Portfolio | Portfolio Yoga

3 Years of Momentum Investing

When 2020 started, I had this strong belief that both career wise and portfolio wise, this decade will be the standout in my life. For the first time after being in markets for more than 2 decades as an investor and trader, I was finally comfortable investing based on a strategy that not just appealed to me, was accepted academically and also delivered the goods.

At the end of 2019, the CAGR for my portfolio since inception was nearly 17% and we had already seen 2 years where the majority of the stocks entered bear markets while my portfolio stood back up after every knock, what could really go wrong I wondered. Wuhan challenged that belief like nothing else has.

The key to winning in the arena of investment management comes down to two things – returns and allocation. You may have an asset that generated a great return, but if the allocation was poor, it may not be life changing even though you would get fulfillment in having correctly identified it early. On the other hand, if you had a large allocation and the investment turned out bad, it can set you back by years.

The way out is to diversify, say experts. But diversification as practiced by the majority of investors doesn’t really add value other than enabling them to somehow feel better. What difference would it make to be invested in 3 large cap funds versus one large cap index fund. The final results may turn out to be the same, yet there is a greater comfort with the advisor who asks you to buy 2 funds of each category (Large, Mid, Small, International, Sector) than with an advisor who will recommend that your entire equity allocation should go into not more than 2 funds.

One of the toughest problems that most investors face is staying true to the factor or philosophy they started out with. As humans, we love confirmation of our beliefs to the extent that confirmation bias is a cognitive dissonance. From Value Investing to Quality to Momentum, every strategy has its good times and bad. In the last couple of years, the only one to hold fort has been Quality. This has been especially troublesome for many especially for those on the Value front for while great value stocks seem to be getting killed, stocks with low or even negative growth are standing strong at valuations that most stocks can only dream about.

Passive is now becoming the new active what with every fund house trying to get a foot inside the door of what they think would not click but one they would not want to miss if at all the segment takes off. So, today you have Passive funds for the Large Caps, the Semi Large Caps, the Mid Caps, the Small Caps, International Funds and even a passive bond fund. It’s another matter though that without guidance and one that doesn’t come for free other than from Twitter, Investors are falling prey to recency bias and one that generally doesn’t end well.

Unlike Value or even Quality, Systematic Momentum has very few ardent believers. Buying stocks when it’s making new highs and selling some of them as they come crashing down isn’t something that investors love doing. It’s very unsettling and not comfortable for most.

I recently did a short term course by NYU Professor Scott Galloway and one attribute he says that is common across all successful companies is “Storytelling”. In the world of Systematic Investing, this is completely missing. It’s as if there is no story to be told and the only stories we hear are about Algo firms that went bust – so much for the positivity one hopes to hear.

Coming to allocation part, this is my only portfolio and comprises my total exposure to markets other than for the ELSS funds which anyways are locked in removing any ability on my side to mess things up.

One of my observations during the time when I was a stock broker and even today is that most do it yourself investors don’t really measure their portfolio growth. While many do know the stocks that made them big money and a few stocks that lost them big time, on an overall basis, they find it tough if not impossible to know whether they are doing better than the Indices or Mutual funds or not.

The reason to measure in my opinion goes further than just knowing how we are doing. Data leads to Knowledge and Knowledge leads to Wisdom. While earlier it was tough to measure, thanks to technology, that has become easy today and one I believe every investor should cultivate.

But, enough of banter. What has been the performance and what are the learnings.

A key reason for these posts is to be transparent to the reader while hopefully helping me become a better investor myself.

First off, CAGR since Inception

Was quietly plodding around the 18 to 20% mark before it got infected and reduced to a wreck. Stands at 8% currently – not bad in light of what is happening but that is small solace when I look at the drawdown chart.

But performance needs to be monitored against a benchmark. The strategy has despite the setback performed well in line and as per my own expectation. Among non sector mutual funds, the only fund to have performed better is Axis Bluechip Fund with a CAGR of 8.35% over the same period. On a side note, 4 out of the best 7 active funds belong to Axis. The fund house has been on an excellent run in recent times.

The static benchmark I have used is Nifty 500 since the majority of the stocks that I have bought over time has been from this benchmark even though I don’t filter stocks to be from the Nifty 500 Index only.

The out-performance that started in late 2017 has sustained through and through. Unfortunately over time I have continuously added money (Sipping though not every month) and this means that while the strategy itself is positive, on an absolute basis I am currently slightly negative.

