Tag: Monthly Newsletter

One of the aspects that we have seen both in the United States as well as in many other countries including India has been the rise and rise of the Retail Investor. For long seen as the weak hands, today they seem like a fearsome clan of hyenas who can take on even the King of the Forest.

The attack of the hyenas on the Lion seems representative of the attack on hedge funds who were holding short positions in companies that were close to dying. AMC, which was close to Bankruptcy saw its share price get boosted from around $2 to $60 while the more famous compatriot GME shot up from around $5 to more than $400 bringing down a couple of very well funded hedge funds.

While we haven’t seen anything similar in India, we have seen stocks with literally zero fundamentals getting valued for thousands of crores in market cap. The level of insanity is what worries old timers as they feel that this is just a sign of the end of days. But many have been calling it too early and either underperformed the markets or worse.

While retail is seen as the weak hand, the truth is that they are often the drivers of most bubbles. Like a pyramid scheme, the better the performance, more the participation by retail investors. Since many aren’t really investing for the long run, valuations or any other historical parameter makes little difference. 

Look at some of the past price rises in assets such as Retail Estate. It was not the Institutional push that resulted in such a steep hike as much as retail interest. The reasons for the aggressive retail interest could be many, but the more they succeeded, the more attractive it seemed for those left out.

Compared to asset classes like Real Estate where there is tremendous support, investing in the market doesn’t have the same. While there is much talk about the rise of retail investors including data of new account openings, NSE data on the shareholding isn’t so optimistic. From their NSE Pulse,

Direct retail holding has remained fairly steady for more than a decade now: Not surprisingly, while retail investments through the SIP route has been rising over the last few years, barring a steady drop in FY21, direct retail participation in equity markets fell during this period—a sign of maturing markets and indirect ownership. Retail ownership of the NSE listed universe declined steadily between 2001 and 2012, but has since been steadily rising, albeit at a very modest pace, barring a drop seen in 2018 and 2019

Yet the data contradicts NSE own’s data – Net inflows by retail investors

One reason for the divergence could be the fact that much of the retail investment is going to stocks outside the Nifty 500. NSE 1000+ stocks that trade on a daily basis outside the Nifty 500. The top winners almost all come from this list too.

While the markets have been strongly bullish for nearly 1.9 years now, the commentary has been to put in their words, Cautiously Optimistic. There was first the fear of the impact of the virus themselves, the impact on the economy, the fear of the second wave and when it finally came, its impact. In between we had a skirmish at the border with China which added to the fear of an upcoming crash.

It’s in this fearful climate that the optimism of the small retail investor has performed at its best. Was this just an element of luck providing them the advantage or has the skills of retail investors matured to understand the dynamics of the market.  

Ben Carlson in his book “A Wealth of Common Sense” quotes William Bernstein from his book, The Investor’s Manifesto who says that for a retail investor to be successful in the markets, he should posses the following four skills

1. An interest in the investing process
2. Math skills
3. A firm grasp of financial history and
4. The emotional discipline to see a plan through

He then claims that he expects no more than 10 percent of the population passes muster on each of the above counts. This suggests that as few as one person in ten thousand (10 percent to the 4th power) has the full skill set.

But retail investors are not wrong all the time. When the market is trending higher, most are inline with it. The only issue is when the trend goes down, retail is the one that normally doesn’t quit. Look at the shareholding pattern of any of the stocks that have bombed big time and one can observe that the only section of shareholders who added to their shareholding are the retail investors.

The reasons that have been ascribed to the sudden shift in interest are many but the one reason has been the strong momentum that has enveloped the market. Interest in crypto currency today is 1000x more than what it was just a few years back not because investors have understood the logic but because this asset seemed like a fast way to make money.

Take for instance OpenSea, a website / platform that is the equivalent of eBay for digital art. In just around 4 years, it has now existed, it is now valued at $13.3 Billion. How long this merry is anyone’s guess but the biggest losers in all probability will be the small retail, especially those who entered it late.

What is the End Game?

One of the worries that most investors have is that markets are too high and hence not attractive to invest. Even if one looks at the Mutual Fund data, if one removes the contribution of SIP’s, the net result has been negative. 

The recent crash of covid is too near to forget but this only means that we are nowhere near the end of a bubble. George Sorors has a chart that tries to neatly explain the boom-bust phenomenon

Looking at the current market, the valuations per se makes me wonder if we are between C and D or F and G. If the former, the coming correction is an opportunity while if it’s the later, the same becomes a threat. 

