Notice: Function _load_textdomain_just_in_time was called incorrectly. Translation loading for the nimble-builder domain was triggered too early. This is usually an indicator for some code in the plugin or theme running too early. Translations should be loaded at the init action or later. Please see Debugging in WordPress for more information. (This message was added in version 6.7.0.) in /home1/portfol1/public_html/wp/wp-includes/functions.php on line 6121
Notice: Function _load_textdomain_just_in_time was called incorrectly. Translation loading for the restrict-user-access domain was triggered too early. This is usually an indicator for some code in the plugin or theme running too early. Translations should be loaded at the init action or later. Please see Debugging in WordPress for more information. (This message was added in version 6.7.0.) in /home1/portfol1/public_html/wp/wp-includes/functions.php on line 6121
Deprecated: preg_split(): Passing null to parameter #3 ($limit) of type int is deprecated in /home1/portfol1/public_html/wp/wp-content/plugins/add-meta-tags/metadata/amt_basic.php on line 118 Portfolio Yoga - Part 14
One of the often repeated mantras in the world of finance is that if you don’t start saving early, you lose out on benefits in the long run. Theoretically it’s true – the earlier you start saving, the more you end up with. Just look at Warren Buffett, he purchased his first stock when he was 11 years old and look at where he is now.
I passed out of school and later college when the Infotech revolution was just starting to bloom. Most of my classmates chose to do an Engineering Degree and later joined Infotech firms. On the other hand there were a few guys like me who chose a different path. One of the poems I studied at school and love it to this day is “The Road Not Taken” by Robert Frost and it’s amazing how deep the poem goes about life in general.
Thanks to technology, keeping in touch today is much easier than in earlier days and in many ways it’s amazing the divergence in paths that most of us have encountered. But paths aren’t set in stone and as much as early saving habits are good, it doesn’t really add up when you look back over time.
One friend who did not choose to go for Science and then Engineering started with an ordinary job. His life would have been ordinary if not for a decision he made a few years down the lane. He emptied his savings, took on Debt and flew to a foreign land to get himself an MBA.
While I have no clue about the savings of my friends, I can hazard a guess that this friend of mine who chose differently both in terms of career path and later is how to utilize his meager savings is in the top quadrant vs friends who started to save early.
When I passed out, a basic Engineering Degree was good enough for being taken up by any of the Infotech companies at salaries that were at a premium to general wages. Today, even Computer Science graduates have a tough time getting jobs and even those who get the salaries aren’t as juicy as they used to be earlier. A study that came out a couple of years back said that entry level salaries at a reputed global infotech firm had remained the same for the last 10 years.
One reason is the supply and demand dynamics. Karnataka for instance had 60 Engineering Colleges in 2001. Today, it stands at 300. In addition, the number of seats that are available have increased exponentially. So much is the excess capacity that AICTE has shut down 128 engineering colleges across the country between 2016 to 2019.
Everyone has similar goals – Retirement, Kids Education, Buying one’s own house being the primary goals. Yet how much you can save in absolute terms means a huge difference in the lifestyle as well as goals one hopes to achieve.
The path most of us take in life is the result of various factors with luck playing a large role. But luck can do only so much without the right skill set. In 1996, getting an Analyst job was all about being in the right place at the right time. Today in addition to being at the right place and time, it’s also about whether you have the right skills and that generally means either a CFA Degree or an MBA. Just being passionate about investing and research in general doesn’t tend to work out great for a prospective employee.
It’s easy to preach from the high temple about the need to save more, tougher is to show how to earn more for absolute savings finally is about your earning capacity (for majority). There will always be one off cases where just saving with a low base alone was enough, but that is always the minority.
Collective2 is a US website where you can sell a strategy that trades / invests on markets or if you are an investor, track and invest along with the strategy. Think of it like the smallcase in India but without the hassles of having to go for SEBI registrations and as such you can build a model, launch it on the site and if it works as you think it will, keep collecting the subscription fee from your users.
As a free subscriber, I get newsletters sent weekly showcasing the “Trading Strategy of the Week”.
If you notice, there is no single strategy that repeats itself. While this could be to market different strategies, the general reason is that you don’t want to flaunt something that worked earlier but not working now. In fact, since I have a hoard of their letters, I went back to strategies that were recommended to be checked out a couple of years ago. 9 out 10 had vanished showing how low the chances of success is.
