thoughts | Portfolio Yoga

The left out feeling

Its been a pretty long time since we saw a move in the markets where dogs, cats and bananas are all rallying together, may with incredible speed that seems to suggest that even the gravitational force of Jupiter may not be enough to reign it in. For guys who have shifted their focus to selective trading / investments, this is a time where holding the nerves calm is a tough ask.

After all, even taking into account the strong showing of BJP in the polls, Nifty if up by just 8% for the month. On the other hand, stocks have done wonders. But how true is that fact?

A few days ago I analyzed the performance of stocks and came up with the following static

While its easy to assume that stocks have rallied across the board, the above data tells us that not everything has gone bonkers. Many stocks have horror of horrors under-performed even as both Mid and Small Cap indices have beaten the large cap indices by a pretty good margin.

What the left out feeling does is make us react in ways we believe we are trained not to react. In other words, while we assume that our thought process is pretty different from the herd, we actually start thinking and behaving like the herd. It takes a lot of effort (mentally speaking) to be able to remain calm and continue to follow the process we have laid out even as the rest of the market seems to suggest that we are barking at the wrong tree.

In 1999, when the tech boom was under-way in US, the one guy who decided to skip investing into any stock was Warren Buffett. As stocks continued to rally, it was seemingly obvious that he may have started to lose touch with the market. But 2000 showed why his famous quote (which he said in Feb 2008) makes so much sense.

But then again, a guy who one can contrast Buffett would be George Soros who has actually delivered a much strong return for his investors. While Buffett chose not to participate in bubbles and instead arguing for value based investing, Soros has once in the past said that while Gold seemed to be in bubble territory, he would be happy to be long as long as the trend was strong. But then again, Soros being Soros was able to get out of Gold well before it started to tank against say John Paulson who made money on the way up only to let go of a lot on the way down.

The reason I brought in Buffett and Soros was to show the diametrically different ways they dwelt with a situation. Both have prospered due to the fact that they both are good at what they do and rarely do go outside their area of competence (think about Soros buying Good Companies or Buffett shorting Euro / Pound).

A interesting adage in the markets goes like this

Bulls Make Money, Bears Make Money, Pigs Get Slaughtered

The retail participant is generally seen as the Pigs / Sheep as the probability of them making money on the long term is pretty low. But that doesn’t dissuade anyone since they believe they are better prepared than the guys who lose the race. Unfortunately, rarely does it turn out to be true (and this despite many of them spending a fortune in attending courses on how to make money in markets, buying tips / newsletters among others).

As Ed Seykota once said

Win or lose, everybody gets what they want out of the market

If you are feeling left out in the current rally, step back for a moment and think about whether you have a plan, a process to ensure that you can make it out if the cows start to come home (and many eventually will). Without a plan, you are a duck out of water – matter of time before you are shot and curried.

Do remember, markets were we were born and shall remain after we are dead, but if we mess us in markets, it can screw up a lot more things in life than just finances.

Snake Oil Salesmen

In the last few days, mid and small cap stocks have virtually been on fire based on hope of a dramatically changed India. Stocks which were seen as having no future are going up as if its been virtually assured of a place in the heavens. Infra and Real Estate stocks which had been beaten down pretty badly are now up and running with a speed that maybe even Ussain Bolt cannot match.

Its one thing to expect companies that are performing good but have been bogged down due to overall slowdown in economy and credit crunch to try and reclaim their previous peaks and quite another to see companies, many of which are under Credit Restructuring mode to double or more. But then again, a rising tide lifts all boats. As Warren Buffet wonderfully put it and I quote

“A rising tide lifts all boats. It’s not until the tide goes out that you realize who’s swimming naked.”

The tide is rising and its carrying both good stocks and bad (bad doing in may ways much better than good stocks). While this would be a ideal time to unload from the portfolio the bad stocks, what usually happens is that good stocks are sold to buy bad stocks since good stocks do not move as much as bad and why have a portfolio that doesn’t move in such markets providing the right excuse to do the worst possible thing.

This also seems to be the time for both Paid and Free advisers to cherry pick their winners. After all, if one had recommended a well diversified set of stocks, it would be difficult to not have recommended some stock that has emerged a winner in recent times. Since I myself do not subscribe to any such services, I am in the dark as to whether they in addition to recommending a stock also recommend the portfolio weight or is it left to the discretion of the client concerned.

But unless the portfolio size is small (10 – 12 stocks?), its difficult to actually reap the rewards of picking a few winners since with a large portfolio (equally weighted), one’s investment is too small that returns, no matter how wonderful they are on the percentage scale, pale when calculated for the total portfolio.

