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Does Nifty Rollover cost (which may include dividends as well) have any relation to the kind of returns Nifty generates in the following month. Based on that thought, did a test on Nifty current month futures vs next month. All dates used as Last Thursday of the month.

Here are the results:

 

When premium was > 1.0 percent, the return in the following month was the lowest. The data is from 2000 till October 2013 and hence includes months in 2008 / 09 when we saw huge swings on either side. 

If I removed the big outliers (biggest gaining month and biggest losing month), the picture comes to show like this

 

While we can see the big negative bar missing, the positive does not change much showcasing that when Nifty runs in discount, the possibility of gains outweigh losses. Of course, this would be too simple a extrapolation and not useful for trade, but a thought all the same.

 

 

 

“One thing I’ve learned in the last seven years: in every game and con there’s always an opponent, and there’s always a victim. The trick is to know when you’re the latter, so you can become the former”, so says Jake Green played by Jason Statham in the film Revolver.

When we hear the game of con, the image we reflect is of casino’s, lottery tickets among others where the odds of winning are theoretically zero in the long run. Its only in the short run that some do get lucky and win small (compared to the overall pot). Theoretically they are not games of con, just that they are games where the odds are always in favour of the house. But people still play with the hope that they aren’t the sucker and lady luck shall reward them for the risk they assume.

Just in the last couple of days, someone in the United States won a $400 million Powerball jackpot and the risk he took – a measly 20 dollars. This one story in itself will push millions more to participate in the hope that they could be the lucky winner without giving a moment’s thought to the odds of such a win. 

The question that I want to ask is – Are the stock markets nothing more than a big con run to enrich the strong while small wins ensure that people never stop believing that somewhere at the end of the road, there is a pot of gold awaiting them.

Going back to the film Revolver, there is another dialogue that can be quoted in this context, “In every game of Con, there is always an opponent and there is always a victim. More control the victim thinks he has, less control he actually has”

Compare this to the markets. The victim, the small trader / investor is always under the assumption that he is in control – the reason maybe as diverse as knowledge of Fundamentals / Technicals / Astrology / Macro analysis or to the ability of his intuition to guide him correctly. Small wins here and there cement that view while the losses always occur due to bad luck or mistakes that could not have been seen or avoided.

Recently there was this article about a two month challenge run by Zerodha. Being in this industry for more than 15 years, I had a inclination that the number of winners in percentage terms would be on the lower side, but nowhere I expected it to come as low as 5% which the challenge showed.

I recently tweeted a study which said that the just 1%, let me put that in words One out of hundred are consistently profitable. That gives us that odds that I am the One a miserly 0.01% chance which is less than even the brokerage I pay to my broker.

The key attraction to the stock markets has been in generating returns higher than what other asset classes (save for Real Estate in the Indian Context where as @lordludus says It can never come down J ) can provide. But is that really so attractive?

If one were invested from 1979 onwards (never mind the fact that Sensex was not even born at that time), you could have gained an approximate 17% returns per annum – not bad at all. But the very fact that Index ETF’s came into the picture just before the 2003 – 2008 rally took off. A investment at the start would have yielded one a CAGR return of 14% and all of which came in due to the 2003 – 2008 rally. In fact a investor who bought at the peak in 2008 would not yet be in profit despite the profit despite being invested for nearly 6 years now.

Deepak Shenoy has just written a article on how indexed for inflation, Nifty returned a miserly 4% (approx) above inflation. While this seems good (considering that investing in FD may not have even beaten inflation), this number has to be adjusted for the risk taken. After all, there is no draw-down aka negative volatility in FD vs. the kind of draw-down we saw when markets tanked in 2008. Adjusted for risk, markets perform very poorly to other alternatives.

People get attracted to the markets due to the winnings of someone else without applying whether the win was due to skill or pure lady luck. Personally even I got attracted by the riches of a neighbour who made it big in the 1992 Harshad Mehta led bull run. It’s another matter that this ignores survivorship bias and even when the person who was the key motivator himself fell from grace losing all in the markets, I did not exit the market (Endowment effect).

In his book, “Thinking, Fast and Slow”, Daniel Kahneman writes and I quote “The successful funds (referring to mutual funds) in any given year are mostly due to luck; they have a good roll of dice”. My family has been an investor in Mutual funds since 1994 and in the long term, we have bought both good and bad funds with the overall average performance not being as spectacular as our best investments tend to show.

Everyone knows that investing in the markets are risky, it’s just that we hugely underestimate the risk factor and believe that over the long run, we shall make it past the chequered flag, but how many really make it is a question that has no answers.

If one were to look at the Forbes list of billionaire’s, every one of them including Warren Buffet have made it because of the businesses they own. If Warren Buffet was just another shareholder and not the majority owner of his biggest businesses, I doubt that he would have even got featured in that list let alone be the fourth richest guy on planet earth.

