Herd Mentality Syndrome

Special Article - Are you suffering from HMS syndrome?

The following article was featured in Free Press Journal on 27th August 2012. It reveals the idea of staying invested in market helps one create wealth over a period of time. To prove his point the author takes various scenarios where the markets experience ups and downs and investors trying to time the market. Read more.....


Mr. Sarkar is an otherwise disciplined man be it with regard to his food habits, health or devotion to work and family. He is very popular at office being hard working, well organized and always keeps his cool under crisis. So where then was the problem with this “perfect gentleman”. He was suffering from a syndrome which many of us suffer from, namely HMS or Herd Mentality Syndrome – a syndrome where people enter the stock market at its peak and exit at the bottom, and try to time the market.

Here is what Mr. Sarkar has done and the consequences thereof:

Enter at top and exit at bottom:
The year was Jan 2008, equity was the talk of the town, and Mr. Sarkar entered the equity market for the very first time through a Systematic Investment Plan. . Then came the crash in March 2009, and he pressed the panic button and cashed out. The result was LOSS of capital!!

Scenario 1:

Returns on monthly SIP of Rs. 1000/-

* Source: MFI & RBI (Historic data on structure of interest rates)

Start at top and continue:

Despite repeated advice of his financial planner, Mr. Sarkar DID NOT continue with his SIP beyond March 2009. Had he not stopped his SIP in March 2009 and continued till July 2012, he would have got an ANNUALIZED (year on year) positive return and could have grown his total investment of Rs. 55000/- (SIP of Rs. 1000/- per month) to around Rs. 60000/-(See Scenario 2). Not quite the returns he would have got had he stayed invested for 10 or 20 years (we will talk about this latter), but at least he would not have lost money. 

Scenario 2:

Returns on monthly SIP of Rs. 1000/-

* Source: MFI & RBI (Historic data on structure of interest rates)

Start at bottom and continue:

Now let’s look at this scenario from a different angle. Suppose if Mr. Sarkar had started his SIP in an Equity Fund when the market actually bottomed out in March 2009 and continued his SIP till July 2012. With our hindsight, saying this is easy, but to actually understand when the market has bottomed out is extremely difficult. Now even if he had achieved this very-very difficult task, his investment of Rs. 41000/ - (Rs. 1000/month SIP) would fetch him around Rs. 43000/- only. Again, nothing spectacular, but at least money was not lost.

Scenario 3:

Returns on monthly SIP of Rs. 1000/-

* Source: MFI & RBI (Historic data on structure of interest rates)

Investing in a range bound market:

Now suppose Mr. Sarkar actually didn’t found the bottom and started his SIP in August 2009 as the market was stabilizing and continued till July 2012. He would have lost a little money (See Scenario 4).

Scenario 4:

Returns on monthly SIP of Rs. 1000/-

* Source: MFI & RBI (Historic data on structure of interest rates)

The above 4 scenarios are further illustrated through a chart (see below)

BSE Sensex (Aug 2007 to Aug 2012)

* Source: Yahoo Finance.

All these situations tell us one thing, had Mr. Sarkar not been sentimental and just continued with his disciplined investment month after month over the long term horizon, he would surely been a gainer.

For those who are emotional and follow a different SIP i.e. Sentimental Investment Plan, you ultimately land up with HMS and then you lose your hard earned money. Instead be disciplined, think long term and your financial goals may be comfortably achieved with a little dose of equity investment.

What is the cure for HMS? People who don’t understand equity suffer from HMS or herd mentality syndrome!

Equity rewards those who are loyal to it and regularly invest in it over AT LEAST 10 years – Welcome to “SIPEQUITY” the ultimate cure for patients suffering from HMS.

Here we will consider a mutual fund offered by SBI MF called SBI MAGNUM EQUITY as an illustration. Why we have chosen this fund? It is because the return of SBI MAGNUM EQUITY fund had outperformed the equity market in 3 out of 4 scenarios described above and also had a track record of over twenty years.

The table below will illustrate this fact:-

Returns on monthly SIP of Rs. 1000/-.
* Source: MFI & RBI Apart from Scenario 1, an investor would have made more money than market, had he been investing in a SIP with SBI Magnum Equity fund.

The power of long term investing

Had Mr. Sarkar gone for SIPEQUITY of Rs. 1000/= in SBI MAGNUM EQUITY for 10 and 20 years respectively look at what he would have earned at the end of these periods. Amazing BUT TRUE!

Returns on monthly SIP of Rs. 1000/-.

* Source: MFI & RBI 

What the figure shows is correct. If he had invested continuously for 10 years a sum of Rs. 1000/- each month (totaling Rs. 120000/-) he would have made Rs. 3,19,733/- at the end of July-2012. This too is tax free. The same investment in a recurring deposit in a bank would have fetched him around Rs. 1,66,121 (at 6.25% pa rate of interest) and the interest portion would invite tax liability.

Just to corroborate the claim that long term wealth creation magic in equity is not an exception but a rule, let me add that another fund FT India Blue Chip delivered a return of 19.39% per annum during the 10 years between August 2002 to July 2012 period. 

Had he stayed invested for a longer duration say for 20 years in SBI Magnum Equity Fund (i.e. Rs. 1000 pm for 20 years = Rs. 240000), the amount he would have today be Rs. 8,43,399/-. Here again a Recurring Deposit, where you invest a fixed sum of money regularly in a bank account, would have fetched him around Rs. 4,75,975/- (at 6.25% rate of interest) with tax liability of-course.

Equity market is volatile in the short run, however these short term aberrations are ironed out once an astute investor gives the market time to grow his money rather than time the market. Hence it is wiser option to invest in the market regularly and stay put in the market for longer period and Systematic Investment Plan is an ideal vehicle to achieve that objective.