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In January 2018, my portfolio hit a new all-time high. The next time I would hit an all-time high was in November of 2020. 1051 days of living in a draw-down is a pain. What was more painful than enduring the draw-down was the changes I made.
As a systematic investor, my system gave me a list of stocks from my PF to sell and buy an alternative set of stocks. While the portfolio consists of 30 stocks, I sold 220 stocks in the same period and bought 220 different stocks. Almost no repeats.
What if I had not done this and instead stuck to the Portfolio I held in January 2018. How would this be looking in November 2020?
My Portfolio would have been down 50% instead of being back to square one.
After 4 glorious years of barely interrupted bull run, the markets are experiencing an experience with gravity like it hasn’t done in a recent time. My portfolio hit an all-time high in September last year. In terms of the length, it’s still a baby compared to the last time around.
This correction is already proving to be different from the one I experienced last time around. While I had just one instance of a four percent drawdown in a single day between 2018 and March 2020 and just one more before the portfolio made a new all-time high, this time around, this time around I have had two.
In the back-test I have done, the longest period of drawdown was of 1960 calendar days. Jan 2008 to May 2013 to be precise. Being a full-time participant during those times, the despair has to be seen to be believed. The last time one saw such despair was during the dot com bust.
Every such fall has removed from the marketplace quite a few well-endowed investors just to be replaced by equally well-endowed new investors. Lots of stocks which were supposedly the best investments prior to the crash were nowhere to be found by the time the market had recovered. Some like DLF while not haven’t conquered their high of 2008 are still around, others like Unitech disappeared
When death comes to companies, what is uniform is the fact that majority if not all of the equity in the company is held by individual investors. When Naren made the most controversial statement one has seen in recent times, one word caught my attention. His reference to OTCEI.
If one pools a random set of 100 investors today, I wonder if even one had heard about OTCEI. OTCEI, the acronym for Over-the-Counter Stock Exchange of India was set up with the purpose of providing small companies an ability to raise funds without having to bother with the compliance requirements of large exchanges. Sounds familiar?
Every few years, the market teaches everyone some old lessons that get forgotten in the heat of a bull market. Every bull market has bottomed out with Nifty being way lower than its 1000 day moving average. Currently that stands around 19,600. Question is how deep this shall be and how long the next recovery. Only the prepared survive.
When podcasts first got started, it was interesting to hear. Great investors we knew about only in books or articles came to talk about a variety of things. Learning became interesting.
Today, we are overwhelmed by content, and this includes podcasts. On any given day, I assume there are hundreds of new podcasts that are churned out. some good but most barely worth the time. Since a hour is these days the standard length, its tough to go through even the ones that come well recommended for there is so many of them.
Excess Returns is an investing podcast hosted by Justin Carbonneau and Jack Forehand, partners at Validea. They have had some great guests and some great discussions. But over 3 years, I would think they have talked to guests for more than 140 hours of discussions.
Recently they came out with a summary of the advice given out by 70 of their guests. Just this is two hours long but more importantly, it’s tough to remember. I have tried to reduce their advice to one to two lines. It’s amazing that despite them being a diverse set with diverse beliefs, how when it comes to advise, there is so much of overlap between them.
Pick a strategy and stick with it come high or hell water. Good strategy that you can stick with is better than a Great strategy that you cannot stick with
Don’t confuse information with knowledge. Any strategy that invests in risky assets can go through long periods of underperformance. Diversify across factors.
A couple of months back, I bought a stock not because it came in one of my models but because it was recommended by a very good friend of mine who is also pretty successful. The trigger came because of 2 reasons, One the guidance he claimed the company had provided to a friend (who is another excellent investor) and secondly it was cheap, massively cheap and looked like a fine turnaround story.
The stock promptly fell right after my purchase. I asked my friend who said, nothing to worry, stock will recover in time. With IT returns date fast approaching, the same friend approached me with help on dates for stocks he had purchased but misplaced the contract notes. While helping him, I realized that most of the stocks he held were for anywhere between 5 to 10+ years and here I was trying to coattail him while also checking the stock price every day.
