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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 19
It’s that time of the year when you start finding analysts coming up with the Top stocks to buy. Basically there are three ways in which such lists are prepared – search for the best stocks of this year and recommend the same for the next year in anticipation of continuation of Momentum.
Search for the worst stocks and recommend the same for the next year in anticipation of a mean reversion or Recommend a random set of stocks and hope that something clicks.
Most investors on the other hand will rather buy a stock that is down 80% for the year than buy something that is up 80% for the year. It’s just a behavior trait. But how does buying a stock that was the best of last year pan out versus buying a stock that was the worst of last year.
Since 2010, the average gain of the best 100 stocks of the year has come to around 200%. On the other hand, the average loss of the worst 100 stocks of the year is about 60%. In other words, if you had created an equal weighted portfolio of the best stocks of the next year, your capital would be 3x what you started with while if you were unlucky and bought the worst 100, your capital would have gone down by 60%.
Do note that if you have a stock that has lost 60% from the time you bought it, it needs to move up by 150% for you to just break even. Other than in extreme bear markets such as 2008, more than 70% of the stocks that fell 60% or more never break-even or take years.
Here is the data for every year since 2010.
If you observe the data closely, you can see that the worst stocks of this year save for 2 years of the 9 years under consideration. While best stocks didn’t shine greatly, they did end up positive in 4 out of 9.
There is a very wrong belief that buying stocks that are going up is Momentum Investing. It is equivalent to saying that all beaten down stocks are value. Neither is True and the results above are proof of that.
Momentum is mean reverting. What this means is that if you hold a stock that is seeing strong momentum over an extended period of time, you are likely to take a hit since the stock generally sees reversal.
Take a look at the table below. Longer your holding period and higher the diversification (size of portfolio), lower is the return
What would be interesting to research is whether buying a portfolio of the best stocks and holding for a short period of time works better. While trends tend to phase out over time, one month holding for the best stock of the past year should give out a better return than holding the same for one year.
I shall be speaking at the Indian Trading Conclave 2020. A event that requires no travelling or spending megabucks and at comfort of your location.
I don’t consider myself to be a trader these days even though when one talks about “Momentum”, the automatic assumption is that one is trading since investing is all about Value / Growth.
I shall try to dispel such doubts in my talk. I believe long term investing has nothing to do with holding period which could be long or short depending on one’s choice of time-frame.
Even if you are not interested in “Technical Analysis” perse, I believe that attending the seminar can give you new perspectives and thoughts.
Since the event is a non-interactive one, no questions will be taken but am happy to answer any questions you may have via email or on Twitter.
If you are interested but have any questions, you can connect with the organizers here
https://twitter.com/IIC_2019
Since this is a paid event, I shall not be able to share the slides. I do believe that more than the slides, my explanation would help understand better.
One of the key differences touted by PMS fund managers are the fact that they are long term oriented and willing to take higher risks by having a concentrated portfolio.Historically there have been examples of great fund managers coming off with huge returns when they bet and won big.
But history is written by the victors and we never know the number of investors who bought and held concentrated positions only to see large portions of their capital being wiped out. Survivor Bias is a key logical error one has to be aware of.
Rakesh Jhunjuwala is a man of many traits when it comes to the stock markets, but much of his fame comes from an investment he made way back in 2002 – an investment which today contributes to a third of his networth.
In the world of investing, its sexy to talk about big risks that paid off. Soros shorting the Pound is part of folklore history now, but it’s interesting to note that despite the fund being highly leveraged, they had a lot more positions other than the short on the pound. But it was not a risk that was foolish.
Steven Drobny in his interview with Scott Bessent in the book “Inside the House of Money” talks about that trade. The position was Gigantic, but that did not mean that Soros who asked Druckenmiller to go big risked the future of his firm on this one trade. Quoting from the book,
“With the pound, we realized that we could push the Bank of England up against the trading band where they had to buy an unlimited amount of pounds from us.The plan was to trade the fund’s profits and leverage up at the band’s boundary.The fund was up about 12 percent for the year at the time, so we levered the trade up to the point where if they pushed us back up against the other side of the trading band,we would lose the year’s P&L but not more.”