The question though – how do we really know where we are and more importantly where we are headed. It’s a Million Dollar Question with no credible answers.

Based on my own Top-Down analysis, I believe that our markets still have enough legs to move higher. While the markets have risen a lot from the bottom, if you look at the larger picture, the health of the companies are way better than they were in the past. Leverage is down and while there are pockets of over-valuation especially in the new age space, much of the market isn’t.

On the other hand, does it really matter how well our companies and industries are doing if the US markets crack. At the start of 2008, companies were showing strong growth and hence being richly valued. If not for the financial crisis in the United States, our markets would have been able to achieve much higher levels even after the stampede of investors who came in for the Reliance Power public offer.

In recent weeks, hot trending stocks on the Nasdaq have taken a significant hit. But thanks to stocks such as Apple, the Index in itself has not suffered anywhere close. 

Chuck Prince, a former CEO of Citigroup has been immortalized thanks to one quote of his he gave just at the fag end of the market rally.

“When the music stops, in terms of liquidity, things will be complicated,” Prince said. “But as long as the music is playing, you’ve got to get up and dance.”

As much as he faced ridicule, the fact is that as investors, we need to continue to play till the music stops. The music may stop in the coming months or coming years or worse in the coming decades, no one can really tell it beforehand. 

As with most market rises, there has been a huge explosion in market participants. This in itself is not a cause of worry. I don’t think this is the time to be scared because the data just doesn’t agree. Data could change but so could we. Looking at the past and building a framework is a good way to make the most of the opportunities presented but still be on one’s toes if doomsday were ever to make an appearance. 

Book Review: Confessions of a Stock Broker

As someone who has spent a better part of his life around stock brokers, the very title was too attractive to miss out on. The business of brokerage has moved from being more customer centric to one where both the client and the broker barely talk anymore. The old days when clients used to arrive at the brokers office to enquire about their stocks, the broker views on the market or even general chit chat is no longer there. My best friends today though are all stock brokers – some continuing to be in business, some who have quit to become full time investors. 

Like every other industry, there have been black sheep among the broking community as well, but there have been and even today exists a few brokers who work hard for the benefit of their clients. It’s a dwindling community.

This book is in a way an autobiography of the author. At 19, he was conscripted into labor by Germany which was occupying Hungary during World War 2. His escape and how he went on to become a stockbroker in the United States forms the initial part of the story.

When I began my journey in the stock market, I associated myself with a stock broker who was a speculator. That starting point and the fact that I saw money being made in the brokerage business was what drove me to become a stock broker myself. Today I realize how wrong a starting point was and how dearly it did cost me. 

Brokers like Andrew Layni who rather than encouraging speculation by clients encouraged investing backed by research were few and far between in the pre-internet world. His strategy was based on identifying small cap stocks that fulfilled the following criteria’s

1. Fast Growth – he looked for companies that were small and yet growing rapidly.
   
2. Industry, niche, or area domination – something that Warren Buffett talks about as Moats and Peter Thiel talks about as companies that are monopolies or are market leaders in their industries.
   
3. The ability to increase earnings during recessions – note that he became a broker around 1958 and from that to say around 1982, Dow saw just one good rally – between 1962 to 1965, it doubled. The next 17 years were spent in range bound fashion.
   
4. Wall Street’s lack of familiarity with the company – even in the good old days before the internet, tracking small companies was incredibly tough. Even today, much of the broker research available is for the top 500 companies at best. Outside of Nifty 500, NSE itself has more than 1000 companies while BSE has even more. The objective here was to try to and seek companies that had not become popular and hence relatively cheap.
   
5. Ever growing repeat orders – this is something very few track but an interesting metric to understand single product companies better. 
   
6. The “cookie-cutter” factor – cookie cutter refers to the ability to mass produce something based on a fixed design. Think about franchisee companies like McDonald or Starbucks. Once they establish the basic elements, it’s easy to replicate. Closer home, Advisory and Asset Management firms can be seen as being cookie cutter. The cost of managing 100 clients or 1000 isn’t too different but the income is 10 fold.

Overall, for some one associated with stock broking, I felt a bit of nostalgia even though the book in itself and the ideas presented are pretty dated.   