During 2020 / 2021, there was a lot of interest in Momentum based Portfolios. Even Asset Management Companies chased the flame launching their versions of Momentum Fund. A year of no real returns and the interest has waned, another year or more and very few will stick with the strategy. Same goes for Value / Quality, you name it.
Thanks to easy availability of tech, its possible to backtest 100 years in just a few minutes and come up with an answer as to whether the strategy is worthwhile or not based on the end results. But what about the interims? How long are the down periods and what if we encounter one in the near future.
In 2002, Sensex was at the same level as it was in 1992. Yes, we had ups and downs, but if you were an investor in the Index (which wasn’t possible at those times), you basically earned nothing in a period when fixed interest by NBFCs breached 20% p.a for a short period of time.
We have seen this even in International markets. Markets that are going nowhere for a very long time. Even today, many European Stock Market Indexes are in sideways ranges for a decade and more.
All those investors who invested in the IPO of say Infosys or Wipro and still hold today, the amount they invested were not really important in their scheme of things and this allowed them to be invested for a really long time. Of course not to forget, Survivor Bias.
When financial planners talk about long term growth numbers, most of them are based on historical insights. But what if history doesn’t hold true. Australia for example has had continuous GDP growth – from 1992 onwards.
All Ordinaries, the oldest Index in Australia, went up from 1400 in 1992 to 6800 in 2008. Today it’s around 7200. This even when the economy was expanding. Measured in Dollar Terms, even our own Sensex from 2008 to 2020 while in local currency it had doubled.
A model might show you some risks, but not the risks of using it. Moreover, models are built on a finite set of parameters, while reality affords us infinite sources of risks.
Nassim Taleb
Much of the behavior gap we talk about in Investing happens in my opinion because of time frame mismatch. Its easy to talk about long term investing, but how do we react to short term blips and how do we react to long term blips matters.
Investment drawdowns are normalized these days as something you should not worry about. Markets always go up. While they do have gone up, time that has gone by (where little or no returns have been achieved) are of importance too.
Fund Managers say that one has to give at least 3 to 5 years before deciding on whether an investment is worth holding or not. Given the high career risk for fund managers underperforming for long, the probability is that an underperforming fund shall either see a change in managers or if the situation is too bad, simply merge the offending fund into a fund that is doing well.
As an investor in such funds, does that require a reset of expectations. How long a rope to give the new fund or fund manager before calling it a day. Goals can be reached via two ways – high savings that require no need for risk or moderate savings where some part of the goal can be met with adequate returns. Time frame of our investments need to be inline with our requirements as also our ability to go through painful periods when all seems lost.
Coming back to the stock I bought based on my friends recommendation, I think it deserves a lot more time. One I wasn’t ready when I started but one I need to be if it has to work out as a good investment.
I got introduced to Technical Analysis by way of an accident during the time of the Dot Com bubble and I fell in love with it. I loved it for both the simplicity and the fact that the answers were binary in nature with very little between.
Pure Technical Analysis though is as discretionary as with any other strategy. Buy if the stock doesn’t break below 100 but if it breaks 100, expect the stock to go down to 80. Good Luck trying to invest or trade based on such analysis.
Loving the method is not enough, one needs to be a constant cheerleader for how else will the world know that my method is the best. The ability to spread the word during the early part of this century wasn’t easy – no Twitter or Whatsapp or Telegram. So, I did what I could do – started a Yahoo group and given that I still believed myself to be more of an investor than a Trader named it Technical-Investor.
While I may or may not have learnt anything from the group, I did make quite a few friends for life. In a way, my scribbles on the group were also responsible for my first real job when I got a job with Dr. C.K. Narayan. This was kind of a midwife to me for enabling me to meet “Captain Hindsight”, someone who has influenced me and continues to do so .
Technical Analysis for me still is the bedrock for understanding markets. If prices move based on Demand and Supply, it can be only gauged by data.
