Portfolio Yoga - Part 33

Blog Porn

Before the advent of the Internet the only resources available for a Investor / Trader were books and Newspapers. For Indians, it was more of Newspaper and “khabar” since investment books were rarely found in one’s library (am speculating here given my experience, could have been different in a city like Mumbai for instance).

Internet and the arrival of blogging has changed all that. While most of us have moved to Twitter, its actually in the blogs that you can really lay out your thesis without being constricted by number of characters.

There are a few well known blogs by Indians though my own view is that most of them lack quality and those that are of high quality are either paid blogs or worse the author decides to blog once in a blue moon.

On the other hand, US which has a much longer history when it comes to both the Internet as well as participation in markets, one sees a very huge number of blogs that touch on every aspect that you could think of.

Few days back, friend Arun @LazyTRaider made a tweet request for blogs that one follows. I responded with a list of blogs I generally follow. This pic attracted quite a bit of interest with it right now having been Favorited by 136 folks. But the pic doesn’t really do justice since it requires a lot of effort to track and read the posts on each of those sites.

Rather than you spend time going through various sites to check for updates and read what interests you, I decided to pull the feeds into a single sheet and make it available on this site. By doing this, I hope that this becomes your one stop shop for reading anything interesting that is happening in the investment world.

So, what are you waiting for, go and check out US Blog Roll

You shall also find the link in the Menu Option above. Happy Reading.

Stock Advisory in India

With there being more than 2500 listed stocks that trade every day, picking the right stock is tough for professionals, let alone Individuals. If you are an Investor wanting to build a stock portfolio, how do you go about it?

The answer is basically two fold,

You do your own research and buy stocks that you believe in.
You outsource the decision making to a third party and take the trades advised by them.

Friends who know me know how anti advisor I am. This has been borne out of personal experience with stock advising. For those who don’t know, I long back had started an advisory, was part of another advisory firm started with a few friends and then worked (though my role was different) in a firm that had stock advisory as one of its offerings.

What was uniform across the three was that performance (as I measured) was below par given the commitments that were required to be put in by the Individual who took such a advice. Advisory, especially of the Stock variety is asymmetric in nature. You not only pay the advisor beforehand, you have no recourse in case they fail to meet the expectations (on which the product has been sold to you).

Worse, many a firm locks you into the plans with no exit in case you want to get out. Prorated refunds are essentially something you barely find among most of the firms. Remember, the cost of advising 10 or 100 more or less remains the same and yet, they want to make sure that you cannot exit.

But then again, this is an Industry that seems to be growing by leaps and bounds going by the number of people who are registering and offering service to Investors. The one common factor is the returns they seem to have generated in the past. Most beat the best mutual fund out there handily. Of course, given that there is no Audit or third party tracking, it’s a guess as to what the real returns to the investor could have been (after accounting for slippage / taxes).

While collating the list, I left out advisors who also provided advice to traders (Intraday / Derivatives). I believe that most advisors who offer intra-day service / positional derivative trading ideas know that most clients will get burnt and yet the attraction of easy fees attracts most of them to offer such a service.

So, without further ado, here is the list (which shall be constantly updated over time) of Stock Advisors. Do note that for it to make sense, you need to commit enough capital to make the cost less than 3% of your portfolio. Else, the returns no matter how good they are will be meaningless from your net worth point of view.

Link to google spreadsheet.

Becoming a Trader

One of the constant queries I receive from readers is how do they go about becoming a Trader. Where and How should they start, what books to read, do I take classes on Technical Analysis are among the top questions asked. Rather than keep copy / pasting similar replies, I felt that it was time to expand on the same and post it as a blog, so here I go.

What attracts men (very few women) to trading is a question I think has a question that hasn’t been fully addressed despite enormous amount of research on the same. Trading attracts literally everyone, from some one who found it tough to pass his degree exams to some one who may have topped in his Masters. Education in a way is no Bar.

