jan 1900 to Sep 2016 for S & P 500 TRI and

Apr 2000 to Nov 2016 for Nifty TRI.

Two probabilities are considered:

1. The probability of a normal SIP beating a low-SIP.

2. The probability of high-SIP beating a low-SIP.

Results for S & P 500 Total Returns Index

sp500-sip-1

Here 1347 periods implies that the number of 3Y SIP durations were tested between 1900 and 2016.

Results for Nifty Total Returns Index

nifty-sip-1

Compare the very low number of periods available here. Our market is a baby and I am interested in reading too much into these numbers.

For the 7Y period, if you consider the excess return obtained when buying-low did better than a normal-SIP and such excess returns were obtained:

nifty-sip-3

It was only for investments started just after a big crash (dot-com and 2008) and even here the difference is only about ~ 1% or so.

I think the data speaks for itself and no commentary is required. Happy to let my dull and boring SIPs continue

Will say this much: It is one thing to say I will invest on dips or invest during crashes etc. because it appeals to me, and quite another to insist that buying low is the best strategy.

Related Reading

Relevance of the Nifty PE for the long-term investor

Misconceptions about the Nifty PE

Is PB-based investing better than PE-based investing?

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12 thoughts on “Buying “low” vs Buying “systematically”: Surprise, Surprise!

  1. Ranjan

    Hi Pattu sir,

    I’m reading The Four Pillars of Investing by William Bernstein and came across the Gordon Equation which he claims does a good job of predicting long term (30 years+) stock market returns.

    Have you heard of him, the book or this equation?

    I can email you the book in pdf format if you’re interested. It seems to be high quality information.

    Reply
  2. Amit

    This is indeed eye-opening. I am guessing this is because bull runs have been much longer & pronounced than bear runs (they would usually have to, if one believes that over the long term markets have to rise). Consequently an opening to invest in a low-SIP is created very infrequently and after a considerable rise in the market, such that you would have been OK buying the market systematically along its rise.

    Reply
  3. Anjan

    I am probably mistaken here in my understanding but I think the chance of a low SIP beating a Normal SIP is getting hampered by the fact that you end up wasting a lot of time on the sidelines when you are waiting for the Index to hit its low. During that time the money is considered to be lying idle. Thus returns are becoming lower for a low SIP. But what if you assume that the money is earning 9% in a debt fund while you are waiting to time the market. I think if you add the debt part, the overall rate equation might give a different picture. Am I missing something?

    Reply
    1. freefincal

      If I can find a nice debt fund which will give me 9%after taxes (as per slab) and loads for 15Y .... We can always find a way to make buying low better. The point is, it is NOT necessary to time to finance our future and that is the only reason we invest.

      Reply
  4. Jay Cobb

    Why is it called "low-SIP" and "high-SIP" when they are actually Lumpsum investments? Also why is 10-month average chosen as decision point instead of some DMA like 50 or 200?

    Reply
  5. Neeraj Sahgal

    Kindly revise your calculations, as follows.

    When you are investing Rs 9,000 lump sum during a market dip, please note that you had been investing Rs 1,000 per month in a debt recurring deposit over the last eight months @ 0.6 percent per month interest, after tax, therefore you will be investing Rs 9,160 in the ninth month, nearly 2% more than your figure.

    Reply
  6. Neeraj Sahgal

    I mean 0.5% interest per month.
    My comments presume 10% tax slab, which would be true for mostly all the middle class persons claiming tax deductions under home loan, kids' school fees and PF.

    Reply
    1. freefincal

      While we are at it, might as well use 0% tax slab. More people there. Then buying low might have a better chance.

      Reply

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