Inside the House of Money by Steven Drobny
In other words, the worst that could have happened if they went wrong was going back to square one for the year. But if right, they were likely to make a Billion which they did.
Once in a way, a big investor bets the farm and comes out as a winner with the biggest example being when Warren Buffett bet big on the stock, putting 40% of his partnership’s assets in American Express shares. But such instances are rare and even then one off.
Let’s go back to Rakesh and his stake in Titan. In around 2 quarters of 2002, he accumulated a 4% position in the company spending approximately 12 Crores. 12 Crores is a very large sum and betting that amount of money on a single stock may seem as recklessness but Rakesh hasn’t accumulated his wealth by being reckless.
In an interview Economic Times, he puts his networth in 2002 at around 250 Crores. 12 Crores when seen from that perspective was around 2.5% bet (in fact since he was levered, overall size of the bet would be even small). But that bet worked wonders to the extent that today constitutes approximately 40% of his networth.
Titan in 2002 wasn’t a dazzling stock. In fact, from 1995 when it started trading on the National Stock Exchange, it had gone down by more than 50% with another watch maker, Timex doing even worse by being down 77%. Nifty on the other hand was flat post the crash following the dot com burst.
Relative Performance Comparison between Nifty 50, Titan and Timex
The outcome of one stock dominating to such an extent in one’s portfolio isn’t a random occurrence either. Take the story of Anne Scheiber who is considered one of the great equity investors of the 20th century. Once again, wealth was not accumulated by a small number of concentrated positions but basically buying and holding a large number of stocks for lifetime.
While its guaranteed that quite a few stocks will be worthless, the overall portfolio can be a big gainer since the upside for stocks can be infinity versus just losing the capital if it goes bad. Recently there was this article about Voya Corporate Leaders Trust that hasn’t traded for 84 years and yet has beaten the S&P 500 over its lifetime.
More than 5 years back, I had written a post titled Throwing Spaghetti Against The Wall. My testing that over the long term, even a randomly chosen portfolio of stocks had a very high probability of beating the benchmark index.
Of course, this doesn’t mean that one should randomly invest into stocks. What it shows instead is what one remembers from one of the famous paragraphs from one of the greatest story ever told – Reminiscences of a Stock Operator.
In fact, if you were to think about it, the reason Coffee Can strategy works is simply because you are filtering for good quality stocks and then holding them for a decade. Not every stock will yield great returns, but the overall outcome is far better given that the selection is not random but consists of a well thought and tested strategy.
In 2016, after reading Saurabh Mukherjee’s book The Unusual Billionaires, I had invested in one such set of stocks for my brother.
It recently completed 3 years in which I haven’t done any trade. As on date, the portfolio is up 53% slightly beating the Nifty 100 which was the benchmark I am using. This despite the fact that 5 out of the 16 stocks that I have invested are in negative territory.
There was this interesting thread and one of the tweets applies when we look at investing in markets.
As investors, we are just side-car passengers. We are in a way at the mercy of the promoter and his idea. If it works out well, we claim credit for identifying it at an early stage while if it fails, it’s easy to blame the promoter for the various acts of omission and commission.
When I tested for my Momentum Strategy, the outcome was that the most optimal position size was around 25 stocks. But I have chosen 30 since it reduces the risk even further while allowing me to stay in stocks that have intra month dips without the need for panic.
Then again, my strategy is hole and sole based on the price of the stocks and nothing to do with fundamentals. But even when you know the company better than even the promoters, there is no telling what you may be missing and come back to bite. Should you take that Risk when your future is tied up with how well your investments will do over time?
While I can try and optimize it even further to gain those few extra bips, I have come to the conclusion that I can do better by just allocating right. A tactical Asset Allocation combined with a philosophy that works over time is good enough for me.
Investors take all kinds of Risks to earn a couple of percentage extra when even a small allocation to equity could have given them the same or even better return with much less headache. Then again, where is the thrill in it. Same is the story with Concentrated Portfolios.