Trading is tough, but if you are able to call it right, the financial rewards are huge. If you analyze business / companies, you shall find that not many provide / generate Return on Equity as large as that could be gained without the need to employ thousands of staff.

The chart alongside for example depicts the returns generated by some one I know purely via trading in 2016. While the returns are volatile, the returns are enormous (especially since the capital employed is pretty large). You can find very few businesses that can generate such returns on capital.

While money attracts, the key attraction I have found for many to try their hand at trading is the challenge it seems to provide and one that is missing in their own work places.

Trading for a living is too romanticized. Unfortunately truth is that more traders fall by the wayside than in any other business. While friends have disagreed with my numbers, the fact is that success in markets is by a very small minority.

Where success is tough, you see ancillary industries prop up that promise you success for a small fee. In the trading business, you have Fee based Advisors who promise to alert you with the best trades, the educators who promise to educate you to ensure that you can find your success and the broker who showcases / talks about great traders and how you too can maybe become like one of them.

I tried to search for Top Technical Analysts in India (since Technical Analysis is often linked with trading) and the names that came out weren’t surprising. After all these names are well known to anyone who watches business channels such as CNBC. But do you know what else is constant among them all? Well, you just need to check their websites to see that they all offer (for a fee) tips both of the Intra-day variety as well as Positional.

If you are a top lawyer, your income is still dependent on how many clients you can attract, If you are a top Surgeon, your Income is directly related to how many operations you make and same is the case with literally all other business / service sectors. But in trading, if you are good, market rewards you. Its as simple as that. You really don’t need to put up a website, have a call center to answer client queries, spend time to advertise on Television among others.

If you succeed in trading, there is nothing equivalent to describe and compare it with in the real world. You are the real Master of the Universe and every dream is out there to make it a reality. But then again, as a saying goes “if it was easy everybody would do it”.

Assuming that you still want to go ahead, how and where should you start?

Well, for starters start with a Billion. Am joking, but you really need some serious capital if you really want to make a career out of trading. Then again, as many a bloke has found out, no amount of capital is enough if you have a crappy strategy – its just a matter of time before you blow it all away. (Related Reading: Post by Nooresh Merani on the same)

Trading is not like any other job and that means that you don’t have a regular income as well. So, make sure that your life is not entirely dependent on how much you can make it in that month. If you do, its a sure fire way to failure.

While much of trading is seen as the hectic / intra-day variety especially in the derivatives segment, if you want to survive and thrive, avoid at least at for the first few years anything close to intra-day or trading in futures and options. As enticing it may seem, its a fast path to disaster for most.

Education is important to succeed in any field and trading is no different. While trading is supposed to be about reading charts, its important that you know anything and everything there is to know about. That said, I am skeptical about the quality of advise provided by Individuals who for a fee promise to help you learn the ropes. On the other hand, I would suggest you attempt to pass the CFA / CMT exams. While they are self study based, the exams aren’t easy and require you to have a deep understanding of the intricacies of the market.

Trading in my opinion is not for everyone, the few who succeed aren’t the ones you would have thought would succeed when they first started. Having lost money in every way you can think of, all I can say to conclude is that Trading ain’t Easy and if you are enticed by the easy money, beware for the bottom may give away faster than you imagine.

ETF aren’t Stocks

In 1994, Morgan Stanley came up with its first India based Mutual fund aptly named Morgan Stanley India Growth Fund. Investors who had no clue about Mutual funds, felt this could be a IPO opportunity similar to the forced IPO’s of multinational companies in late 1970’s.

Forms were sold at a premium and even before listing, the stock was trading at a wild premium. While I wasn’t a participant there, I wonder how the investor felt when he saw the IPO open below par. The amount the fund collected was way above their own expectations but unfortunately for investors, the investment (even for those who bought at IPO price and not at a premium) was a investment that didn’t prove its worth.

These aren’t early days for Exchange Traded Funds and yet I was surprised to see a investor willing to buy a Index ETF at a 15% premium to the NAV (for a long time Morgan Stanley India Growth Fund was actually trading at a discount to its NAV, so much was the disappointment for the Investor who had literally given up on it).