It’s a question that has been debated and discussed deeply in the financial community. Those who believe equity fund managers should go to Cash when the odds aren’t favorable suggest that the objective of a fund manager is to generate superior risk adjusted returns.

On the other hand, those who believe that the equity fund manager should not go to cash within the portfolio base their belief on the fact that the asset allocation is best left to the discretion of the client.

A not so recent thread on the subject

Cash calls in Asset Allocation can be taken in two ways. One would be based on Valuation while the second method is based on Trend. Both have their positives and negatives and it’s important to understand the merits and demerits of each before deciding on what suits one best. A combo works well as long as one is willing to stand apart from the crowd.

Compared to other methods of investing, a key expectation of Momentum Investing is going to cash when the market goes down. While from the theoretical angle of risk, this appears to be a great way to reduce the draw-downs, going to cash has draw-backs of its own including the fact that going to cash at the wrong time results in opportunity costs that are never calculated.

Even setting aside that, the issue with going to cash suggests that the strategy is more of a speculative strategy which inturn means that serious allocation becomes tough. The only time Cash as a position makes sense is when there aren’t enough stocks that pass through one’s filter. This happens rarely – last time it happened was in March / April of 2020.

Cash as a position has its utility when the odds are heavily stacked against the strategy.I don’t believe that we are at a stage where going to cash makes eminent sense. If the view turns out to be wrong in which case, we shall see a mid month shuffle. 

Market Trends

Writing in March of this year, I used the idiom that Lightning doesn’t strike the same place twice to suggest that a big fall wasn’t on the horizon. Even though VIX in the US has done what it did way back in February 2020 – a breakaway gap of nearly 50% then and we  have seen the same on Friday too, I think the future path isn’t looking similar.

In his book, New Methods for Profit in the Stock Market, Garfield Drew writes

The human mind is always inclined to go back to the past experience in the market and judge the future by that. Post Mortems may be held after each largely unforeseen collapse in order to determine what the warning signals were. Attention is then focused upon them for a time in order to avoid the next crisis , but when it comes, it is usually found afterward that the primary signs of danger had shifted to another field.

Since the original crash is still very fresh in Investors memory, the anticipation is that the current fall will be of a similar nature. 

In early 2020, Markets were unprepared for the impact of an epidemic and one that seemed to shut down countries. The markets expected the worst well before the worst actually took place. When markets bottomed out, the number of new cases per day worldwide was just around 50,000 versus the peak we saw of nearly a million in early April of this year.

Broader market trends have been starting to show weakness for a while but not all weakness leads to crashes either.  Number of Stocks (Universe being all listed NSE stocks) that are currently above their 200 day EMA stands at 60%, something we saw in September 2020. Markets saw a slight pull back before it bounced back with some ferocity.

Primary Trend: The primary trend in Nifty has been bullish as is easily evident from the lows of March 2020 seems to have now been broken. A break of the primary trend means that the market now will tend to trend either sideways – time correction or downwards – price correction. 

In August 2013 Nifty began a strong rally upwards. The Primary Trend from February 2014 onwards was especially strong. This ended in March 2015 though the confirmation as such became possible only in June of the same year. The correction would last nearly a year with Nifty bottoming out in March 2016 before the next leg of the rally started.

I sense we are somewhere closer to March 2015 with a lot more sideways – slightly downwards action on the way. 

“History Doesn’t Repeat Itself, but It Often Rhymes” – Mark Twain

There is no reason that the market should follow what it has done historically to the dot. What history provides us is a perspective from which we can draw conclusions and act on the same.

How did Momentum work during these times?

The backtest for the period shows that Momentum did not initially succumb to the weakness though it did bottom out with similar drawdown by the end. The reason for the divergence can be seen when we look at the performance of the Nifty Small Cap Index in the same period. While Nifty was trending down, this was trending flat. This enabled Momentum strategy to actually outperform both the Small Cap Index and the Large Cap Index for a while. From early 2016, the Small cap too took a severe pounding and took everyone down with it.

This time around, we don’t have that divergence. Large, Mid and Small Cap indices are behaving in a similar fashion and what this means is that there could be pain ahead regardless of the methodology one uses to be invested in the market.

So, how should one play this out?

This depends on what your time horizon is, your ability to digest a drawdown and the willingness to bear pain of a different nature if you are out and the market takes off.