In fact good friend Kiran tweeted as much today where he said (Link)

A company I know sells multiple newsletters with total portfolio size of nearly 100 stocks (max). Since the subscription is not expensive, I do believe that the number of subscriptions will be big. What I wonder though is, with such a large portfolio, how much can a investor hope to beat the market returns since the law of large numbers applies here as well as it applies elsewhere. While the risk of a strong hit to the portfolio due to one or two dud stocks is reduced to a very large extent, if a stock doubles in price, the swing it makes for the total portfolio is still just 1% which is negligible to say the least.

The biggest issue in my opinion with many of these stock advisors is the fact that their portfolio’s are high beta and strongly correlated to market. During good times, the returns are strong to make one not worry about the risk being taken, but as and when the tide turns around, easy to lose much more than what a simple index ETF would lose in the same period.

To me, stock markets are the only field (other than maybe Sports) where you really do not have to sell anything to make a living out of it. Using one skills is all that is required. Yet, this is a field that is filled with snake oil salesmen who clamor to help you in your goal to riches.

With there being no requirement of track record, no public audit of returns and very little interference from authorities, this is one field that seems immune to bear markets or bull. Claims of clients made X amount money after attending my 2 hour seminar / buying my newsletter is becoming common. I really wonder why the same guys need to sell their wares (products, what ever it may be), if making money was so easy. After all, all you need to do is press F1 (Buy) and sit while profits stream to your account. Why spent time writing mails on the great achievement their clients made and indirectly calling for newbies to come, learn and make big money.

The reason unfortunately is pretty simple. Very few actually make reasonable (in percentage terms) money trading the markets. Markets is a very harsh area where evidences seem to point out that survivor ratio (especially among the trading community) is less than 5%. Since traders / investors who lose money never fault themselves, they are easy feed for those who promise them untold riches only to be duped again and again.

Like any other professional activity, becoming a successful trader / investor requires one to be dedicate time and energy to the goal. Malcom Gladwell in his famous book Outliers talks about the fact that on an average, it takes about 10,000 hours of dedicated practise if one really wants to be successful. I wonder how many put in even 1000 hours before they decide that short cuts are the way to go (and 1000 hours of staring at the screen doesn’t count 🙂 )

I for one continue to believe that the best way to take advantage of the market for the vast majority of the population is via ETF’s and low cost mutual funds. No newsletter or tip giver will ever beat them on the long run (if they exist till then being the million dollar question).

And before I conclude, the following quote by Fred Schwed Jr in his Classic book “Where Are the Customers’ Yachts?”

“Speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money from becoming a little.”

Buying ill-liquid Stocks

Markets at near all time highs and the euphoria of a further rise in case NDA comes to power (with a massive majority to boot) has meant that retail is starting to enter in a small way. But since most of the big guns have already become too expensive (in terms of price of shares mostly though for many valuations are a stretch at the current juncture), its a season for those stocks which barely saw any trade for hours together to now be the ones much talked about.

Most of these stocks which lay theoretically dead are now roaming around like zombies though from afar, they do seem like normal behavior and hence easy to mistake one for the other.

The problem in most of these stocks is not in getting in as much as getting out. Right now, its time to get out of many such stocks as volumes have suddenly sprung up on the back of pretty good increase in price.

Warren Buffett says and I quote

“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”

While it makes sense logically, the problem comes in terms of practical suitability of it especially in a market where stocks go out of favor before you know. Add to that, while its true that good stocks are better held for the real long term, our life requirements mean that if for any reason we want to exit a stock, we should be able to do it without having to take massive slippage costs.

Liquidity should be the corner stone of investments in companies where you do not have a meaningful stake and one which you regard as something that could be en-cashed during times of distress. After all, what is the point in having stock worth lakhs if it cannot help you when you need it most.

The thought on the above subject came to me after reading a recommendation by a fellow blogger who has recently recommended a stock that this year alone has gone up by >80%. The problem is not in terms of the rise in itself, as a technical guy, I believe that momentum begets momentum. The concern for me in that stock (other than seeming to be expensive compared to its peers) is that this stock was having a average 10 day trading volume of <3000 for better part of last year (with there being times when it dropped below the 1000 mark as well) and now does a good 25K odd shares.

If and that is a big If, market loses flavor for the stock (in other words, operator having done his deed decides that there is nothing more to squeeze it from), its a matter of time before the stock not only goes back to square one or thereof but also for a investor who has entered the stock at higher levels, getting rid of it becomes even tougher as volumes slip back to the normal levels.

Due to changes in my own belief and trading style, I had disposed off most of my portfolio last year (and despite the massive run markets have seen, my stocks have not participated which has meant that I have been better off without then than with them) but had to hold on to a couple of stocks that were listed on BSE and were in the Periodic Call Auction list. Try as I might, I could not get rid of it ( with avg volume being less than 100 per day on many days).