Most Index ETF’s are a fraction of the Index they track. While some are 1 / 10 of the Index, some others are 1 / 100. But the smaller the fraction, larger the chance for buying / selling at levels which the Index isn’t trading.

Take for example the Edelweiss Mutual Fund – Edelweiss ETF – Nifty Quality 30. The ETF is a 1 / 10 tracker of Nifty Quality 30 Index. While Nifty Quality 30 currently stands at 2099, the NAV of the fund is at 211.42 (positive Tracking Error).

On NSE though, its last traded price is 241. Now, 30 bucks in a stock may not mean a big thing. After all, stocks can and do move big time a lot of times. But 241 on the fund is equivalent to 2410 (approx) on the Index, something the Index hasn’t seen till date (All time high being 2292).

To give a better comparison, Nifty is currently trading at 8180. Would you be willing to buy it at 9300 levels right now?

While we have seen growth in ETF’s in India, the liquid ones are still very few. When you go out to buy a ETF, do note that slippage can harm your returns by a margin that you weren’t expecting when you placed the order. Remember that while ETF’s trade like a share, they move like a Index. So, don’t pay for a tortoise assuming it will run like a Hare.

Misunderstanding of Absolute Returns

In school, I never wanted to be scolded / hit / made to stand on bench by the teacher and while I was never a meritorious boy, I did enough to ensure that I never got on the wrong side. By the time I finished studies, I was sure I wanted to get into business and not a job. Why? Well, you never get scolded by your boss while you can easily (or at least those were the thoughts in those days) make as much or even better by being your own boss.

I read stories of the successful men and women who went to the top starting with not much than a Garage and a few ideas (I don’t remember reading too many Indian Entrepreneur stories). Then again, no one told me that failure was plenty in business and very few actually made it through.

Its been 20 years now since I went on my own and its been a journey of up and down’s and like in markets, have always used the stairs to climb while lady luck (why blame myself) pushed me back through the elevator vault to nearly where I came from (with only experiences to carry forward). On the other hand, the 1 year I did work under some one else was a revelation and a thoroughly enjoyable experience. Talk about getting misled by faulty opinions.

Being a trader I talk with a lot of people and the one common refrain I hear (especially among trend following friends) is that the reason they chose this method over others is their belief that only this method provides them with “Absolute Returns”. But digging a bit deep, it seems for majority of the folks, Absolute Returns = (Strong) Positive Returns regardless of where the market has done.

Much of the literature too tries to showcase how trend followers blew our their competitors in 2008 even as much of the competition just packed up and left. But that is just half the story. Lets start with one of the most famous trend followers and CTA – Dunn Capital Management.

Draft DUNN Information September 2016.xls — Dunn Capital – Equity Curve

The chart (Click to Expand) showcases 2 things – the out performance of Dunn Capital over the S&P 500 as well as the major draw-downs it had during the course of the journey. [A note here, Dunn trades more than just S&P 500 and hence the comparison maybe down right faulty]

When one looks at charts such as these, its easy for the mind to assume that we would be more than happy to have similar kind of returns.

But then again, that is due to the visual nature of the chart which leaves out a large part of the information.

Take for example their draw-down of 63% (heart breaking for anyone regardless of how well his previous returns have been) that seems to have been touched in late 2007.

Let me expand on that a bit. You are down 63% on your capital (measured from your peak) even as markets have bit a new all time high. While the rest of the world (your friends basically) are partying, you are left wiping up the ashes your system seems to have left behind.

This draw-down started not in 2007 or 2006 or even 2005 but in 2003 / 04. Remember, that was the start of a great bull run that ended in 2008 even in US. Can you really live with that kind of performance number.

I don’t know about you, but I personally would have long died (not financially but due to the emotional hit that such draw-downs create) long before the next peak in my equity curve arose .

When folks talk about “Absolute Returns” they aren’t meaning returns that are different in nature from the S&P. What they mean (in their view) is returns that are positive regardless of the state of the market. In other words, they are looking for the Utopian dream of “Permanent Returns”, something that can be achieved only by the much abused (by market folks) Fixed Deposit.