While the Momentum Portfolio will continue to be fully invested as long as we have enough stocks that meet our criteria, the action can be taken from the asset allocation side. 

The old adage – a penny saved is a penny earned doesn’t hold good in the markets. While saving a penny is always appreciated, it often results in an opportunity cost of two to three pennies. This is because while getting out is easy, getting back in full force when the market trend turns up once again but the overall newsflow is still very much negative is tough for most investors – new or experienced.

I wrote about some historical examples in this post – Mayhem in Markets. Will it End

Markets were due for a correction, this is something that everyone knew.  The reason could have well been different and we would have seen the same action play out. The question though, what next is always difficult to predict especially in the short term.

I drive a bike and have been driving one for the last two decades and more. Roads being what they are, we do get into numerous potholes. The key to safe driving is not avoiding such potholes but avoiding the massive ones that can literally throw you off the vehicle.

In similar ways, I feel that the only time when we should get out of Equity and into the safety of Bonds / Cash is when we find ourselves on the cusp of a major drop. Small jerks are best accepted as the trade off for ability to garner returns that are way better than any other asset class.

When we look at market corrections, the calculation is between the peak and the trough. But neither are known other than in hindsight. Let’s assume that we cannot sell before the market is down 10% from the peak and buy back 10% above the trough. In essence we miss out on 20%. Gains accrue only if the fall is deeper and smoother without violent pullbacks that get smashed.

In the fall of 2000 (Dot Com bubble) for instance, Nifty rose 10%+ from the intermediate lows multiple times but failed. In hindsight, it’s easy to notice things that would have made one avoid getting caught in the bounce, but in reality, I remember seeing more money lost in these bounce back trades than in the first fall itself.

The key to successful investing lies in having an exposure that allows you to peacefully sleep at night even during the worst times but also has enough exposure to ensure that the goals are reached. Peaceful sleep can be had by stuffing the pillow with cash, but that doesn’t grow.

August was the second time in 3 months, Portfolio Yoga Portfolio’s went through a change mid of the month. Stocks got removed without replacement. This has led to questions whether we are moving to a weekly rebalancing mode as is the case with everyone else. The answer to that question is a firm No.

The rebalancing will remain in monthly mode since we have enough data to showcase that monthly is better than weekly on multiple parameters. 

Before I explain the reasoning behind the mid month change, let me talk about something that is happening in the world of Trend Following in India.

Before 2017 when I made a complete shift to Momentum Investing, I was a Systematic Trend Follower for a decade. I read everything that was available on Trend Following, heard multiple podcasts and learnt a lot about how to test ideas better and understand which models were flaky and which were antifragile.

Yet in 2017 when I got the first real opportunity to shift from trading to investing, I did that without the blink of an eye since I recognized the fallacies that prevented me from being a successful trader. 

There are a lot of things that need to go right for the trader to be successful, but the one key and one that is constantly overlooked is the capital. I recognized that my capital was scarce to trade a diversified portfolio.

In 2012, I was working with Dr. C.K Narayan building and executing trading systems. We were trading on a broad set of stocks and Indices such as Nifty and Bank Nifty. While the strategy foundation itself was based on trend following, the way risk was managed was anything but trend following based. 

We had for instance target profits, initial stop losses, trailing stops and reduction of position size as the trend went in favor of us. Literally everything you won’t find in a trend following book which generally always talks of Ride the trend till it ends. 

The period we traded did not have great trends on either side and yet, thanks to the way we were able to build the strategy, we actually made money. Credit for most part belonged to my boss, CKN who had a much deeper experience than me and helped me shape the strategy in line with his experience.

Trend Following has a huge history and has been successful in what it professes to do. The strategy is not about beating the markets but about generating non correlated returns. 

Since Clubhouse became available for Android, one room I try to be present in is the one hosted by Jerry Parker. Even though I myself am out of trading, I love to understand the intricacies of succeeding in a business like this. On his website, Jerry provides month by month returns going back to 1988. 

What interested me was not the returns – 10% over the last 33 years but the smoothness of returns. In the first 23 years of running his fund, at the end of the year he barely had a draw-down and when he had it was in single digits. The last decade has been tougher, relatively speaking.

Way back in time, I ran a site called NiftyTiming.com. The advisory was to provide clients with the signals that got generated by a trend following system.  It was a system I had coded and one that traded on the Nifty. The venture itself was short lived and I pulled the plug 3 months down the lane before anyone got hurt.