What can I say, No Pain, No Gain or No Mercy, No Malice as Scott Galloway sees it. The only silver lining to my bruised ego is the fact that unlike in 2018 and 2019, my drawdown is now in line with overall markets. That should count for something. 🙂

The Escape from Covid

Friends of mine who practise slightly different versions of Momentum but have two things that are different than mine are

Going into cash during market weakness.
Weekly Rotation vs Monthly Rotation

Thanks to the availability of their daily NAV, I wanted to compare my strategy with theirs to see if that made sense. Chart comparing on such strategy with mine

The differential as I can see was not much just before Covid happened showcasing the similar end points despite the different paths taken.Post Covid, I am down approximately 14% versus their strategy.

During the last few weeks, I have spent a long time thinking on whether I should have had a market filter to reduce drawdowns but the evidence has been that other than in market falls of 2008 and 2020, such moves to cash have not added value. I continue to tinker with allocation methodology to see if I could get better returns by not selling any stock but having a tactical allocation strategy. A work in progress I would say for now.

The drawdown is a trade-off that I had anticipated based on the backest though when reality hits, it hurts a lot more than just a few numbers on the spreadsheet which is what backtest finally comes down to. Despite the setback, I am still not convinced about the idea of going into cash on every market dip – the costs alone can set you back big time not to mention the feeling of constant churn that has an impact on one’s behaviors.

A superior way would have been to take Insurance to limit the loss as Bill Ackman did with his fund. Then again, that’s why he manages Billions. Who am I kidding. On the other hand, one could start the year by buying Insurance for such an eventuality and roll it up or down every year. I got caught flat footed this time around and I do hope I am better prepared the next time around. This has been a key learning for me and one that hopefully shall add value over time.

They say, Learning never Ends and so is the case when it comes to the world of finance. From the Franklin debacle to the Covid meltdown, there are always things to learn even if some of them come at a personal cost. Then again. who said Learning was Free 🙂

Previous Posts;

1st Year

2nd Year

Introducing Rel-Rand

The objective of this site is to provide proprietary and non-proprietary models portfolios that suit one’s purpose.

To begin with, introducing the Rel-Rand portfolio family. The objective of the portfolio is to beat the returns of its benchmark index by buying stocks that are showing strength and selling those that are showcasing weakness. In other words, this portfolio shall aim to hold stocks that are winning while cutting back on stocks that are losing.

The portfolio consists of 25 stocks with it being long all the time (No Shorts). Each month, on the last trading day, the system is run and stocks that have weakened over the look back period are removed and fresh ones added.

General Info

Inception Date	31-12-2010
Last Rebalance Date	31-03-2015
Rebalance Frequency	Monthly
Rebalance Method	Semi-Automatic
Benchmark	CNX 500

Link to the PDF file containing its historical performance.

While the 5 portfolio’s each showcase different returns, since the only difference between them is the order of ranks, we believe that over time, all of them will showcase similar returns.

The file will be next updated on 30th April 2015.

Portfolio Construction – An Introduction

The long term goal of building wealth in markets starts from being able to get right a portfolio of stocks that suit ones risk tolerance. Take too much of risk and you may jump ship well before the goal is reached, take too little and your goals may remain unfulfilled.

So, what is risk?

While risk is often defined as the volatility of the investment, Warren Buffett sees Risk as Permanent loss of Capital which seems to make much more sense when taken in the context that no investment (other than Fixed Deposits) will yield a return without some amount of volatility.

Hence when a portfolio is being build, one has to ensure that the risk of permanent loss of capital is kept low. But then we come to the axiom which seems to say that Risk and Reward go hand in hand. Higher the risk, Higher the return, or so goes the saying.

But as Howard Marks says, while its true that market appears to provide higher rewards for assets that seemingly have higher risks, its worth noting the word “appear.” We’re talking about investors’ opinions regarding future return, not facts. Risky investments are – by definition – far from certain to deliver on their promise of high returns.”

By creating a portfolio of stocks, the idea is to minimize those risks by spreading them across. But the question that comes up next is that while its true that its better to have a basket of securities, how many should one have. Should one have a few stocks which one beliefs will deliver strong returns or spread it thin across many stocks to ensure that one or two bad apples do not negatively impact the net portfolio.

Below here, I have reproduced in graphical form the damage a portfolio can see from a stock that has fallen 25% from the entry price (Equal investment is assumed in all the stocks)

The chart above shows the damage to a portfolio in case a single stock among the portfolio constituents goes down by 25%. The impact is highest if the number of stocks in a portfolio is just 5 and the lowest in case the portfolio consists of 50 stocks.

On the other hand, we get a similar number if a stock moves up by 25%. For a portfolio with 5 stocks, the net value of the entire portfolio moves up by 5%. On the other hand, in the portfolio of 50 stocks, this barely makes a dent as the portfolio climbs a partly 0.50%.

We believe that a good portfolio can be of 20 – 25 stocks which in essence will mean that the investment in each stock is limited to 4 – 5 percent. But the choice comes down to both the risk taking capacity as well as the goals one defines.