For long I have been a votary of Trend following and have given talks on the same to showcase why people should give a thought to this kind of strategy. But the question that I hadn’t focused was whether it was suitable to everyone I preached. An even more important question I left asking (to myself) was whether I was willing to take the pain of short term draw-downs and be able to live with it.

Most trading systems I have come across don’t beat market returns (if you measure / compare correctly). They do beat over short to medium time frames, but over the long term, very few are able to consistently beat and compound the returns.

For many, the way out is to leverage. If your system generates say 10% vs Nifty move of 12%, a leverage of 3 times should provide you with 30% returns. Easy right? But then again, draw-downs are thrice what your historical draw-downs will be and given the fact that leverage means paying up the margin / marked to market losses means that the risk is that rather than seeing yourself with 3x returns, you will have a much higher probability of seeing your capital deplete by 65% or even more.

“Bulls make money, bears make money, pigs get slaughtered” is an old Wall Street saying that warns investors against excessive greed. As traders, I wonder whether we ever think that we could be the pigs (majority of us since few will always be there with mind boggling returns). Food for thought, eh?

Waiting for a Bear Market

Today I came across a interesting post by Dev Ashish at Stable Investor about why a investor (especially if he is young) should yearn for a bear market than a bull market. The logic he provides is pretty right given that the cheaper you buy a stock / index, the higher the probability that you shall make a decent return on the long run.

Then again, a bear market is a symptom of a disease rather than the disease itself. A bear market is primarily caused by a change of opinion about future growth of the economy. A good economy that is not overheated and yet growing on a consistent tick can provide way better returns than any buy you can make in a deep bear market. Don’t believe me, well check out the chart below which plots the performance of the Dow Jones Index from 1982 to 2000.

Over the period of time (18 years approximately), the Index went up 1,113% (or 11.xx times its initial value). Only once during the entire phase was a strong opportunity (Black Monday of 1987). If you started investing in 1982, you had to wait till 1987 for a bear market and if you started in 1989, your opportunity came only after the IT bubble burst.

In previous posts I have detailed about how I use multiple ways to determine whether market is bullish or bearish, but that is more from a technical perspective.

A drop of 20% (one of the ways a bear market is classified) doesn’t happen a lot of the times. In fact since 2009, we have had only three times Index has fallen by 20% or more and each time the scare is that this is just the start with worse yet to come.

But do investors really need to await for a bear market to come before investing money for the long term? Even in bull markets, you can find sectors / industries that are hitting the floor due to issues. 2008 marked the peak of the Nifty Metals has been smashed like anything. In fact, other than realty, this has been one of the worst performing Index. And yet, after each big fall, the Index has risen like a phoenix.

PSU Banks were literally written off thanks to their disclosure of high NPA’s quarter after quarter and yet in the recent months, they have given nearly 80% from bottom. Of course, none can catch the bottom and 80% is not something that could have been achieved (and the other thing it would have needed is to time the top as well). But what about 30%?

Asian Paints has been on a one way trajectory and yet if you were to check out the charts, falls of 20% or more have been all too common. Unless you believe the company has gone to dogs, does it hurt to risk a bit when stocks that are excellent have been plummeted due to one or the other issue that has taken over the media frenzy at that point of time? Or what about Apple or closer home ITC or Hindustan Unilever among hundreds of others?

Okay, you are using hindsight and selection bias to showcase companies that have survived you may claim and I plead guilty. But while companies may die, do sectors die? Nifty IT which represents the cream (and not so creamy) companies is down nearly 20% from its peak. Valuations are at multi year lows, is it worth a Buy?

While I have invested a small bit, I am waiting for confirmation of a trend reversal to plunge in more. In that way, I want the fundamental evidence I have in hand to match the technical parameters I follow. From its peak, Nifty Pharma index is down more than 20% even after considering today’s rise. Yet, given that Pharma as a Industry should continue to grow, doesn’t it make sense to risk either when it becomes too cheap (it hasn’t for now) or showing the technical evidence necessary that makes it a worthwhile sector to pick?