Recently when I checked out the price, I was astonished to see that not only the price had nearly doubled from where I had first intended to sell but volumes have been much better too. While the strong move did have me thinking of the best possible action, knowing how tough it was to sell the same last year at half the current price, I decided the best way was to exit regardless of whether this will be a case of missed opportunity in case the stock continues to move higher.

The road to hell is paved with good intentions. Just be careful on what road you choose since when it comes to the crunch being on the highway is much preferable to being on a inside road which most of the time ends in a dead end 🙂

Volatility, Nifty and analyzing your system

Trading strategies are like seasons. When the season is in full swing, the person who follows a strategy that correlates with it feels like a king and the guy who follows a strategy that is antithestis of the that feels like shit. Currently, its a season of Mid and Small caps. Stocks in those pockets have gained substantially, better than what the overall markets have done for themselves.

When the markets are in a range, trend followers wonder where the good old days of smooth trends on rocks went by while mean reverters seem to be like god as they sell at tops and buy at bottoms. And then the season changes and every attempt at catching the top and bottom just goes for a toss.

I have been in recent times investigating how volatility can affect system returns and while there is no conclusion as such that I am willing to lay upon the table, I hereby present some charts which may hold a clue to what kind of markets the system does best in.

To start off, the 1st chart on the table is one where I have taken the Geometric Mean of the daily range (High – Low) and then calculated the Standard Deviation of the same period

Its no surprise to see 2000, 2008 and 2009 being the top years in terms of both range and deviation from the mean. After all, we saw maximum volatility during these years. What is interesting for me is 2012 wherein Nifty gained 27% while Nifty saw the least amount of moves on a intra-day scale.

The Weekly Range

and the Monthly Range

do not show any major difference compared to the daily range (other than percentage change). The way to use the above dataset will be to see if there is any marked difference in system returns in years of high volatility vs. years where volatility was low. Depending upon the average holding period for the system, one can compare and contrast with one of the above charts to try and see what kind of markets appeal to the system and what doesn’t.

The reason to compare in my opinion would be to figure out whether bad periods in the past (system) were due to some factor that can be in hindsight seen as a problem area for the system (you may actually have to break-down the above chart on monthly scale since its unlike systems to under-perform for years unless the logic itself is hugely faulty.

For example, check this Equity Plot (Plot starts in Jan 2012 and is upto 15/04/2014)

The system had a excellent run in the initial few months (Jan – Feb 2012 being a runaway bull market) and then more or less settled down until it had one fiery run (this taking place from late July 2013 to Early October 2013). In this period, it was not a run-away market, but one where you could see huge swings (Wide Range Bars being many in the months of August and September). The system seemed to be able to take advantage of the volatility. But once the volatility ended, even though markets have climbed steadily higher from that point onwards, the system has returned zero returns indicating that the system got caught with low volatile periods and lost money (more or less – Since October 15, Nifty is up by around 800 points while the system in the same time has actually lost around 400 points) .

Good systems (which have sustained profitable periods) are tough if not impossible to create. Markets being dynamic, no matter what one does, markets always seem to be able to get the better of us. Its hence important that one constantly revises his views and strategies while at the same time keeping in mind the fact that even the best systems can have a long period of draw-down due to unfavorable market conditions. As they say, do not throw the baby with the bathwater.

Update for Nifty

In my last post on Nifty, I said that a swing trading system I use seemed to suggest a move to 6850 and that has been achieved. The question hence comes as to what next. On one hand, the mind being bullish, its tough to stay neutral and seek out whether there exists an opportunity for markets to fall. After all, I myself am a proponent of “Prediction is Impossible”, so it will be ironical if I start predicting where Nifty may go next.

Yesterday, Krishnakumar came out with his medium term target of 11000 on Nifty and while its easy to say that the target is too high, markets themselves have no memory of the past and forget 11000, even 16000 shall get achieved (its just a matter of time).

Coming back to Nifty, at 6850, are the markets over-heated. While on the short-term charts, many oscillators are indeed over-bought, on longer terms charts, there is still way to go before things become really overheated. For example, lets take RSI on the Monthly charts. As of now, its at 66 levels and 70 is considered to be the level above which markets are seen as over-bought.

But overbought doesn’t mean a sell. Those who have read John Haydens on this aspect would known that its actually a stronger buy above 60. And this is the first time RSI on the monthly charts has closed above 60 since 2010. During the runaway bull market during 2003 – 2007, RSI on monthly only once slid below the 60 mark (when Nifty fell due to NDA loosing the election and worse, Left having a hand in the power).