There is a large amount of reading material that is available on the internet that goes into every little facet concerning portfolio management and construction and it can help one a lot.

In our future posts, we shall attempt to build portfolios using various proven methodologies. But for now, lets wrap it up with a nice little presentation from Vanguard (Link)

Concentrated or Diversified Portfolio.

Depending on how you use it, Twitter can be Good / Bad or Ugly. For me, it has been an interesting minefield of information on a variety of subjects that hold my interest. One of things I keep stumbling about is when a guy says, ABC share has returned 5X returns in Y years. A secondary thing I keep hearing is that equities have given great returns – this is generally calculated by using 1979 as the base and calculating the CAGR returns from that point of time.

Both in a way are bandied about as to why Equity is the best place to invest. While I agree, one should invest in equities, there are several issues with the above statements which I want to explore more via this post.

There are two ways of building a portfolio

1. A Concentrated Portfolio of a few select stocks (or more stocks but with one or two having unequally high weight).

2. A well diversified portfolio of a large number of stocks

Both come with its advantages and disadvantages. Lets first deal with the Pro’s and Con’s of a Concentrated Portfolio

Lets start with this cheesy quote by the Oracle of Omaha

If you have a harem of 40 women, you never get to know any of them very well – Warren Buffett

The advantage of holding a concentrated portfolio is that you have a very low number of stocks / industries you need to understand. We all have our limitations, both in terms of time and knowledge and its impossible for any one person to know everything that is needed to know about every industry / sector / company that is listed.

The second advantage of having a concentrated portfolio is that even if 1 or 2 stocks click big, the out-sized position size means that the net affect on the overall portfolio will be pretty huge.

Peter Lynch made his name managing the Fidelity Magellan Fund. Over the 13 years he managed, he grew (both in terms of AUM & Net Returns) exponentially. The number of stocks he had when he exited the fund as the manager – 1400+ (Yep, One thousand Four Hundred) (Source: http://bit.ly/169mypw ).

The biggest advantage of having a large portfolio – no one or two stocks can damage the portfolio badly .But on the other hand, even if a stock goes 5x from your purchase price, the net impact on the portfolio may be very negligible.

The larger the portfolio, lower is the volatility of returns. A large enough diversified portfolio more or less starts to mimic the Indices both in terms of returns and risk.

So, what is better?

I believe that the final call on what approach is best is dependent on how much of confidence you have in your ability to pick stocks as well as your ability to absorb the pain that comes in with it.

But if you believe that you do not posses the skill set to identify stocks and bet big on it (Concentrated), you may actually be better off investing into a diversified Mutual fund while concentrating your efforts on understanding the larger picture so that you know when you should be Sipping (in other words, following a Systematic Investment Plan) and when you should be Whipping (Systematic Withdrawal Plan).

And before I conclude, just remember that there is no Free lunch in markets. Its all about give and take. Knowing what you are willing to give will also give you a idea on what you can take 🙂

Maggi on the Wall – the bigger picture

In my last post titled “Throwing Spaghetti Against The Wall” I showed how after picking up 3 portfolios whose stocks were randomly picked, I could still beat the overall return of the market over a time frame of 10 years.

In continuation of the same, I decided to to a double blind test on picking random portfolios and comparing them to the returns Index gave. I randomly selected 1 date in a year and on that date randomly selected 25 stocks (all done through Excel so as to avoid any bias creeping in).

I did it for the years through 2005 to 2010. The results can be downloaded from here (Link). To summarize the same, Random portfolio created beat the Indices in 3 out of the 5 years, in 1 year it under-performed Nifty and Mid-cap while out-performing Small cap Index and in one year has under-performed all other indices.

But if one were to take the final tally, the net results beat the results of all three indices comfortably.

The question that comes thus is, is it a real waste to spend time, energy and money trying to analyze companies? Well, to me, it isn’t so if you believe that you are the 5% of the achievers when the rest of the 95% under-achieve. But if you aren’t sure and your bank balance (from trading / investing and not Salary / other Income) doesn’t seem to show that, its not too late to admit and get back to doing what we do best.

Do note that the only filter I have used was to select stocks that had closed the previous day above 50. It did not matter for me whether they were bullish / bearish based on technical parameters or whether they were fundamentally strong or not based on value analysis. Its pure random selection.

The reason why its tough to believe and even tough to implement this in real life is that we are all suckers for stories. We want a solid reasoning (that resonates with our mind) that comforts us that despite the fact that our investment is deep under water, its not we who are to blame but market forces and the desertion of lady luck.

The whole financial industry is build on this story that you can be better than the markets though not everyone can be above the average (statistically impossible, eh? ), the story has takers (as can be evinced from the number of Mutual funds to PMS to Hedge Funds who offer to take care of your money for a small fee).