Markets are currently in one of the longest bull rallies ever. One key reason for this has been the ever expanding money supply which has ensured that like sheep, investors have no choice but bet money on the horses in the exchanges in the hope that they can beat the returns offered by bonds (which are next to nothing if inflation is accounted for – and in many a country even negative). But if history is any Guide, this free run cannot continue till eternity and the higher we go, harder shall we fall.   

And it is into this market we are investing our money (direct / indirect) with the hope that they shall pay off big in the future to enable us to achieve our goals and live a happy retired life. The question though is – what is the probability of finding the pot of gold at the end of the rainbow. 

I believe that this market is not one suitable for investment (and have written a blog post a few months ago on it as well detailing my reasons) – not for now, not for in the next couple of years at least (when one can re-analyze the situation with fresh data on hand). But if you do think that you are one of those guys who are above average (in terms of being able to milk the bull), do note that almost everyone thinks they are above average in which case, one needs to question who is actually below average J

To me, the markets are a way of transfer of wealth – just that the odds of you being the recipient is so small that you may actually be lucky to be there in the first place.

 

 

 

 

 

Once upon a time, getting to read the view point of an Analyst was a big thing since access to his views was limited to a small circle and rarely was one able to get access to that info. The higher the rating the Analyst had, greater the chance that his views were taken as the holy grail, something that should be worshipped.

But times have changed and instead of the hard route to get the views, we are now inundated with views of analysts all day long via media – Television and Newspaper as well as Facebook / Blogs / Websites, etc. And more the reading we do, more uncertain the world and the markets seems to be.

But then again, Analysts at the end of the day are human beings too. It’s just that they may have a higher amount of domain expertise than the man on the street but that does not stop them from making wrong judgment calls once in a while. But the more important question is, whether you should read views (or hear them on Television) or are you better off without any reading and following up on your own analysis.

What we need to understand about Analysts is that there are essentially two kinds of Analysts as Philip E. Tetlock wrote in his book Expert Political Judgment: How Good Is It? How Can We Know?, you can classify Analysts into two broad categories – the Fox and the Hedgehog. And its actually easy to discern the category to which an analyst belongs to. If you come across an Analyst who makes bold predictions and does not change his stance even as the markets move against him, you are more or less looking at a Hedgehog who will not accept defeat even if his whole fleet has been bombed out of existence. A foxy analyst on the other hand is one who is able to see the change, accept that his view was wrong and turn around. While that may seem to be ridiculous and even downright silly, the wily fox knows the art of survival in the markets is more important than attempting to swim against the tide and in the face of adversity.

Of course that does not mean that Hedgehogs aren’t right ever. As a famous idiom goes, “Even a broken clock is right twice a day” and so will be some analysts. When the markets fell in 2008, there were many such analysts who said we said so or have been saying so right from 2004 – 05 onwards. But who cares if one got it right after 3 years during which time, we had one of the strongest bull markets that one can remember in a long time. The success and failure then becomes more of academic rather than serving any useful purpose.

The problem area with most analysts is that most are bothered too much with the short term picture while ignoring the bigger picture. For many, especially those who appear on television, knowing how Nifty will move tomorrow and the day after seems to be more important than working on whether we are at a major inflexion point. This kind of extreme short term views at the end of the day as good as a toss of the coin since results are random and not worth the time one needs to spend to get the input.

The same holds true for many daily newsletters as well with the only difference being in terms of the view which is a bit more clearer with most giving both entry and exit prices.

But let’s come back to our original question: Is it worth following analysts and their views? The primary answer would be based on how capable are you in taking the inputs without that distorting your own opinions since for the mind, it’s easy to blame someone else for our faults but the damage will be on our bank accounts and not that of the analyst.

Second, consider whether the time frame of the analyst suits your investment / trading timeframe as well. If you trade on say the weekly charts, it makes no sense to hear views on whether Nifty will fall another 50 / 100 points from this point onwards since that will be not one you are targeting in the first place.

Third, while we are influenced more by the star analysts, my personal experience has been that there are quite a lot of small independent analysts / traders who are able to get a better perspective due to the very fact that they aren’t bothered with being wrong (the bigger the Analyst you are, the tougher it is to accept that the markets fooled you and you made a big blunder).

As @lordludus once said, “The ONLY coin you can take home is by outfoxing someone trying to outfox you”. The question as they say you need to ask at a poker table – are you able to see the sucker since if you cannot find one, it just means that you are the one.

One of the things I have learnt is that the best analysts in town are invisible since they are busy trading their own money rather than trying to advise others on what to do. After all, this is one business where you need nothing more than capital in bank and a trading account at a broking place to earn amounts that can be mindboggling. The question that hence comes to the mind is, are you following an intelligent guy who can give you fresh perspectives with regard to the markets or is he as blind as anyone else trying to find the way home. The answer to that shall answer the question as to whether you are better off trusting someone else or are you better off trusting yourself. Either way, the credit and the blame will be laid at your door and no one else.