Commentary | Portfolio Yoga

Peak-and-Trough Analysis on Nifty 50

A adage in the market says that Stocks take an escalator up, and an elevator down and in this environment with Nifty falling like nine pins day in and day out, one actually wonders if it has taken the elevator or has actually fallen through the elevator shaft.

While till recently the mood of the market wasn’t bearish, the last time we saw a new high was way back on 3rd March and a month from now, we would have passed a year without being any closer to the same (unless of course the market decides to make up for all the mistakes in double time and make a new high before that).

But, historically what has been the duration of time spent between two highs and more importantly in light of the fact that we are now down 18.75% from the high point, what is the average draw-down one encounters.

When markets are hitting new highs, there is generally some amount of continuation and to avoid small number bias, I have reduced the number of highs to those that occur at least 1 month after a previous high. In other words, if markets hit a new high 3 times in the month, I ignore the 2nd and 3rd high and take for my calculation only the first.

But to calculate the draw-down and number of days spent, I use the 3rd high so as to ensure that only the draw down seen after the last high to the next high gets measured.

Web of Lies

From a very early age, one of the key leanings for most of us is the fact that lying can be beneficial when you are faced with the ignominy of accepting a fault which you would hopefully avoid accepting. Generally one starts lying to others, then slowly it transcends to family and finally we start lying to oneself – all in a attempt to prove that we were right.

It is said that every New Year, there is a spike in admissions to Health Clubs / Gyms, but over time, the interest wanes off and people just stop going. Of course, ask anyone and he has a plethora of options which he says is stopping him from going to the Gym and that he is really serious and hence the sign up. But dig a bit deeper and most of the flags raised are just issues one came up to convince oneself that while I am ready, its factors beyond me that is stopping me from being able to do what is needed.

Lying always has a cost and its visible everywhere. One such place is the stock market. Trading is a risky business proposition with a high mortality ratio, yet that doesn’t stop people from trying to excel out here.

Most of us know the importance of Stops and how its important to exit when we are wrong, but how many times have we skipped getting out in the hope that this is just a temporary phenomenon and like the last time around, markets are just trying to take my position before it starts its journey back to where it started from.

Yes, some times, stocks do bounce back from where we go stopped out and make it seem that only if we had not got out, we would have been a lot better. But most of the time, a stop actually means that our view was wrong and markets were right.

After all, there is no operator who works day and night with the sole intention of stealing your small position. He will not move the market X% just because you have placed a stop that he wants to trigger. But, hey, the excuse of operator taking out your stop is a good one since it ensures that if markets did crack later on, you can always say that I would have kept the stop just that stops are seen and taken out by the bigger traders / investors.

We are lied all the time elsewhere too. When a Pseudo Analyst says that Nifty will reach 5,000, he is basing on fact that people really have a short term memory and if it does’t work out, no one will be the wiser, but if it works, if it woks, Oh, God – that can make him a Hero for having called the same correctly.

When the Vastu guys says all your problems are due to the fact that your door faces West instead of East, he is just providing you with the excuse that seemingly makes everything else seem right.

When we do’t accept our wrongs, we are just prolonging the pain that comes with it. As a famous Quote by Benjamin Franklin goes
“For the want of a nail the shoe was lost,
For the want of a shoe the horse was lost,
For the want of a horse the rider was lost,
For the want of a rider the battle was lost,
For the want of a battle the kingdom was lost,
And all for the want of a horseshoe-nail.”

Have seen a lot of folks losing fortunes in market just because they didn’t adhere to their stops the one time that would have made all the difference.

Stop lying to yourself that your problems are not because of your decisions but factors outside your control and that alone can make a hell lot of difference to the way you trade and invest.

Keeping up with the Joneses

The last couple of years has been fabulous for a large variety of shares. While good shares (large cap) have appreciated a bit, it really has been the season of small caps with many of them showcasing (at their peaks), returns in excess of 1000%, this when the larger market had really gone anywhere.

Most investors are rational and know that they really cannot generate the kind of returns you can by investing in stocks where you really are clueless both about the company and the business it runs. But too many get swayed by the emotions and profits that such moves are accompanied with.

When everyone out there is showing how great their picks have been, its tough to stay calm and be a observer of things believing that normalcy is around the corner and this is just a short term phenomenon. On Twitter and WhatsApp, where I find a large amount of time, its Lake Wobegon affect all over. Everyone is happy to share how the stocks he has picked doubled / tripled (after which its only showcased as having returned some random number with a X suffixing it).

Some of these winners are genuine companies with a great business model that was left un-noticed for a long time but is now coming into the lens of the Institutional Investor. But then again, there are stocks which have gone 10 / 20X for no dime or reason and unless one has the ability to understand the difference, its easier to get into unworthy companies and the worthy turnaround ones, its easier to fall for the unworthy since they really make a lot of noise.

Much of the noise in retrospect is made by guys who picked it up early and are enjoying the returns. While its nice to have such ego boosts once in a while, since most of the time, one is clueless about how much (say as % of networth) he has really risked, it becomes a tale where your imagination is the key.