I have in the past once written on Yes Bank with my view being to ignore Yes Bank as a stock to “Buy”. The price when I wrote the post was around 185, today it trades a touch below the 50 Rupee mark.
The world of finance operates based on Trust. Lose that trust once, its difficult if not impossible to regain it back. As Warren Buffet’ts once said;
It takes 20 years to build a reputation and five minutes to ruin it
Warren Buffett
Jignesh Shah started what was then known as Financial Technologies in 1988. Thanks to the debacle of National Spot Exchange, he was forced to quit his company in 2014. While the company renamed itself to 63 Moons, it hasn’t been able to shake off its past.
The stock couldn’t care less about the name as it still trades 97% below its all time high set in 2008. To give a context about the fall, anyone who bought and continues to hold the company shares anywhere from 2005 is still under water.
Stock Price Chart of 63 Moons (formerly Financial Technologies)
NBFC’s had a great run until IL&FS went bust. While IL&FS in itself was not seen as an ordinary NBFC, its sudden death created an environment of fear and panic and one which is yet to see its end. Weaker NBFC’s suddenly saw not only their cost of borrowing raise but many weren’t able to raise even at higher levels.
The 2008 financial crisis in the United States was of a similar nature with no company willing to trust another and lending freezing altogether. While Lehman had a lot of bad mortgage loans on its books, what killed it finally was their inability to raise the capital required even when they had substantial assets.
It was only after its death that the Federal Reserve decided to throw open its window to anyone wishing to avail of liquidity buying all kinds of mortgage bonds. The rest as they say is history.
Bank failures in India post the Nationalization phase have been very few and even those have been mostly limited to Co-operative Banks. The only scheduled bank that went down was Global Trust Bank.
In case of Global Trust Bank, RBI ensured that the banks customers were not impacted by going in for a shotgun marriage with Oriental Bank of Commerce.
Yes Bank has been facing issues for some time now. The very fact that RBI felt the need to appoint a Director on its board showcases the seriousness of the issue. But what is surprising is the lack of clarity when it comes to the future.
Yes Bank has booked losses of 2000+ Crores in the last 3 Quarters. This has meant that it now desperately needs to raise capital to shore up its capital. But what is interesting is the way the capital raise has been played about
In its board meeting dated Aug 30, 2019, the Board approved a resolution calling for the increase in the authorized capital of the company. This was not surprising given that the CEO, Ravneet Gill had way back in June was quoted as saying “The number one priority would be raising capital,”.
Yet nearly 6 months after that we are yet to see Yes raise any capital even as every other day rumours swirl about possible investors who are wishing to invest in the Bank. At the beginning of this month, Yes Bank claimed to have received firm commitments from investors amounting to around $2 Billion and one which was supposed to be approved in the board meeting of 10th December.
Yet, this was the outcome of the board meeting
The outcome of the meeting of the Board of Directors is as follows:
1. The Board is willing to favourably consider the offer of US$500 Million of Citax Holdings and Citax Investment Group and the final decision regarding allotment to follow in the next board meeting, subject to requisite regulatory approval(s).
2. The binding offer of US$1.2 Billion submitted by Erwin Singh Braich / SPGP Holdings continues to be under discussion.
The Bank shall continue to evaluate other potential investors to raise capital upto US$ 2 Billion
In other words, no new issue of shares were made even as the bank continues to try and scamper for new investors before it releases its quarterly results for the quarter ending December 2019.
Another bad loss making quarter could easily push the Capital Adequacy Ratio of the Bank below the RBI mandated 8%. The core capitalisation level for the Bank stood at 8.7% as on September 30, 2019.
The lack of clarity has meant a field day when it comes to rumours that swirl around their capital raising ability. Today for instance,
The constant flurry of news has meant that Volatility has shot up the roof with speculators having a field day.
30 Day Volatility of Yes Bank Shares
The inability to raise capital isn’t much of a surprise given how supposedly well run companies like DHFL collapsed like a pack of cards. No one knows how much of debt lent out by Yes is good and without a forensic audit by a neutral agency, its doubtful any major investor will be willing to risk capital or his name in an attempt to bottom fish.