I realized I was missing something but wasn’t sure of what it was. It was only much later I understood that the risk I was taking by trading a single symbol even if it was an Index. Yet, I see advisors doing the same. 

Last year was a very good one for trend following advisors who reaped the benefit of smooth trends and counter trends. 2021 even before the halfway stage was setting up for a disaster with draw-downs touching levels that would bankrupt any trader who was trading with leverage.

Unfortunately for most traders who subscribe to such strategies, they don’t have the data or the resources to ask the right questions. What this means is that the outcome is very much a subject of curve fitting.

When market doesn’t trend which is a large percentage of the time, trend following systems tend to get chopped. This is true as much for a 2 period moving average as it is to a 200 point moving average based system. The system itself doesn’t understand that the market is range bound in a tight range. But an analyst monitoring the system can definitely observe that.

I have observed one time too many the thought that one needs to stick with the system regardless of what one’s one observation is telling us to do.  Yes, there is a risk of the observer getting the view wrong, the fact that one builds the system to ensure that one’s own opinions don’t mess up with the trade, the fact that this could be a slippery slope among others.

But what use is experience if one cannot at the least ensure that risk is reduced when it’s very much observable that the risk outweighs the rewards. Should one just hope the system will get lucky and we shall recover all our losses.

The biggest advantage of managing one’s own funds vs advising others comes from the fact that one’s actions are never questioned regardless of the results while the results dictate the questions when one is dealing with other people’s money (directly or indirectly).

Discretionary Advisors have it easy here. They understand the reason and while they may or may not turn out to be correct, they can provide a narrative to their actions and be done with. When it comes to systematic advisors, we are held to a higher standard. 

Most Momentum advisors have gone with a Weekly rebalance schedule. I have tested hundreds of variations of momentum on weekly rebalancing and yet to come across strategies that have very low churn. Yet, somehow advisors seem to have much lower churn. Given that most of these models are “proprietary” in nature, maybe they have found a way to limit churn while still rebalancing on the weekly mode.

A system can be built to take into account everything that one wants to take into account when ranking a stock. But adding more parameters opens up risks of a nature that is not seen. Every additional parameter brings about its own issues of edge cases.

Talking about edge cases, let me provide an example of a Portfolio Stock – Linde India. Since it got into the portfolio, the stock had a one way move – down contrary to going up. Yet, the rank itself dependent on both volatility and one year returns did not budge below the cut off ranks. It finally did go below (slightly and hence an edge case) when we rebalanced for August.

I had two options then. Take the loss and move on or based on my reading of the stock, take a chance and wait it out for another month at least. Luckily it worked out fine. But this was not because I read a chart but more because I understood why ranks may move around despite having nothing to do with the performance of a stock. 

What I have found for myself is that it’s better to have as few variables as possible and then add a bit of discretion when it comes to execution. The last two instances worked out fine and saved a bit, but this approach could also get it wrong. 

The biggest risk of black box systems is that one doesn’t understand the deeper nuances of what goes into the system and how and why signals are generated. This results in a lower allocation than one that could be possible. 

At Portfolio Yoga, I have constantly tried to be as transparent on how I rank (Sharpe Ratio slightly modified). The purpose of the advisory is not just about providing a set of stocks and signals thereof but to provide you with a framework which helps you make better decisions. 

Do-it-yourself (DIY) investing is all the rage. NSE data reports that retail now commands 45% of the total turnover on NSE

Turnover doesn’t equal ownership. Retail ownership has moved slightly higher versus its lows but even if the indirect ownership via Mutual Funds are included, it’s still very much below its all time highs.

One explanation for the fall in direct ownership over time would be the rise and growth in assets at Mutual Funds. Retail has slowly shifted away from owning Individual Stocks to owning Mutual Funds. 

From both the tax point of view as well as the cost structure, owning a fund is generally cheaper. This is more so for the investor who looks at investing a large part of his net worth in stocks. 

Indian Markets are very illiquid. What this has meant is that the majority of funds concentrate on the top 400 stocks at the most even though NSE alone sees daily trading in more than 1700 stocks. On the BSE, there are another couple of thousand stocks that are not even part of the ecosystem of most investors let alone Institutions

The above chart plots the number of new demat accounts that have been opened.