Digging a bit deeper, most of the time I find guys who claim big to be sellers of subscription based products. Its impressive as to how good they are in their ability to find great investments / trades for their clients and all that for a small fee.

Being a trader, one of the few record keeping trader I follow is @liveNiftyTrades who trades Nifty using a systematic trend following system. Recently, he changed the system and started from a scale of Zero after a year or more of under-performance in his old system.

Right off the bat, it seemed as if this system was designed for Glory as he racked up impressive gains in a very small amount of time. While I generally do not get affected by the profits generated by others, the kind of gains he logged in made me work on whether I was missing something (as my system was nowhere close to generating even 25% of the profits he had made).

But thanks to my mentor and saner thoughts, I was able to continue trading what suited me rather than try and devise a system that was not suitable both in terms of risk and time commitment it requires (shorter the time frame you trade, more the requirement to be in front of the system). Today as he closes his trading account (hopefully temporarily), I understand how fickle that thinking was. But when I look again at those who claimed the multi baggers, even with markets being down big time, I see no one accepting that they went wrong in a few stocks. Its as if, stocks that they were recommending (and many of which are now on the reverse path) are no more in the portfolio.

Instead, now I find a new set of guys who claim to have foreseen this fall and predicting a apocalyptic ending to it. Its their time in the Sun now and if you get swayed by their predictions, do remember that just like the setting of the sun, even this bear market will end – the only question that remains is how many remain to see the dawn of the next day.

Every bear market throws out weaker investors / traders who weren’t prepared for what the market dished out. But if you are able to survive one such market, the lessons learned will come handy for the rest of your life.

As a adage says “This too shall pass”.

The Startup Dilemma

So, the government has finally come up with a kool-aid scheme to help “Start-Ups” though on reading I wondered if it once again is out of reach to vast majority of Entrepreneurs and targeting the ones who are already beneficiaries of a new way of investing.

But before we go further, what exactly is a Start-Up?

Searching for Start-up on Google gives me this definition “a newly established business.” The number of books where start-up as a word has been used has shot up in recent decades

While many of us would think of a start-up as a technology firm (or one that uses technology to provide a non technological service), when you see a new shop opening at the corner, the guy is most of the time doing a start-up. Of course, we don’t use that in that context since it doesn’t seem “sexy”. After all, you really cannot compare a Flipkart (which is a seller of a lot of items) to the new Grocery strore coming around the corner, would you?

The film “Joy” revolves around one such Entrepreneur and like any of the thousands of Entrepreneur’s who crop up day in and day out, the key issue for any Entrepreneur is not whether Tax is a burden or not. Most of the time, his biggest problem is availability of finance.

New business by its very definition is a risky proposition and it doesn’t matter whether you are starting something that is entirely new way of doing business (Uber / Amazon for instance) or you are just opening a grocery store / a hotel in a area you feel in under served, Capital is the biggest impediment most of the time.

Because its seen as high risk, Banks will not fund you without collateral (generally it comes to a point as to whether your dream is strong enough to risk your property in an attempt to make it fly). Private finance (which again comes with horrendous interest rates) is hence the only option for those who don’t have the collateral to enable accessing cheaper finance of banks.

If you are resident of any of the major cities of India, you would have heard about something called “meter baddi” (baddi in Kannada being Interest). This is a form of finance that is given out to Vegetable Cart Sellers / Flower Sellers among many other small businesses where the risk is supposedly so high that charging 10% per day is seen as being normal (in other words, you get 900 Rupees in the morning and need to pay back 1000 by evening).

Outside of the privileged circles, life is pretty tough. So, even though the intention of the government seems great on paper, there are issues at stake which cannot be solved by funding fund of funds. What we instead need is encouragement for Micro finance companies which are willing to take that risk (rather than making them unviable)

Lets not see every start-up through the eyes of it being a “undifferentiated products or services or processes”, the likes of which do not happen without there being a bigger foundation in society when it comes to accepting entrepreneurship as also a way (rather than just being about getting a good job).

While its good that the government is pro-active, hopefully it can also look beyond the trees for a entire forest of entrepreneur’s in India struggle with real problems day in and day out.

This time its no different

So, we have had one more day of Blood letting with markets showing no signs of bottoming out even though domestic institutional investors continue to Buy into the weakness, a weakness that has been caused majorly by global factors accompanied by ceaseless selling by foreign institutional investors.

Blood letting was a medical practise carried out as late as end of the 18th Century due to the belief that only by removing all blood could some of the ailments be resolved. The reason is survived so long was due to the faulty way its success and failure was calculated. If the patient survived, the blood letting worked whereas if the patient died, the catch was that the patient could not be saved even though blood was let. A kind of Heads I win, Tails you lose.

In the markets, blood letting is a ritual that is practiced every year. Investors who are strong survive to see another year while weak Investors just die never to come back again and will be replaced by a new breed of investors hoping to make a mark.

Markets are now down 18.43% from its peak but for many a investor, it seems as if the floor has given way. This could be due to the fact that the markets which topped out in early 2015 has been on a consistent decline ever since. Of course, this was not visible in the Mid and Small cap segments which till a few days ago were in a world of their own, but the flight of capital from Small Caps where the exit door is very small has made it similar to people trying to rush out of a single door when a room full of partying people suddenly realized there was a raging fire outside.