A reason for me sticking with it is also because of the fact that I was barely able to forecast my own businesses let alone dream of being able to forecast the business run by others.
Not for lack of trying though. I have read most of Buffett’s writing as well as have books written by many well known authors on Value Investing. While I understand the rationale, I doubt my ability to muster enough courage to bet on companies based on the understanding.
Quality is something I have grown to like with a lot of credit for it owed to Saurabh Mukherjea. While most analysts try to showcase quality by way of narrative, SM to me was the first to backtest a simple idea and showcase its ability to generate above market returns for any investor willing to invest for the long run.
To me Value, Quality and Momentum are many sides of the same coin. One cannot exist without the other. In fact, I was recently said that my returns suggested that my portfolio was more of Quality stocks and less of Momentum even though my selection criteria has nothing to do with fundamental aspects of the stock itself
Financial Advisors tell you that the risk you should take should not disturb your sleep. In many ways, the method you follow is something that you can sleep with. Every strategy has its positives and negatives. I have in the past tried to showcase the negatives of Momentum Investing for example. Same risk exits for Value / Quality or any other strategy that exits.
Finance is simple. Try to earn more than what you need to spend, save the difference as best as you can. That is what my Parents and their Parents before did. They earned, they saved a bit and invested into assets they were comfortable with.
I have never been to the United States, but I have read much about the choices available to a customer. A quote that got my attention,
A typical Costco store stocks 4,000 types of items, including, say, just four toothpaste brands, while a Wal-Mart typically stocks more than 100,000 types of items and may carry 60 sizes and brands of toothpaste.
Four vs Sixty. There is not even a sense of comparison on what is easy to pick and select. When it comes to finance, from the US to India, it’s moving closer to what we see with Walmart. In 2020 alone, the US saw 318 new ETFs being launched. In the first 7 months of this year we have seen 221 new ETF’s being introduced.
There is a plethora of Blogs, Podcasts, Youtube Interviews, Clubhouse Discussions, Substack that constantly pump out information – way more information that what we need or desire maybe. Choice is good to an extent after which it starts to actually hurt. More choices basically means more options which generally tends to create more confusion. Oh, I left out Television and Pink Papers.
Opinion Makers are dime a dozen. On Twitter, one interesting observation has been that those who tweet a lot get a lot more followers. This even though they may not even have a track record of their own. On the other hand we have Fund Managers and CEOs who have much lower followership.
Noise makes us question our beliefs. From April of last year, the best way for most investors would be to just be invested. But data – the one from Mutual Funds shows otherwise. From April 2020 to June 2021, investors have actually pulled out money and this after accounting for the huge inflow that SIP’s bring in every month.
Some actions may be due to need but the majority is mostly money that was scared out by the constant humming of those who feel that markets are ripe for a meltdown. After seeing one as recently as March 2020, it’s not surprising that those sitting on the edges would want to get out as soon as they saw some recovery from the bottom.
This is not to say that markets may not fall, that they shall fall is guaranteed. But the constant refrain of crash and the accompanying loss of one’s net worth impacts a great deal on one’s ability to handle the smallest of drawdowns.
On the other hand, because I am bullish, continuously pushing that narrative is wrong too for that sets the wrong expectations. The last year has seen a surge of new investors. In markets, these investors have been rewarded plenty.
Investing Now
Does it make sense to add money at the current juncture was a question I received from a subscriber. My standard reply has always been – it doesn’t matter when you invest, the first year of investment is when the risk is at the highest.
Markets since 1986 (when the Sensex started) have closed in positive one year ahead 70% of the time. This is the drift that has meant that a long term investor has a very low chance of losing.
This is not unique to India either. For the same time period, the FTSE Index and the German Dax had a positive return 68% of the time. S&P 500 has an even better record – positive 80% of the time. Since its own inception though, this falls to 74% of the time.
The only exception of course remains the Nikkei. Since 1950, the one year positive return percentage is around 65% and this falls to 55% if you were to start from 1986.