In markets, you continuously see some industries that dominate only to wither off over time and some other industries take the leadership. Currently it is Pharma that is dominating the news but a few months back, it would have been Quality and a bit before that it was Large cap and even before that it was Small Cap.
The other day, a fund completed 10 years of successful investing. While the fund returns have been fantastic, the article pointed out how just 911 investors were invested throughout the journey. Clients were to blame
It reminded me of an old blog post about Fidelity where it said that the clients that did the best were the ones who were dead. The second best performing set of clients forgot they had Fidelity accounts.
It’s not the case with every investor of course. I have had my family invest in Mutual Fund Offer for Sale in the late 90’s and we hold many of them till date. One of the better investments I can claim to be invested since day one of the fund is Franklin India Technology Fund. The return since inception is 18% – wonderful right. Should have really boosted our family’s net-worth.
Unfortunately, nope and the reason is twofold. One is of course how much we invested in 1998 when it was first launched – we invested a measly 5000 bucks (the minimum investment if I remember right). That was a very small part of our family’s net-worth as on that date. So, it was just one another investment – not THE investment.
Second reason is that we did not add to it over time. This meant that what was already a small percentage over time became a rounding off error in a sense. So, while the 18% looks great, its value as part the total net-worth is negligible.
It was based on the thought process, I asked this question to my dear followers on Twitter
The answers were as usual very interesting, but most were against the principle of investing all of one’s money other than maybe in the Index. This is not surprising especially in light of recent events such as Franklin Templeton’s debt funds – it’s bad to have a small holding, think about if this was the only investment.
As I write, a mailer from Motilal has landed in my Inbox. Motial is launching a new Multi Asset Fund with the title, Different asset classes outperform each other at different times. What is different for a Multi Asset Fund from a Multicap Fund? In both, the fund manager has the ability to move assets towards sectors or caps where he believes lies the greatest opportunity. The only difference though is that while a Multicap fund would essentially buy only stocks, a Multi Asset Fund is more of a Fund of Fund and one that invests basically in other funds (mostly from their own house as far as possible).
These days, passive investing is seen as the key for data shows that 90% or more fund managers are unable to outperform the same. Passive investing hasn’t grown as much as the hype we see on Twitter though for the simple reason that the monetary gains to be gained by selling a client and servicing him are nothing compared to active funds.
But how much of that is the genuine belief that no manager can out-perform the top 50 or 100 stocks of India in the long term vs recency bias due to current better performance by the large cap indices vs say the small and mid cap indices. This applies for even N100 or PPFAS which is suddenly being seen as the cool investment to be invested into
But back to my question – why is it so tough to make a choice when it comes to a fund. The reason is simple – we are afraid to take a call which in hindsight may look foolish. For all the talk about Fund Manager, Process, etc, our focus is extremely short term and looks back at the returns – nothing wrong in that perse, but that also means we lack the confidence in both our own approach as well as the approach of the fund manager.
As an Investor, you really are at your peak when you start to think like a Fund Manager – which is what one is essentially with the only difference being that rather than other people’s money we are dealing with our own money. Every decision has to be seen in the light of what it brings to the table when relative to the rest of what you hold. Once you get an understanding of it, the choices in front of you become very easy to make.
The objective of this post is not to hold a gun to your head and make you choose a single fund but to provide a perspective that more may not indeed be better. The better we understand what we are invested into, the easier it is to navigate during tough times as it is during the good times.
Post leaving my last job, I spent a few months basically meeting people – both who I thought I could associate with and those who I thought maybe interested in partnering with me for the new venture I was planning. The former did not work out for various reasons and the latter did not work out for the single reason that starting a new venture is one bridled with uncertainty and it’s not easy for anyone to leave out a job he doesn’t like but one that guarantees food on the table. Investing is no different.
In March of this year, there was a great deal of uncertainty which also meant stocks were cheaper relatively than most were for a long time now. When a friend asked for my opinion on what to do with his equity exposure, this is what I had to say
“I don’t believe that we should exit equities at the current juncture. In fact, I am personally adding more to equity (reducing from Debt)”
Uncertainties offer opportunities and while I would have been happy to have deployed big time, the fact was that even I got cold feet after speculating on the second and third-order effects. As much as I try to keep myself away from the Media and more importantly perma-bears who can really make you question your thesis at the worst possible time, this time I fell to their spell and wondered if this was only the start with much more to go.