But the draw-down in itself has not been abnormal. Nifty has seen a average decline of 21.87% (even if you remove 2008 from the calculation) from the year high and in that aspect, the current draw down for 2016 is just 6.60%.

Every fall is a opportunity provided one is ready to catch the same when its available. In panics, investors (both retail and institutional) are so immersed in trying to get out that they are willing to sell Gold for a few trinkets of Copper only if they can get ready access to cash. We are no way closer to that though a final long term bottom would see something similar. Hope you are ready when that happens.

The Ghost of the 2008 Past

I have literally lost count of the number of analysts / articles who compare every fall to 2008. Its as if everyone attempts to be the one who called the top and more the attempts, better the chances. At some point of time, we will have a significant fall and for those who were lucky to have called it just before the final blow came, book deals and even movies could / would be on offer.

Raghuram Rajan has been credited with calling the housing bubble. While he did get the bubble and how damaging it could be, anyone trying to follow his advise by shorting the markets would have been burnt and buried years before the 2008 blow came.

The recently released movie “The Big Short” based on the wonderful book with the same name by Michael Lewis showcases one such fund manager who understood the big reward that could be got by shorting and yet, due to the fact that he was early, had to go through suffering of the kind that very few fund managers can withstand.

Its one thing to call is right and quite another to actually be able to take advantage of the frenzy since not just is it tougher to initiate short positions in stocks / markets that are in bubble territory, its tougher to hold on to positions even as markets continue to move against you.

At the current juncture, Indian Markets aren’t cheap, but they are nowhere close to where they were even in 2008. Since earnings aren’t improving, our markets seem expensive but if (and I know its a big IF), the earnings start to improve, we will get very cheap very fast.

As on date, Nifty 50 is down 17.5% from its 52 week high. In 2011, we went down by nearly 25% from the highs while in 2006, we went down 30% from the highs. Unlike 2008 or 2004, these falls came with literally little explanation and hence aren’t discussed as much as they should be.

Markets once again hit a new 52 week low today and historical evidence is that whenever we have seen such a incident. the probability is high that we shall continue to go down for some more time before there appears some amount of stabilization.

Another 10% or bit more, we will reach a point where the odds of markets continuing further down start receding pretty significantly. Of course, if there is a global catastrophe, India will not remain secluded, but otherwise we should see some sort of bottoming process happen.

January will be the season of the results and February will be a month where anticipation builds up on the forthcoming budget. Unless as I said above, there is a global catastrophe or results are really bad, I doubt we would go into the budget at the lowest end of the spectrum.

Bias: Am bullish (in general) and hold long stocks and long futures (using Option Strategies).

Judging a Fund

One of the often repeated statements I hear is about Distributors advising clients to stick to the funds even though the fund may have under-performed for 2 – 3 or even 5 years (rare but have heard that number). The essence though is that if you stick long enough, who knows, even the tortoise may cross the finishing line (remember, goal has shifted from winning to completing).

I would actually have agreed with the waiting period if some one came up with evidence on why it makes sense to wait for X years in a fund that is under-performing but before we go further, lets first try and understand how performance is measured.

Basically there are two ways to measure performance

Relative Performance: Here, you compare the performance of a fund with its peers. For instance, if you are a investor in say HDFC Top 200, you will likely compare the fund against funds such as Franklin India Bluechip Fund / Birla Sun Life Frontline Equity Fund
Comparing against the Benchmark Index

In Relative Performance, the key is whether the fund one is invested in remains in the top quartile for the maximum period of time. This check ensures that you are with a fund whose fund manager has showcased the ability to deliver the goods.

The second way of measuring performance is by comparing its returns against the Benchmark Index. Any additional returns generated here without adding for Risk is known as Alpha though you will need to make certain that the performance has been delivered without actually investing big time in stocks which are in no way associated with the Benchmark under consideration.

The reason I say this is because, fund managers (especially of Sector funds) have shown how they achieved out-performance by investing in sectors which are no way connected with the core sector the fund is named after.

While you may argue, any out performance is good, the point that gets missed is that the performance may be more due to Luck and less the skill of the fund manager. But I am digressing

Lets start with what happens when funds start under performing for long (3 years by my score is a long time indeed). If you have a housing loan, you will know that all other factors being the same, a small hike in interest rate can extend the term of your loan by years.

When funds you have invested under perform, they impact in terms of how fast you can achieve your financial goals. Remember, the whole concept of Retiring at X years or ability to fund children’s education is based on the assumption that investment in MF’s (which can be a big part of one’s portfolio) yield a certain return. Take out a percentage or two and you will find yourself either having to commit more per month or worse finding it too late that more sacrifices would be necessary to achieve the goals outlined years earlier.

And as much as its true that on the long term, you can get better returns by just sipping regardless of what is happening in the real world, do note that blind investing can only return you average returns (and many a time even worse) which you could have well achieved without having to take the risks that come with the market.

And finally, the fund manager is paid big bucks to get you the extra returns since you can always perform in line with the Indices by buying a cheap ETF (Nifty Bees on Nifty 50 for example).

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