Now, you can look at it from both the bullish angle as well as the bearish. The bearish angle will claim that the retail rushing in is a clear signature of the top. After all, isn’t there a saying,

“Fools rush in where angels fear to tread”

The proverb is also apt given that despite all the positive news we keep hearing, FII’s have been sellers in the recent past. 

I look at the data from the bullish angle. My view is that while there will always be excesses, the data of the past cannot be directly compared to the data of today. Context is the key.

For a long time stock market investing was equalized with gambling. This was due to many factors including very low compliance and rampant frauds – from the broker upwards. In recent years, compliance has really improved a lot. 

While we even today have broker defaults, the hit for the investor is constrained thanks to better regulations and the backstop of the exchange guarantee funds. 

Access to knowledge has improved by leaps and bounds mostly due to technology. This has meant a better understanding of the markets and how they operate in the long run. This doesn’t mean that investors as a whole will make money.

Rather, I feel that the Pareto Principle is as relevant here as it is elsewhere. 80% of the money will be made by 20% of investors. A study in the US shows that all the wealth ever made in the US Markets has been just 4% of stocks. 

The entire report is worth reading, but here is the key conclusion

While the overall U.S. stock market has handily outperformed Treasury bills in the long run, most individual common stocks have not. Of the nearly 26,000 common stocks that have appeared on CRSP from 1926 to 2016, less than half generated a positive lifetime buy-and-hold return (inclusive of reinvested dividends), and only 42.6% have a lifetime buy-and-hold return greater than the one-month Treasury bill over the same time interval. 

The positive performance of the overall market is attributable to large returns generated by relatively few stocks. Rates of underperformance are highest for small capitalization stocks and, as would be anticipated based on the evidence in Fama and French (2004), for stocks that have entered the database in recent decades. 

When stated in terms of lifetime dollar wealth creation to shareholders in aggregate, approximately one third of one percent of the firms that issued common stocks contained in the CRSP database account for half of the net stock market gains, and slightly more than four percent of the firms account for all of the net stock market gains. The other ninety six percent of firms that issued stock collectively matched one-month Treasury bill returns over their lifetimes.

With odds as unfavorable as these, it’s not surprising that long term wealth creation by Do-it-yourself investors is a rarity. Yes, everyone has that stock that one bought at a low level and held till it was a multibagger, there are exceptional years such as the one we are presently in. But one swallow doesn’t make a summer 

One of the most surprising things is the fact that very few investors actually take the trouble to measure their performance. 

Sharmaji ka Beta is the benchmark for most parents. If that boy can do it, why can’t you achieve the same. This is also called Cross Sectional Momentum. The comparison is never against self but against the rest of the colony / class.

Yet when it comes to one’s own performance, there is very little clarity as to how we are doing. Measuring performance is akin to keeping a dairy. It helps understand how we are performing and compare and contrast with the opportunities that are available elsewhere.

Measuring helps understand whether we are doing the right thing or not. When I used to be a broker, I measured the performance of myself as well as a few friends who also happened to be clients. This helped in understanding how I was doing in the scheme of things and where I could do better.

In Measure what Matters by John Doerr, the author expands on OKR’s (which stand for Objectives, Key & Results). Once you get them right, all you then need is a checklist to ensure that execution is as good as the process. 

Since I started investing based on the Momentum factor, I have kept detailed records not just of the transactions but the ranks the stocks were during the time of entry / exits. This is helpful in removing chinks that are part of my system.

The way to identify the chinks though comes with Performance Attribution and Performance Measurement. 

In the 2017 bull run, I remember a fund manager who ran a small cap fund but compared his returns to the large cap index. This turned out to be a good way to sell, but reminded me of the famous quote by Richard Feynman

“The first principle is that you must not fool yourself, and you are the easiest person to fool”

What is the appropriate benchmark for a DIY Momentum you may ask. 

I believe that comparing an active strategy such as Momentum with a passive index is doing a disservice. Yes, the outperformance is awesome, but the products are as different as chalk and cheese – this more so for the Multicap strategy.

Momentum has been awesome since April 2020, but if I were to plot the NAV of my own personal performance with Nifty Smallcap 250 Index and the Nifty Smallcap 100 Index, this is how it would look like

The above chart is useful to understand where the performance is being driven by. What this also provides is a framework of the risk such a high Beta strategy will face if the markets were to start rolling over.