History in a way provided a similar view for when markets went down 30% or more in the past, it usually went well below 50% and with limited money on the sideline I wasn’t willing to dive into the deep end.
Markets have recovered tremendously and what is interesting is the fact that it has done so in record time even as the Virus continues to have an impact on the day to day life and business is not as usual for most. It’s as if we have accepted that earnings this time will be bad but the future holds promise and hence lets bet on that future instead of betting on the current despair.
Some time back, I was looking at the chart of Nifty in 2008. If one had entered the markets after it had fallen in August when the Index was seemingly bottoming out, he would have seen a draw-down of 50% in the next couple of months.
It’s not impossible to catch the bottom or close to the bottom. Was lucky to have caught ITC at 145 which I would say is as close as it comes. But what is impossible is to allocate in full at the bottom. The ITC allocation was the single biggest stock for my brother’s PF, it was still a single digit allocation in the overall scheme of things.
The only way to take advantage of falls like these is to be prepared well before the fall happens. In addition, you also need to know what you are willing to pay – markets sometimes may provide you that opportunity for a small time frame, but the speed of this rally is astonishing even from historical to the extent that unless you were prepared to bet with no worry about how the stock may perform in the coming days and weeks, opportunity got lost pretty fast or did it?
The markets made a low on 24th March though it actually closed positive for the day. The lowest close was made on the previous day when Nifty fell an astonishing 13% – something we had not seen ever. The largest fall was the 12.2% fall Nifty had seen on 24th October 2008. Interestingly then too, the next day was the lowest ever reached and a level that is unlikely to be ever seen again other than by using eccentric patterns on charts.
Nifty gave a clear signal to me using what is known as the Lowry Indicator on 7th April 2020 when the country was in a lock-down. It’s amazing in hindsight how the trend shifted right under our noses while most were still arguing how much damage the virus could have and how low the index could go. In fact, on 9th April, Nifty made its first higher high – a clear and simple signal to say that the trend has turned.
The 200 day EMA is seen as the barrier between Bull and Bear Markets. Nifty crossed it a few days ago. While more and more signals are confirming a bullish trend, the narrative has shifted underneath to – what is going on in the markets which suggests that way too many have missed the boat. But the uncertainty about the markets haven’t changed
There are charts and data trying to showcase how lopsided this rally is and that may well be true – but the only way to make sense out of that data is to compare it to historical data and see if it was different then. I say it may well be true because breadth data which I use is suggesting otherwise – in fact, one of the indicators I have developed using breadth (and as any indicator has its bad calls) went long in the markets on 29th May 2020. In fact, if you were to track PMS returns, I found that June for most has been a better month than April when Nifty went up 14%.
Personally I regret missing out on buying some stocks at what really were mouth watering valuations, but what I will regret more is if I stay out of the entire rally due to anchor bias. Its okay in my opinion not to be able to catch the low, as long as the valuation is still worth and the company is available at prices not seen for a while, I think its okay to jump in though the risk today may be slightly higher than what it was in March. But that is the price we pay for more certainty.
The risk though is that markets may come back down to their March lows or lower. This fear is what keeps most investors out for there is no honest answer. It’s a coin toss probability at any point of time. With people supposedly making millions left, right and center, you may question whether this time ain’t much different from the past and there will be a price to pay.
Once again, I don’t know the answers but sitting in cash post a crash and hoping for another crash is not a strategy either. Having a plan and sticking to it are two different things but that ultimately is the only way you can have a great career as an investor in the market. If that is too much, its no shame to just push your money into Index Funds for in the long term, the index generally goes one way – up (there are exclusions, but lets for now assume that India is not an exclusion).
Serendipity the occurrence or development of events by chance in a happy or beneficial way. For me, meeting Sameer as his family lovingly calls him was no different. Its been 8 years of learning from some one who has an innate ability to question (with data) and think out of the box. Its a pleasure for me to have him co-write this post (my contribution is just the narrative, the real deal is his data and numbers).