Do note that every opinion including mine are biased based on our circumstances and our beliefs. Anyone who isn’t holding any investment in Real estate (and that would include me) is hoping for and building a case as to why Real Estate prices should fall, but if you ask one who are invested, they can give you as logical answers as I do on why it will not fall. Either way, none of us know the future.

A bear market is useful for building stocks only if your own job is secure but deep bear markets don’t arise in a well doing economy. It arises when shit hits the fan so as to speak and when that happens, you would wish that you rather have your job back than a opportunity to buy stocks cheap. Rather than wait for a proverbial bear market, I think it makes a lot more sense to take advantage of market miss-pricing in individual stocks / sectors and hope that the long bull run continues without too many a hiccups.

Blind Belief’s

Belief is defined as “an acceptance that something exists or is true, especially one without proof.” Focus specifically on the underlined portion for that conveys all that is wrong with belief’s in the first place. Investing is a belief that what you are doing is the right thing and the only thing that should matter.

Speaking on CNBC, Irfan Razack, Chairman and Managing Director, Prestige Estates says the time is in fact right to buy property because the fall in property prices is unlikely. Then again, he is in the business of Selling Real Estate and its highly unlikely that he would speak otherwise.

Ambit the other day came out with a bearish view on Indian GDP, but even after that, they managed to provide a positive target for the Sensex (by extending the time frame further). Any surprises given that they are Sell side advisory firm?

On 2nd November, with Nifty 50 trading at around 8500 levels, Porinju Veliyath who runs a portfolio management service tweeted that he foresaw Nifty 50 trading at 9120 levels if Donald Trump got elected within 6 weeks. With markets down 600 points from that point, he tweeted today that this fall was similar to the bottoms we had seen in earlier times. Then again, being a long only fund manager, he cannot tweet about a oncoming bear rally, can he?

Today I came across a tweet by a Value Investor who claimed that he is bullish on India since he is 100% invested in Equity.

International experience has shown that you have a much higher probability of great returns in Equity vs Bonds but even there the result is not 100% since there have been times when the bond returns was way higher than what markets provided (unless you were invested in a time when there was no way to invest in the way we do now – Index ETF’s).

While its important to be optimistic, its doubly important that we are realistic in our assumptions for faulty assumptions can and shall lead to a outcome that we least desired when we started out on the journey.

The other day I tweeted out the following;

Draw-down in Nifty & Nomenclature 🙂
Bloody: 10%
Rare: 20%
Medium well: 30%
Burnt: 50%

If you know your beef, you know where I borrowed the expressions from.

10% falls are common. After the great crash of 2008 and the amazing recovery we saw in 2009, markets fell by a bit over 10% 4 times in between June 2009 to November 2010. While Nifty was trading at 4500 at the time of its first 10% reaction, it was at 6300 before the reaction took a more serious turn.

In between 2003 (July) to 2008 (Jan), we saw 7 falls of 10% of which only 2 times did it turn more serious with the falls finally getting contained at around the 30% barrier (all percentages calculated from previous peak or 52 week high).

Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family, is credited with saying that “The time to buy is when there’s blood in the streets.”

When markets are flying we think we shall buy when there is a correction / reaction. But do we really buy when markets are falling. For example, right now markets are falling and yet rather than buying I see people anticipating lower (Am guilty of posting one such chart today) levels where Nifty 50 could come.

But will it go down to those levels? What if markets jumped back from current levels back to new high – is your exposure to equity good enough to overcome the regret bias. On the other hand, if you are over invested, would you be able to psychologically sustain yourself even as markets continue to drift lower and showing better opportunities if only you had waited.

Given that investing is a belief, ensure that the beliefs you hold dear to your heart are supported by evidence. Skepticism is the highest duty and blind faith the one unpardonable sin.” — Thomas Henry Huxley

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