In US, it seems for the first time in decades (if not more), people are finally getting out of active strategies and investing into passive ones (ETF’s that provide market returns with minimum fuss and very low charges). Here in India we do lack the spread of ETF’s that are available in US, but I believe that over time, we should see more and more ETF’s hit the market and that would enable investors to invest without having to pay through the nose and yet end up with more or less the same return (or heck even lower).

The reason random portfolio works has nothing to do with selection (after all, we aren’t selecting) but with the concept of compounding. If you were to look at the excel sheet, you shall notice that its not the number of winners that count, but the returns outliers have been able to deliver.

For example, in the portfolio of 2009, the biggest winner was Vakrangee Software. This one stock was able to return the whole capital in affect making the other 24 stocks free.

Warren Buffet has made his money not because he was able to pick all the right stocks, but because some of the stocks he has picked has been multi-baggers to a extent that it wipes off the losses of the few stocks (or should I call business since he having grown so big rarely picks up small stakes and instead wants to get fully into the company) where he called it wrong (and he has several wrong calls).

Markets grow in fits and starts, but in the long term, growth is there for sure (unless you believe that the India story is done with and we shall see a phase such as one seen by Japan). Long term some business will grow at a pace more than others and if we are lucky to have them in our portfolio, our returns should at the very least equate to market returns and at best out-perform the other asset classes easily. And all this without having to burn mid-night oil on what stock to buy, when to buy, when to sell and a thousand other loaded questions.

And before I conclude, do read about how funds rated as Gold can under-perform and many rated neutral / negative outperform (Link). If companies that spent thousands of man hours analyzing in depth funds cannot distinguish the bad apple from the good, what are the chances we can?

Throwing Spaghetti Against The Wall

This post has been driven by a deep discussion I had with Nooresh Merani today and hence the credit for the idea would remain with him 🙂

While study after study has shown that retail investors are unable to match the performance of the Index let alone beat it, it has not stopped a army of advisors and technocrats from coming up with new ideas, ways and thoughts on how to select stocks and become retire rich.

There is a very famous quote by legendary trader Jesse Livermore which goes as such

“It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!”

Sitting tight is the easy thing to do when you have no real money at risk, but once you have put money, can we sit tight and hope while the stocks we have bought are moving all around. I am jumping the first step, so let me go back.

How do we create a portfolio?

A portfolio is a set of stocks we buy that we hope shall perform in the long run. But since we are provided both a price and a opportunity to trade the stocks day in and day out, its just a matter of time before we let go all the wonderful stocks we had picked (by way of Luck or Skill) while adding or at the least holding onto stocks that are touching the nadir.

The discussion I had with Nooresh was about whether a Random portfolio (contructed purely out of chance) can beat Index returns if one just invested and sat tight.

While we hope that every stock we buy ends up being a multi-bagger in the long run, its very rare for us to not just buy a few stocks that eventually end as multi baggers but actually hold them.

The test I did was simple. I took a 10 year time frame (long enough I presume for a long term investor). I used April 1, 2004 as the starting date. The date had the additional advantage of markets being near a short term top (in hind-sight) since after NDA lost the elections, markets took a steep dive and hence for at the very least 6 months from entry, we were underwater.

The biggest problem in conducting these types of tests is that finding historical data is tough since delisted / merged stocks are moved trimming the database of that day considerably. Since I maintain a database where delisted stocks aren’t deleted, it made it a bit easy for me to work on the approach I had decided upon.

I took the Bhavcopy of NSE of 1st April 2004. On that day, 750 stocks were traded and I removed 250 using the filter of removing any stock that had closed below 25 on the previous day (Idea is to remove penny stocks).

I then used Random function in Excel to randomize the 500 that remained. I then selected 3 sets of 25 stocks each from them (1 set each before refreshing and randomizing the set of names again – and hence a couple of stocks do repeat).

I then used the Opening prices of these stocks as per my database (where its adjusted for Bonus / Splits but not for Dividends) so as to get the current average price of acquisition. All acquisitions were assumed to be equally weighted (same money invested in each stock)

So, how did the three perform compared to Nifty. Well, here you go

Every Random Portfolio beat the CNX Nifty. Is it Luck? Maybe to an extent, but what drives a diversified portfolio is if you can get caught with a few multibaggers. Regarless of how badly a few others do, since the exposure to each stock is 4%, not much of damage can happen while the ones that click big shall make more than what they lost (worse case, you lose 100% in a stock. If one stock moves 400%, it makes up for the loss of 3 of them).

I am not suggesting that you need to buy stocks randomly, buying good stocks is said to make a lot of money, but unfortunately we come to know of good stocks only after they have bolted off the stable (hindsight).

Food for thought?

File if you need to download (Link)

The Escape from Covid

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