If you are on Twitter, you should by now be used to ism’s of every kind on how to go about building wealth in markets.
Bhave Bhagwaan Che say Investors who follow Price without really explaining how one reduces the number of stocks from hundreds to something more meaningful and easy to execute.
Buy Stocks for the Long Term say Classical Fundamental Investors without mentioning how to find stocks that will still be around 10 years from now let alone have generated wealth.
Financial Planners on the other hand say, don’t worry about Portfolio or Returns but about whether you can reach the goal.
Everyone loves to talk about stocks and why not. Stocks are more volatile, Stocks can be storified and Stocks finally are about their underlying Business and it’s easy to make a case for or against a stock. Add to it, it makes for good party talk.
So, What is a good portfolio?
A good portfolio is something that contains just the right amount of stocks and yet is diversified enough to provide protection from the vagaries of nature.
Charlie Munger whose quotes you will find tough not to come across for example has a portfolio that consists of just 3 stocks. Thes stocks he holds, Berkshire Hathaway, Costco and Wells Fargo. A caveat though – Gurufocus shows his portfolio as 3 but omits Berkshire and instead has Bank of America.
When you look at the number you may tend to feel that this is an overly concentrated portfolio but if you dig deeper you know that though Berkshire Hathaway is a single stock, it’s actually made up of more business and variety than what many indices can provide.
When we invest in real estate, we don’t diversify. We make a commitment that is most of the time larger than our Networth in a single investment. Never do we worry what if I have picked up the wrong location and one that will go down in value. While it’s true you cannot really compare a house with a stock, even in the world of investing there are options where you can safely invest 100% of your net worth and be diversified enough even though you hold a single ticker symbol.The Vanguard Total Stock Market Index Fund for instance.
From Mutual Fund advisers to Asset Management Owners, I am yet to come across someone who will suggest that a portfolio can be diversified by holding just one fund. On the other hand, I have come across Advisors who suggest their clients to buy 2 of everything – Large Cap, Mid Cap, Small Cap, Multi Cap and for good measure a couple of thematic / balanced funds.
In a way, this is a hedge for Career Risk. In 2017, Client is happy seeing the returns of the Small Cap fund while in 2019, the large cap funds would have given him solace and in March of 2020, the Balanced Funds would have proven their worth. Client is Happy, Distributor is Happy and of course the AMC is happy. What more can you ask for?
But, when it comes to stock, how many stocks should you hold? Well, it depends – if you are betting on say Nano Cap Stocks, the more the better for the odds of success is low but it provides the optionality when a few stocks hit the jackpot. But if you are betting on large cap stocks, do more stocks add value or just another number
Vijay Mallik has a post (2015) where he says that you need nothing more than 30 stocks to be well diversified
This month I completed 1 year on Single stock investing. Yes, you read that right – the entire portfolio is composed of a single stock. This post is a note on experiences – the good and the bad of holding just one stock as against a portfolio composed of multiple stocks.
What do I mean by a Single Stock Portfolio?
Well, it means what you think it means – the whole portfolio consisted of just one stock at any point of time unless I went to cash in which case, it would be Zero stocks.
But isn’t such a portfolio risky? Well, it depends.
Prashanth a couple of days ago ran a poll asking whether a portfolio of just 3 stocks invested in 10% of Networth was more Riskier than 30 Stocks invested across 100%
Which strategy would you consider MORE risky {NW = Net Worth}
Though it can be argued either way, the distinction is pretty clear – a 30 stock portfolio may offer diversification but when you invest all your money is more riskier than a 3 stock Portfolio that is diversified across just 3 stocks.
Among the many manifestations of risk 2 of them are well known
1) Market Risk – The part of risk that comes because of the market. In March when the bottoms of the market fell off, stocks regardless of their fundamental strength took a tumble. You can view this as being similar to collateral damage suffered by Innocents during a War. Unfortunate and rarely can be avoided
2) Stock specific risk – This is the risk where you have a much better control. A fundamental investor would say that given that he knows the company better, he is able to reduce the risk even though other factors – Market Risk for example can cause the stock price to cause quotation risk.
One way to limit the impact of Market Risk on any given portfolio is by having a trailing stop that exits the whole portfolio on breach of certain levels. Larger the portfolio, tougher is to execute. On the other hand, with a one stock portfolio this becomes fairly easy – the number of decisions you need to take is just one.