Now to check against some Momentum Indices – primarily Nifty Alpha 50 and Nifty 200 Momentum 30

While Nifty Alpha 50 is not an investable index owing to no funds, it’s a pure Momentum strategy and hence a worthwhile opponent to compare against. Nifty 200 Momentum 30 on the other hand is more like a Nifty Plus strategy and not a pure momentum one given how lagging its rebalances are, but since it’s possible to invest, it’s another one which can be compared against.

Do note that a straightforward comparison in a way is wrong too. Unlike DIY, Mutual Funds gains are tax sheltered and in the long run that can really mean a huge world of difference. Not to mention the advantage of Buy and Forget in the world of Mutual Fund while having to be alert and tinker with the portfolio every week or month as the rebalance frequency tends to be.

The other day, I tweeted this

In my 25 years I have spent in the markets, I have seen a lot of people come and go. Some had exceptionally good returns for a while but mostly lost their way. I wish & try to meet people who are exceptions to that rule. 

For a fund manager, beating the market is what he gets paid for. He can’t have a few lost years and a few great years. Even if the ultimate returns are better than the benchmarks, clients won’t stay {Exceptions alway exist}.

A Momentum or a Value or even a Quality factor will be unlikely to beat the markets every year. This means that one has to have the framework to allow oneself to be beaten by the markets once in a while (or maybe even a bit more).

Finally allocation is more important than returns. Allocation though comes with comfort in the strategy. As a Do it yourself investor, the key is to understand the source of the return and the failure points. It’s that which can help stay sane when the strategy is not working while also not getting hyped up over excess returns in one or two years.

The reason funds managers get rich has to do not only with the leverage provided by assets of the client as also their own confidence in their strategy that allows them to be 100% invested. As a DIY investor, we are our own fund managers.  Its up to us to take the steps necessary to make sure that we are on the right path.

What makes a Great Fund Manager?.

How to spot a good fund manager was a question asked at a Twitter Spaces event. This was a question that Swarup Mohanty answered. I wish I could understand the answer he gave, but I don’t know Oriya :). What I could understand about the answer he gave was to forget about Fund Managers and focus on the Advisor.

If you were to dig down the reasons , the answer appears simple. Recognition for a fund manager has less to do with his philosophy. Or how erudite he is but more to do with his or her past returns. Period.
Beating the market is the prime criteria to be get judged by history as a great fund manager. The moment you stop beating, critics latch on to you. So, Warren Buffett with one of the longest period of performance has become a good guy to hit at.

Dave Portnoy called him a washed up Investor. But this is not a fringe opinion (Dave Portnoy for instance has 2.5 Million followers on Twitter). The worst performing Indian mutual fund outperformed Warren Buffett in dollar terms by over four times in the past 17 years remarked Nilesh Shah a while back.

An old saying suggests that a movie star is as good as his last few pictures. This is something that is applicable from Sports to Movies to Markets. You are only as good as your last trade.

Last year we saw some interesting funds register astonishing returns. Quant Small Cap fund for instance has a one year return of 200%+. The funds asset under management today is low (268 Crores). It should be interesting to observe how their AUM moves if they can deliver good performance. Even if they aren’t able to repeat the blockbuster performance of 2020 – 21, process is the key.

The current hot fund manager of the moment is Rajeev Thakkar. PPFAS has been consistent in both process and returns for a long time now. Their fame though has shot up in recent times. The 10-year track record of PPFAS Long Term Equity Fund is now the best among all multi-cap funds.

In 2018, I attended the Morningstar Investment Conference in Mumbai. While a lot of unknown but famous RIA’s got mobbed around during the session breaks, Rajeev was standing with a colleague of his at the corner with none to hound.

Despite being an introvert, I introduced myself and had a couple of minutes of general talk with him. Today I am sure he will get surrounded by investors who wish to know what the future of the market is. Whether investing in the US which is one of the current rages, will continue to hold or not for example.

Business Channels love speaking to fund managers but unfortunately big mutual fund managers are generally very busy to give them the bites they are looking for. We have a good ecosystem of Portfolio Managers who most of the time wear the cap of not just the Chief Investment Officer but the Chief Marketing Officer willing to spare time as often as possible.