In fact, Macquarie in a recent report wondered whether Nationalization of the bank loomed ahead and that question has been haunting me since I first wrote on Yes Bank. Unlike an NBFC, failure and collapse of a bank can cause unmitigated disaster when the overall environment is already weak.
Post the fall and freezing of depositors amounts at PNC Bank there is a fear that lurks around any bad news that could freeze up the depositors money with no end in sight. To me it’s surprising that RBI is keeping it quiet even as the media has a field day.
In 2008 when rumours were swirling around ICICI Bank, RBI had come out with a statement saying that ICICI had enough liquidity, and RBI was ready to make more cash available to the bank, should it run short.
Yes may not in that situation but as we have seen in the past, things can deteriorate pretty fast. As Andy Mukherjee wrote earlier this month,
Yes, India’s fifth-largest private-sector lender, can’t be left adrift much longer. But the RBI is so distracted fighting other fires that it would rather not have to think about Yes.
I sincerely wish that Yes Bank can raise capital before the end of this financial quarter for any weakness in numbers can set off a vicious cycle that isn’t easy to firefight.
Disclaimer: I have no personal positions in Yes Bank.
Days pass into weeks, weeks into months, months into years, years into decades and decades into centuries. It’s amazing how time flies.
2009 was a great year for the markets if you did not remember 2008. Nifty 50 went up by 75%, the best yearly change since its inception and yet it was still 18% below the highs of 2008. Stocks, many of which had been beaten to death a few months earlier were showing great sign of recovery.
While not a single stock on the National Stock Exchange had closed in positive territory in 2008, in 2009 just 50 stocks out of the 1200+ that gets traded closed in negative territory with 600+ stocks doubling from their opening price of the year or more.
When we started this decade, the overwhelming question that was on every investors mind was whether this rally will sustain or its just a mirage before the world ends. Ten years later, the question has remained the same even though the Index is today up 133% from those times with many stocks having generated much higher returns.
Not really surprising given that the past decade that had just ended had seen 2 major crashes – first the dot com bubble burst and then the financial crisis of 2008. But for those who were willing to bet on a brighter future, the returns while not overly fabulous haven’t come with the kind of draw-downs we saw in the decade of 2000 to 2009 either.
Let’s look at Index returns over the past decade. I have used compounded annual growth rate throughout this post since that offers a better comparison with other asset class returns than absolute.
Nifty Sector and Thematic Index returns over the decade
Your best bet for the decade would have been to be invested in Nifty Private Bank Index. Of course, even better would have been to be invested in Bajaj Finance. The current favorite, Nifty 50 generated a compounded return of just around 8.9% per annum. To give you a comparison, Franklin India Ultra Short Bond Fund – Super Institutional Plan – Regular Plan (Direct Plans did not exist in 2010) had a CAGR of 9.12%.
10 Year CAGR Returns of Ultra Short Term Debt Funds
Total Returns of Nifty 50 would be slightly higher than the Bond Fund but how many of us reinvest all the dividends we receive. The very fact that we are comparing Debt returns with Equity returns is like comparing apples with oranges.
But what it shows is that even though this was a really great decade, this has been the decade with the lowest return since data starts for BSE Sensex.
Drawdowns
While the period of 2000 to 2010 saw multiple large crashes (2000, 2004, 2008), in the current decade, the max draw-down never exceeded 30% from the peak (for Nifty 50). This is reflected even in Option Premiums as can be gathered using India VIX which has been trending lower through the decade.
This is not unique to India either as even in the United States and elsewhere, Volatility has just disappeared. Will it come back with a bang in the coming decade, we will need to see. But draw-downs as we have seen in the past can be great opportunities for those who are well prepared.
Political Stability
For the first time in many decades, we have had pretty strong stability when it came to the Central Government. This was missing for decades with the last decade where we witnessed such stability coming maybe in the 1960’s.
What about Mutual Funds?
Unlike stocks, Mutual Fund data isn’t clean. Over the decade funds have been merged, renamed and category in which it invests have got changed. So, you have Survivor Biased data, but something is better than nothing, Right?