This is similar to trading say a Dual Momentum Strategy using Nifty and Liquid Bees with the only difference here being that instead of Nifty we are long a single stock.
In most diversified portfolios, you may find that on any day the number of winners and losers tend to be in line with the broader markets. On days when the markets bullish, you find a lot of your stocks to be doing well and when markets are bearish, most of the portfolio stocks
This is not too different in a single stock portfolio where unless there is company specific news, one tends to observe that stock is up when markets are up and stock is down when markets are down.
The key to ensuring that the portfolio doesn’t destruct itself is by ensuring that the stock is chosen with a certain amount of care to eliminate the risk of getting caught in stocks that can go up in flames in no time at all.
One year generally is too small a time frame to analyze any strategy let alone a strategy that is dependent on the fortunes of a single stock at any point of time but 2020 is not any normal year and while its too early to say that we have seen all we need to see, the correction and the recovery has been something that we have never seen in the past. In the US, a technical correction like the one they saw in 1987 took 3 months for recovery vs just a month this time around even though much of the country is closed and the Virus seems not to let up regardless of how strictly people are quarantined either.
Almost every Entrepreneur is by nature holding a portfolio of just one stock – the company he owns. In fact, for most, its 100% of their networth and more given that in addition to owning the business, their debt is backed by personal guarantees and personal assets. While theoretically they have a greater knowledge of the business than we as shareholders can claim to, they also suffer from the illiquidity of not being able to exit when the tide turns around.
The way to become rich is to put all your eggs in one basket and then watch that basket.
– Andrew Carnegie
In a way, the single portfolio is similar. We place our bets on a single stock and then watch the stock very carefully. There is this risk that some news may come out either during the trading day or post close and one that could know the steam out of the stock and that risk gets magnified since instead of our exposure being 5 or even 10%, it’s 100% which means a death blow from which one can not easily recover.
But this is actually rare even though news would suggest it to be normal. Take for example the recent case of Luckin Coffee. The stock fell 80% when it disclosed that an internal investigation has found that its chief operating officer fabricated 2019 sales by about 2.2 billion yuan ($310 million).
But this did not happen with the stock trading at an all time high. Rather, the stock as you can see in the chart below was already down 50% from it’s all-time high. This is not a one off either as history shows that rare are the occurrences where the stock reverses immediately from an all time high without giving the slightest of opportunity. As with everything, there are exceptions to the rule – Vakrangee for instance gave barely breathing space to any investor before getting locked in lower circuits.
It goes without saying that there is ample amount of Luck involved. But where it isn’t really speaking for Luck plays the role of a catalyst that can change fortunes a great deal. So, how has been the performance. The chart below provides a visual of the same. Do note that at any point of time my allocation was limited to 50% which means that true stock return would be double. But given that allocation was my choice, it’s important to be true to the objective which in this case is to try and observe the Pro’s and Con’s of such a strategy.
Net Asset Value of the single stock portfolio
Risk as you know can be defined in many ways but one of the best ways is to measure the draw-down from the peaks. This provides us with an ability to understand how much we lost at any point of time.
Maximum Draw-down seen at any point of time since Inception
As soon as I started, the portfolio hit a draw-down of 8% and one that was reclaimed by the end of August. As the NAV shows, the strategy equity kept moving higher without deep interruptions till we got bit by Corona. The stock I was in breached the pre-existing stop and the portfolio went to cash.
I will not go deep into the stock selection strategy other than saying it’s based on Montecarlo based evaluation of historical draw-downs and tries to select a stock that provides max buck for the risk taken. Exits happen when the stock draw-down goes below a certain quartile that has already been seen in historical data as the point after which risk starts to balloon up but not so much for the reward.
It’s a strategy that I am sure most will not be comfortable with, but also a strategy that allows you to understand the nature of the market better than what you could accomplish by being long 100 stocks at any point of time. Diversification in itself reduces but never can eliminate risks as we have seen time and again.
If you have any questions, do ping me on Twitter or better still, Portfolio Yoga Slack Channel. If you are not there, do join using this link (Portfolio Yoga Elite Slack)
A few years ago, I was having a severe case of a running cold. After days of torment, I finally decided to go for a specialist who I hoped would know and treat me better. The Doctor took one look at me and prescribed a CT Scan. This was to be done at a specific facility which meant a kick-back, but suffering as I was, I decided to get it done.