Longer the time period, greater the probability that you shall be positive. For most prominent indices, being invested for 15 years or more has more or less guaranteed positive returns (exceptions being the Dow due to the Great Depression and of course Nikkei).
The chart below from the book Stocks for the Long Run showcases how both risk and return from 10 year onwards to 30 year is similar.
In April, the one year return for Nifty 50 was 84%. Let me show the rolling one year return to see the previous instances have had such insane returns in such a short period of time.
From 1992 onwards, we had multiple times when we had a one year return > 80%. The next one year returns on an average was negative 8.41%. But if I move the starting point to post 2000, the average return has been positive 11%.
When experts provide data, do note that it’s easy to mess around the same to meet the objectives or the viewpoints of the said expert. If I intend to promote why markets would remain bullish, just using data from 2001 onwards (20 years is long enough, right) suffices.
In the long run, Nifty 50 has given a return of around 12% and going into the future, we should not expect any difference.
If one were to invest today, the expectation has to be low. But one should invest in my opinion for there is no guarantee of an opportunity that can arise and one that can be taken advantage of. Waiting for a correction is good in theory but mostly bad when it comes to practice.
In March 2020, when Indices were down 40% from the peaks reached in January, the inflow into Mutual Funds was the same as in February when we had no worries with respect to Corona. In April, when the same opportunity was available with more clarity, Mutual Fund investments actually fell by half (vs the previous month).
Invest when there is blood in the streets, says Warren Buffett, but most of the time the blood is our own and even if we have the money to invest, we don’t have the courage. What this means is that we should invest when we are comfortable to invest rather than waiting for the best opportunity to come by.
If you don’t have the courage to invest a lump sum, split it into monthly SIP’s but do invest for even though Lump sum may be a better way vs SIP, both are better than staying put waiting for a crash to happen.
There are a few movies I am happy to watch over and over again – Gladiator being one of the elite list. It’s not just about the story that makes me watch it over again but about some of the dialogues and the depth you can take the dialogues to in a different world. One such dialogue is this
Twitter is many things for most of us. For me, it has provided me a world of connectivity and knowledge by being able to read the opinions of others. Now, it’s not like I have been a saint myself and while I don’t regret saying many things that led me to being blocked, I do regret the way I did it. I wonder if I could have been better than that in expressing whatever I expressed regardless of whether I was right or wrong.
In the world of finance, building assets under management – either as an Advisor (or Mutual Fund Distributor) or a PMS doesn’t come easy. It’s in many ways the same for building a twitter follower base. In both the cases, it’s the ability to convince others that you provide a service of value that matters.
Most people with huge followership are those who are well known through other media or have made a name for themselves in their respective fields that even if they don’t tweet much, they still command an audience that mirrors on obscenity.
Then there are guys like D.Muthukrishnan (@dmuthuk). I don’t watch Television much and maybe wrong, but I don’t think he is a guy who comes on TV and says – Buy ITC for 202, target of 212, stop loss of 192. Rather, he uses his personal twitter account to tweet about a stock he holds (and a substantial quantity at that) and the merits of the company.
As an Investment, ITC could be a great one or a lousy one – only time shall tell the difference but what ITC is not is it being a microcap company that has questionable financials. He is not alone in talking about his book – any and every decent fund manager does that. Now, if you are any decent fellow who doesn’t take nicely to being said that ITC is a great stock when you believe it’s not – you have two options – Short the damm stock, call it a fraud or maybe like Bill Ackman did with Herbalife – present a 250+ deck to showcase why its a fraud and why you should not hold it, let alone buy the stock.
But that is tough – ITC for all the wrongs it may have done in the past is still a giant cash generating machine. More importantly it distributes a very large percentage of its cash earrings back to its public shareholders. So, rather than attack ITC, it’s amazing how people I genuinely admire have taken on him for his other aspects of his life – his being a Mutual Fund Distributor being the latest.