But with 350+ portfolio management firms and around 500 managers, you have plenty of options. Business Channels love hedgehogs more than the foxes (Link if you are wondering what is the connection between the two).

Business Channels love fund managers whose strategy is not only hot at the moment but where the fund manager has the ability to mesmerize their viewers. Interviews are generally softball questions with any data that points out to the silliness getting rejected without a second thought.

The moment that trend fades away, the channels have no qualms about dropping him like a hot potato and moving from a fund manager who loves shitty companies to a fund manager who thinks investing in quality regardless of valuation as the way to go.

As an investor, your best returns are when the fund manager is unknown. When Peter Lynch took over the Fidelity Magellan fund, he was an unknown manager who got entrusted with a 20 million dollar close ended fund.

By the end of 5 years though he had shown his mettle with his CAGR return being 35% vs the S&P 500’s return for the same period of 2.70%. The fund was then opened to fresh subscriptions and over time the AUM soared to the extent that when he finally exited in 1990, the AUM was to the tune of 20 Billion.

The performance for the years when it was open is a CAGR of 21.80% versus market return of 11.70%. A hefty outperformance indeed but not as much as his first few years. This is true for almost every fund manager out there – the bane of a successful fund manager it seems is he getting discovered by the masses.

But how do you go about finding those successful diamonds when they are still pretty much rough and undiscovered. Compared to the past, today fund managers are way better prepared when it comes to communication skills to the extent that talking to the fund manager can be a misrepresentation of who he really is.

In markets tops are tough to predict, predicting bottoms are a lot easier. This is because while the market can be irrational when it comes to how high it can go, it’s not that irrational to keep going lower and the bottom is closer than what many actually fear.

When it comes to fund managers, it’s easier to know who will not be the best of the performers for the future. But way tougher to catch the best performer of the future before they became the best.
If you have invested in a fund manager who today is hot, would that mean its better to exit the fund. While my guess is as good as yours, hot fund managers future returns generally are not be like the past. This is more evident if the fund added dollops of new assets under management.

Cathie Wood has a wonderful long term track record. But only in recent months that she came to become the messiah of the masses. Be it Crypto, Tesla and other hot stocks, she is the go to fund manager.
Assets under Management spiraled higher. This created a need for to her to chase stocks at prices she may in the past may not have been comfortable with. Since February of this year, the fund is down 30%. To give a perspective – the fund faced a 42% draw-down during the market meltdown of March 2020).
Nothing destroys returns like amassing of assets.

This has been true for both fund managers and advisors. In a way, it’s a dilemma for if you become too famous, you end up with substandard returns for your clients. But if you don’t become famous, does the world even care about the returns you generated for your clients?

This month I had a talk with good friends Anish Teli and Pravin Palande on the topic of Tail Risk Investment. You can watch it here

The hot topic for the month has to be Crypto and the volatility we saw there. What I learned recently was that Crypto has 1.5 Crore traders . This is huge given that this compares to around 3 Crore Individual Mutual Fund investors. Then again, the number could be a hyperbole for I am not sure if there is a trustable source.

I have been a listener at a Club House discussion on Crypto vs Stocks and what is astonishing was that even though some of the speakers are well versed in Crypto, there is still confusion on what Bitcoin actually represents. Is it a Currency, Is it an Asset, Is it a transitory investment.

In a Club House meet where I was a speaker, we wondered about whether investing in Bitcoin type of assets will qualify as a tail risk investment. Currently investing in Crypto is hard compared to Equity investing. A firm in the US seems to want to make it easy by having a Bitcoin ETF and since Elon’s tweet about Energy Consumption being negative, this will be ESG certified as well.

While I may not invest in a crypto asset, ESG or not, what is interesting is how the purely belief holds up the system – belief in the bigger fool theory.

An investor who is buying a Dogecoin is not buying because he thinks it’s a good investment to own that will generate cash flows but because he believes that some time down the road he will find someone who will pay him more versus what he himself paid for it.

In 1996, Alan Greenspan coined the term Irrational exuberance. Nasdaq was at 1300. Nasdaq peaked in 2000 at 5140. While it did come back to 1300 twice (once in 2002 and once in 2009), it’s hard to say that he was right in calling the bubble. He was way too early and anyone who sold on his call did not get a chance to buy at much lower prices.

I don’t know how Bitcoin or any of the other coins will move but they seem sure to stay around us for a long time to come.