CT Scans are expensive and used only when the Doctor suspects something serious after the patient has been treated and not responding to usual therapies. But here I was taking a CT scan even before taking any medicine. The CT Scan came out clean and I was then prescribed a dose of antiBiotics. Few days later, the cold and the headache vanished. But for me, I lost trust in the Doctor who is very famous and continues to be recommended by friends.
In the United States, Millions are unemployed and unlike in India where they need to worry about where their next meal will come from, most are getting paid more as Unemployment Benefits than what they used to earn before COVID took away the jobs.
With Americans being more exposed to the Stock Markets than others, it hasn’t been a surprise to see huge activity by new traders who are betting the unemployment money which many consider as a freebie in order to try and make more.
Enter Dave Portnoy. Before Covid, David Scott Portnoy was a blogger, and founder of the satirical sports and pop culture blog Barstool Sports. Today, he is New York Times calls it, “Captain on the Day Traders”.
His claim to fame though – calling Warren Buffett and I quote ““washed up” investor who’s no longer relevant.”. This after calling him a Idiot for selling Airlines stocks which he supposedly loaded up on and made a great deal of money.
On Twitter, his word now reaches to 1.5 Million followers many of whom I am sure have no clue about how markets work or what kind of risk it is to buy bankrupt or close to bankruptcy companies, but there is a belief that this new age of traders are now able to move the price of stocks to the extent that a Bankrupt Hertz is trying to sell 1 Billion worth of what will soon be Worthless stock to the new age traders.
A chart says a thousand words and here is one such chart
In a way, this is not too different from what we have been seeing in India especially with regard to Options with claims of profits that should make anyone swoon and promises of teaching you the holy grail for a low cost 25K + GST.
When I bought Franklin Funds, it was not without knowing the risk though I never imagined that they would need to shut down the fund to ensure orderly payment. Today, it’s fantastic to talk and write about how investors were blindsided by the fund manager. What has been missing though is any fund manager coming out before or even after in the open and saying what needed to be said. Maybe they are afraid of “Virtue Signalling” given the bad state of many of their own Credit Funds.
Finance is a domain where there is a direct observable cost. It’s why advisors are said to observe fiduciary duty when it comes to advising – both for clients and for the general public thereof.
What is measured as “Investor Gap” – the return gap between what the fund produces and what the investor is able to capture is basically the cost paid by investors due to misleading advice. One of the observations of my time when I was a stock broker has been that people who lose money following bad advice basically quit the markets. In other words, they throw the baby with the bathwater.
We all make bad decisions and there isn’t anyone who doesn’t get it wrong. Investors buy the wrong stocks, Fund managers bet on the wrong sector, Planners recommend investing in the wrong assets. The key is not to be sure never to make a wrong decision for you will make wrong calls, but to take the good and the bad with equanimity.
Buying bankrupt company stock is a bad decision, advising people to buy such stock is fraud. As Morgan Housel writes,
“Experiencing something that makes you stare ruin in the face and question whether you’ll survive can permanently reset your expectations and change behaviors that were previously ingrained”
Morgan Housel
Fraudulent advice shatters not just dreams and hopes but future financial comfort of many. Makes calling out all the more essential. Trust is the key to success both from an advisory point of view and the client point of view. Misuse of Trust though can mean a heavy price for the client though it may or may not impact the advisor. It’s unfortunate how much it’s loaded against the small investor and in favor of the large advisor / fund manager.
Before I end, one small piece of advice – don’t use leverage – especially in the financial markets at least till you have experience of a decade or more. This means No Options or Futures. Leverage is the biggest killer of small clients who hope to make it big but end up losing everything they have and more. Don’t short circuit your journey into a world of business and knowledge by trying too hard too early.
Not too long ago, investors were told to focus on process and returns, when returns started getting subdued they were asked to focus on the process. Today, we have shifted it completely to “Don’t worry about Returns, Focus on your Goals”.