India has around 1 Lakh Mutual Fund Distributors who account for nearly 80% of the equity assets under management that is held across funds by Investors. A large part of these distributors barely make enough money to make it a worthwhile enterprise. While I don’t have any stats to back me up, I do think that like many other things, even here Pareto Principle works. Basically, 20% of distributors make 80% of the money.
The majority of investors invest through a distributor because he has convinced them that this is a better deal than having their money in an Fixed Deposit or other asset classes. There is a second set of clients – the HNI kind who go through a distributor not because they don’t know they can save themselves the commission by buying a direct fund but because they believe that at the end of the day, the distributor provides him value for the commission he gets.
Some time back, I was associated with a distributor who has a fairly large AUM. His clients are not of the retail category but one who can write a cheque for a 8 digit investment without batting an eyelid. Having met a couple of his clients, I know they know even better than the distributor himself, so why even bother?
In India, we don’t bucket people by their profession. While we discuss only the core requirements at the beginning stage, as we gain comfort, we want to share our thoughts and views on other things that matter to us and love to have an outside opinion. In that way, HNI’s financial advisor provides a perspective that he might either be missing in a range of areas they feel comfortable sharing and asking for views.
For someone who has come from much humbler beginnings, the one thing I would love from Muthu is about how he went about building the business he did – the up’s and the down’s and the path thereof. I don’t see a reason to crib about his Income is still gross income and not net income and is in line with what you expect someone managing a couple of hundred crores to earn.
I wonder if the long period of socialism in India has pervaded to the extent that we feel uncomfortable with those who earn more than us that we need to find a stick to hit him with. On Twitter, it’s easy to call out people – but let’s call our people for their wrongs rather than for being different.
PS: I don’t know or have met Muthu other than from whatever we have interacted on Twitter. I felt like writing since it’s starting to become real ugly.
When 2020 started, I had this strong belief that both career wise and portfolio wise, this decade will be the standout in my life. For the first time after being in markets for more than 2 decades as an investor and trader, I was finally comfortable investing based on a strategy that not just appealed to me, was accepted academically and also delivered the goods.
At the end of 2019, the CAGR for my portfolio since inception was nearly 17% and we had already seen 2 years where the majority of the stocks entered bear markets while my portfolio stood back up after every knock, what could really go wrong I wondered. Wuhan challenged that belief like nothing else has.
The key to winning in the arena of investment management comes down to two things – returns and allocation. You may have an asset that generated a great return, but if the allocation was poor, it may not be life changing even though you would get fulfillment in having correctly identified it early. On the other hand, if you had a large allocation and the investment turned out bad, it can set you back by years.
The way out is to diversify, say experts. But diversification as practiced by the majority of investors doesn’t really add value other than enabling them to somehow feel better. What difference would it make to be invested in 3 large cap funds versus one large cap index fund. The final results may turn out to be the same, yet there is a greater comfort with the advisor who asks you to buy 2 funds of each category (Large, Mid, Small, International, Sector) than with an advisor who will recommend that your entire equity allocation should go into not more than 2 funds.
One of the toughest problems that most investors face is staying true to the factor or philosophy they started out with. As humans, we love confirmation of our beliefs to the extent that confirmation bias is a cognitive dissonance. From Value Investing to Quality to Momentum, every strategy has its good times and bad. In the last couple of years, the only one to hold fort has been Quality. This has been especially troublesome for many especially for those on the Value front for while great value stocks seem to be getting killed, stocks with low or even negative growth are standing strong at valuations that most stocks can only dream about.
Passive is now becoming the new active what with every fund house trying to get a foot inside the door of what they think would not click but one they would not want to miss if at all the segment takes off. So, today you have Passive funds for the Large Caps, the Semi Large Caps, the Mid Caps, the Small Caps, International Funds and even a passive bond fund. It’s another matter though that without guidance and one that doesn’t come for free other than from Twitter, Investors are falling prey to recency bias and one that generally doesn’t end well.
Unlike Value or even Quality, Systematic Momentum has very few ardent believers. Buying stocks when it’s making new highs and selling some of them as they come crashing down isn’t something that investors love doing. It’s very unsettling and not comfortable for most.