The best fund for the decade excluding sector funds was Canara Robeco Emerging Equities Fund – Regular Plan which has a CAGR of 18.50% over the period. Small and Mid Cap funds have been the biggest winners. Mirae which has an entry here through Mirae Asset Large Cap Fund was actually a Multi Cap fund until very recently.
Basically, no Large Cap Funds were able to make it to the top 25 list. My belief is that the next decade would not be different either. But then again, who knows the future
Equity (Regular Schemes) returns over the past decade
Much better than most Indices but with the benefit of hindsight.
One reason for the returns for the decade being on the lower end of one’s own expectation could be linked to the fact that earnings growth has been inspid for quite a while. In fact, as the table below (Credit to Sandeep Kulkarni) shows, the last few years have been absolute disasters for a country which is supposedly the fastest growing in the world and the next best bet after China.
International Scenario
Most of us have a very strong home country bias when it comes to investing. Then again, the issue with International Investing is not just having to deal with higher transaction cost and tax liabilities but also with the fact that you need to account for currency movements which can add or subtract from your returns.
Using ETF’s that are traded in USD, here are the best countries and their returns. The Best country to have been invested, the country that brought down everyone else in 2008 – United States of America.
India barely gave any returns when measured in Dollar Terms {I used Invesco India ETF for this exercise). Sensex Dollex 30 has a 10 year CAGR return of 4.80% while Nifty 50 USD 10 year return is 4.43%
I was recently listening to a podcast of Peter Mallouk where he talked about the importance of allocation and how that can make or break a lot of things. While its important to invest in the right assets, the key to generating wealth is to be able to allocate right.
I believe the coming decade will be one of the better ones for the Indian Markets. As of today, the average age of an Indian is around 29 years. While the earlier generation shied away from markets due to lack of information and resources plus a lack of understanding of risks, I believe that the younger generation is more attuned to it.
What this means is that while currently 85% of savings go into the blackhole called Real Estate, over the coming decade and a half we should see a significant shift to Equities. This along with the fact that unless India grows we will face nothing short of a revolution gives me hope that this could be the start of a new age for Equity Investors.
Wishing you a very Happy New Year and a Great Decade ahead.
Assume you have 25 Lakhs you wish to invest in the stock markets but are confused on where to invest and when not to talk about the fact that you don’t have the time to monitor. Rather than risk your capital vanishing due to bad calls, you call me, a portfolio manager to handle your funds and invest right.
I sign you up as a client and claim I will charge a low asset management fee but will charge you a performance fee. As a client I am sure you understand the need for both – the asset management fee helps run the company while the performance fee is incentive for me to, well perform.
So, here is the fee details
Fixed Fee of 0.60%
Performance Fee: 20% of Profits
Some PMS use a hurdle rate of say 5% or 10%. But they also charge a higher level of fixed fee. The above is the fee charged by a real life PMS, so am not making it all up.
What is performance Fee you may ask?
It’s a fee that is charged if I can generate a positive return. Now, back to you or rather me since I now have 25 Lakhs that I need to deploy.
Now, I have a Momentum Strategy which I really believe will generate above market returns, but to generate above market returns, one must also be different and this difference can result in risks such as draw-downs of the nature we see today.
As much as you have trusted me with your money, should I try out-performing at the cost of such risks which require explaining month after month even as you observe that the front line indices keep making all time highs?
A simpler way would be to invest in Nifty ETF’s. The SBI Nifty ETF charges just around 0.07% and is liquid enough for buying and selling in volumes. So, I will just buy SBI Nifty ETF for you.
In the first year, Nifty 50 goes up 20%. This means that your portfolio is up 20% too, but that is not your return, No Sir. That is Community Adjusted Profits. To calculate the real profit, we first need to subtract a few things.
First we shall remove our management fee. 0.60% of 30 Lakhs (25 Lakhs with 20% return) is 18K. So, your asset value post management fee is 29.82 Lakhs. From this we deduct our performance fee of 20% (20% of the 20% gains) which comes to 1 Lakh. Deducting this would reduce your capital to 28.82 Lakhs. Of course, I am ignoring Brokerage, STT, GST and all other taxes that are levied on your account at actuals.