Achieving your financial goals that you set based on inputs from your advisor seems to be the only thing that matters with the rest thrown to the dustbin. Not that goals are not important, they are important in the sense of knowing where you wish to reach, but the focus on goals at the expense of everything else is to me defeating the very purpose of life.
The picture below is showcased to signify that even when it comes to investment, success isn’t straightforward
As investors, we are too easily swayed by the soft talking skills of fund managers – they became fund managers not just because of expertise in markets but also ability to convince others. On Twitter, they try to make themselves likeable to the extent that it’s easy to believe that they are as commoners as are even though what they earn in a year or two is most probably your goal to achieve by the time you retire.
We all know that we will die one day but what motivates us and where we find comfort is the fact that we don’t know the date. Assume for instance you knew that you shall die on a certain day – while the facts don’t change otherwise, your ability to look forward would decrease substantially owing to the fear that one is coming closer and closer to the deadline.
Ever since the Franklin debacle and the markets meltdown just before that, one common trait I find is among those who missed out on either of the two. Advisors who for whatever reason did not get caught with Franklin funds in their kitty today flaunt that as the reason why you need an advisor and one who understands risk better than the fund manager himself.
On the other hand, we have advisors who were able to stay out of the markets just before the little boy dropped today are happy to showcase how they were able to stay out of the markets and why their method is superior compared to other styles of investing. Dare you have a draw-down is their tag line today.
I am one of the poor folks who not only was invested in Santhosh Kamath’s fund but also continued to have exposure even as markets dropped. If not for the fact that I have a bit of experience when it comes to markets and advisors, I would have thought that I am the worst investor around.
There is always something that has worked wonders at some point of time. Hedge Week for instance reported “Hedge funds were down 6%, global equities, -14%.CTAs were up 1.90% in Q1, outperforming other major strategies.”
CTA’s are nomenclature for Commodity Trading Advisors who manage funds using trend following methodology. With negative correlation to S&P, they are seen as the absolute best funds to hold during market weakness or even better when all asset classes are weak. But the last time they showed exemplary performance? Well, that was way back in 2008.
India doesn’t have any CTA’s – but if there were such funds, I am sure that this would not be flaunted as the best investment strategy to be invested into as is the case currently with Hybrid funds that due to the nature of their stye are uninvested in equities and hence have borne the least amount of damage.
Coffee Can Portfolio is today seen as the punching bag for every advisor. This ain’t based on returns, mind you – even today, the stocks that qualify and the portfolio that could be built around it is one of the best portfolios measured on risk to return. The anger stems from the fact that how can something so expensive generate returns while the cheap stocks that I hold continue to lose money.
Unlike Saurabh Mukherjea, I am not sold about buying high quality stocks at any value – but I recognize that the strategy has value. It had value a few years back when I invested a small sum and will have value some time in the future as well. Nothing is permanent in this world.
As an investor, your Goal is simple – get the highest possible return with the lowest possible volatility. In other words, a strategy that can deliver a high sharpe ratio. Doing that consistently is all that is required to live a life that you can afford while at the same time ensuring that the future requirements could be adequately met.
But that also means that you shall have to stray away from the herd at some point of time while being with the herd at other points. 2017 was the years to be massively invested in Mid and Small cap stocks, 2018 to 2020, not so much. Large Caps would have been a better fit.
Asset Allocation is today looked at mosty from the split between Equity and Debt. But what also matters is the kind of stocks you invest in equity and the kind of debt you risk upon in Debt. A conservative investor can be conservative when it comes to debt and aggressive when it comes to equity and yet ensure good sleep by having an overall allocation that is conversvatie in nature.
From Real Estate to Gold to Bitcoin to Bonds to Equity, risks exist everywhere and you cannot really overcome it all. But understanding the nature of that risk and accepting when that risk becomes real is what can help you stay the course.
“A ship in harbor is safe — but that is not what ships are built for. In finance, if you can sail through life with no reason to risk – don’t risk. It’s not worth the additional few pennies for the stress you may have to put up with. But if you need to take risks, remember that no strategy is ever going to give you rewards without you having taken commensurate risks – knowingly or unknowingly.
Risk is exposure to change. Nothing lasts forever. The situation will change eventually. Forecasting the change is a mug’s game. The future is not sure yet. history helps us build models that can provide us perspectives on the risk – that is all we can need to accomplish.
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 🙂