I recently did a short term course by NYU Professor Scott Galloway and one attribute he says that is common across all successful companies is “Storytelling”. In the world of Systematic Investing, this is completely missing. It’s as if there is no story to be told and the only stories we hear are about Algo firms that went bust – so much for the positivity one hopes to hear.
Coming to allocation part, this is my only portfolio and comprises my total exposure to markets other than for the ELSS funds which anyways are locked in removing any ability on my side to mess things up.
One of my observations during the time when I was a stock broker and even today is that most do it yourself investors don’t really measure their portfolio growth. While many do know the stocks that made them big money and a few stocks that lost them big time, on an overall basis, they find it tough if not impossible to know whether they are doing better than the Indices or Mutual funds or not.
The reason to measure in my opinion goes further than just knowing how we are doing. Data leads to Knowledge and Knowledge leads to Wisdom. While earlier it was tough to measure, thanks to technology, that has become easy today and one I believe every investor should cultivate.
But, enough of banter. What has been the performance and what are the learnings.
A key reason for these posts is to be transparent to the reader while hopefully helping me become a better investor myself.
First off, CAGR since Inception
Was quietly plodding around the 18 to 20% mark before it got infected and reduced to a wreck. Stands at 8% currently – not bad in light of what is happening but that is small solace when I look at the drawdown chart.
But performance needs to be monitored against a benchmark. The strategy has despite the setback performed well in line and as per my own expectation. Among non sector mutual funds, the only fund to have performed better is Axis Bluechip Fund with a CAGR of 8.35% over the same period. On a side note, 4 out of the best 7 active funds belong to Axis. The fund house has been on an excellent run in recent times.
The static benchmark I have used is Nifty 500 since the majority of the stocks that I have bought over time has been from this benchmark even though I don’t filter stocks to be from the Nifty 500 Index only.
The out-performance that started in late 2017 has sustained through and through. Unfortunately over time I have continuously added money (Sipping though not every month) and this means that while the strategy itself is positive, on an absolute basis I am currently slightly negative.
What can I say, No Pain, No Gain or No Mercy, No Malice as Scott Galloway sees it. The only silver lining to my bruised ego is the fact that unlike in 2018 and 2019, my drawdown is now in line with overall markets. That should count for something. 🙂
The Escape from Covid
Friends of mine who practise slightly different versions of Momentum but have two things that are different than mine are
Going into cash during market weakness.
Weekly Rotation vs Monthly Rotation
Thanks to the availability of their daily NAV, I wanted to compare my strategy with theirs to see if that made sense. Chart comparing on such strategy with mine
The differential as I can see was not much just before Covid happened showcasing the similar end points despite the different paths taken.Post Covid, I am down approximately 14% versus their strategy.
During the last few weeks, I have spent a long time thinking on whether I should have had a market filter to reduce drawdowns but the evidence has been that other than in market falls of 2008 and 2020, such moves to cash have not added value. I continue to tinker with allocation methodology to see if I could get better returns by not selling any stock but having a tactical allocation strategy. A work in progress I would say for now.
The drawdown is a trade-off that I had anticipated based on the backest though when reality hits, it hurts a lot more than just a few numbers on the spreadsheet which is what backtest finally comes down to. Despite the setback, I am still not convinced about the idea of going into cash on every market dip – the costs alone can set you back big time not to mention the feeling of constant churn that has an impact on one’s behaviors.
A superior way would have been to take Insurance to limit the loss as Bill Ackman did with his fund. Then again, that’s why he manages Billions. Who am I kidding. On the other hand, one could start the year by buying Insurance for such an eventuality and roll it up or down every year. I got caught flat footed this time around and I do hope I am better prepared the next time around. This has been a key learning for me and one that hopefully shall add value over time.
They say, Learning never Ends and so is the case when it comes to the world of finance. From the Franklin debacle to the Covid meltdown, there are always things to learn even if some of them come at a personal cost. Then again. who said Learning was Free 🙂