Based on my assumptions, this will reduce your capital to 28.50 Lakhs. Yes, you are still profitable but thanks to the fee structure and the way its applied, your 20% gains is now reduced to 14%.
I will never invest in a PMS that just invests in Nifty and if I do, I won’t pay any performance fee you may claim. The truth though is that while most PMS don’t buy a simple product such as Nifty ETF and do try to beat the Index, they tend to use the wrong benchmark to showcase a much better performance when its just Beta that has powered their performance.
The right way to know if the funds are doing anything different from the Benchmark can be tricky but is not impossible to measure.
2 & 20 is what Hedge Funds charge. I came across the following quote in an interview of Hedge Fund Genius Stanley Druckenmiller
When I started out, we were expected to make 20% in down markets and that’s how 2 and 20 came about.
Stanley Druckenmiller
In other words, performance fee is worth paying if the fund makes money for you in both up and down markets. But most PMS are long only which means that when markets go down, so do they.
PMS already suffers from tax disadvantage compared to Mutual Funds since all transactions are carried out in one’s own account. The disadvantage when it comes to Performance Fees is that they are not allowed to be set off against one’s Short or Long Term Tax consideration. (Recent Case)
The basic premise of PMS was to manage the funds of each client in accordance with the needs of the client in a manner which does not partake character of a Mutual Fund. The reality though is nothing of that sort with most clients owing the same model portfolio in the same weights.
The only advantage of PMS over Mutual Funds lies in their ability to move to Cash to the fullest extent if necessary. Given the opaque nature of portfolio management, one wonders if that one advantage which can be created by using prudent asset allocation is worth looking over all the negatives.
It’s not as if all PMS are not worth looking into for investing purposes, but unless they are doing something very different from what is available in the form of ETF’s or Mutual Funds, the fees they charge may well negate any advantages they bring to the table.
Till investors understand that there is no free lunch, there will always be complicated financial products that seem better than simple ones that are offered with no fanfare. As the Latin proverb goes, Caveat emptor.
When LTCM got into trouble, the only way out was to offload some of its positions and hope that they can reduce their leverage. Thanks to the fact that for many of the bonds, they had become the market and with negative news all around, volumes dried up. This meant that when they tried to sell a small quantity, they moved the market enough to lose even larger on what they continued to hold. We saw the same episode repeat in Amaranth in Natural Gas.
Liquidity begets Liquidity until it doesn’t. Bombay Stock Exchange is Asia’s oldest stock exchange but today, NSE is the leader when it comes to volumes.
In 2017, your portfolio would have been a happy portfolio if invested in small cap stocks. Cut forward to today, if you have a large small cap portfolio, you would have not only suffered enormous draw-down but as one PMS has seen, its unable to exit its stocks since the volumes are so low that any large quantity sell will impact prices making losses even larger for the rest of the clients.
SEBI’s new rules have meant that there is a clear classification of what constitutes Large Cap, Mid Cap and Small Cap. On AMFI, the first file with the new classification was uploaded on 2nd January 2018.
Using that data, I wanted to compute the average volume and value of stocks that qualified for those categories and then compare with what is seen in the same set of stocks today. The results aren’t surprising, but average 10 day volume for small caps (using market cap based Ranks from Rank 251 to 500) has plummeted 65% while average value is down 70%.
Volume and Value Comparison by Market Cap categorization as of 1st January 2018
One reason Institution coverage is basically negligible when it comes to small cap stocks is that there is barely any volumes is most counters making entry and exit humongously difficult. In fact, the above mentioned PMS is rumoured to have asked clients to take delivery of the stock in lieu of funds when they wished to close out the account.
Yet, such lack of liquidity and coverage is also the reason there is long term evidence of small cap premium {there is a dispute on whether this still exists when we adjust for volatility, but that is for another day}.
Small caps become Mid Caps and some later become Large Caps. Very few are able to make that journey, but those who do provide returns of a nature that is beyond what any active or passive fund can generate. The million dollar question of course is how to identify such stocks 🙂