Markets follow a strong rally with a real long side-ways correction making the trader forget there had been one hell of a rally earlier and once could soon unleash once again. In fact, we become so used to this side-ways markets that when the real big one comes, we rarely are bullish since we cannot distinguish between this rally and the multiple previous ones that failed.

The 2003 – 2007 rally was not the first multi-year rally to occur in the Indian markets either. The biggest rally (if we are to take into account Sensex back-adjusted) happened between 1988 and 1992 when Sensex leapfrogged from sub 500 levels to 4500 level at the peak. Of course, after this we had a pretty long period without the high getting broken substantially. While the first break came in late 1999 / 2000, the bust of the .com in US meant that we had to wait for another 3 years before the older levels were broken once and for all.

After the peak in 2008, this is the first time we have closed above those peaks and hence its time to reflect as to whether this rally is similar to 2000 or 2003/07 for there in lies the question of whether Nifty will tough 11000 or 30000 (5x).

Unlike US, where there is ample amount of data on everything that has anything to do with markets, data is severely limited in India (unless you are prepared to shell out the big bucks and get yourself the best of the data feeds where you have access to a bit more data).

One way fundamentalists asses a stock is by looking at the Price Earnings Ratio. I have myself in my past Nifty posts used the same and here I post it updated till date

Markets have broken the previous high and currently is above its high of 2012 (Nifty high of 2012 was 6415 just for sake of comparison).

Markets top out on back of Euphoria and I see none. In fact, yesterday when the markets were rallying strongly, all brokers I know of had more sell orders than buy. While the same size is indeed small, the fact that retail are selling out of the rally just doesn’t fit into the theory of markets being in a bubble phase which shall get burst anytime soon.

Lets for a moment move out of Nifty chart and look at broader index charts. First comes the CNX Mid Cap

Forget about breaking 2008 / 2011 highs, this Index is just testing its 2013 highs as of now. Lets now head to the CNX Small Cap Index

Similar is the story out here as well. Its not yet testing the 2011 lows (which unlike Mid Cap Index is pretty far off from the 2008 highs).

And finally the CNX 500 Index

Story is a bit better but nowhere as good as CNX Nifty with its 2008 peak still being un-tested.

The reason for the wide difference (and this despite all these Indices being managed pretty efficiently by removing weak / dud stocks and inducting strong stocks) is due to the fact that this rally has been led by select sectors which were not the main drivers in 2008. Take Auto for instance. CNX Auto Index topped out in 2008 at near 2400 levels. Currently CNX Auto stands at 5950. CNX Pharma / CNX IT among too have a similar story to tell.

Once upon a time, Reliance was for the markets, what Tendulkar was for the Indian Cricket Team. Relaince moved the markets either way – a sort of bell weather. But today, no one cares about whether Reliance is up a percent or down since other stocks and sectors have firmly taken control of the Index.

For every fall and every rise, the public wants reason and the financial / media pundits are happy to oblige. Well before the 2008 bubble burst, small rises and falls were explained by Baltic Index, Japanese Yen among others. And right at that point of time, they seemed to be so correlated, that it made you wonder why you had not observed the same earlier. But while you were watching the statics that led the last rally / fall, markets and media had moved onto the next.

The US markets are on a free-fall as I write this (Dow down 200+ points). This even as today’s data point which was Jobless claims which came in lowest since 2007, theoretically a strongly bullish number, but wait, markets is focusing on something else for now and this hence takes a backseat. What the public evidently forgets is that Dow hasn’t seen a negative year since 2008. Even a 100 point fall would not do such a trend much harm.

According to the old adage, one should not lose sight of the forest for the trees. The markets is the forest that is made up of individual moves (trees). Its very easy to loose focus just at the moment you need to be totally focused. It comes down basically to the fact of what is your objective in the markets. Everyone is here for the money, but very few actually end up taking any part of it. Wealth Creation is the objective of most, but all I have seen is story after story of wealth destruction.

A friend of mine was repenting that the Mutual fund he sold off after holding for 3 long years (and getting back the sum invested) had seen its NAV move up by 10% right after he sold the damm thing. When expectations are high and instead we see a disappointment, its easy to miss the larger picture of this not being a time to sell but a time to maybe add to the investment.

A person who invests today with the 11000 target in mind will most likely end up in a loss, not because Nifty will not move to 11K, it will, but because, he is not prepared for the pain that may come in between the time. If markets were to drop from here by say 350 points (a 5% fall), more people will throw in the towel than what the number who expect to do that today.

A guy who buys Nifty today IMO has to be prepared to withstand (if he is a long term investor and not wanting to look at the daily moves), a pain threshold of at the very least 25% (average draw-down from year high). Even then, if 11K is indeed reached, its still a good risk reward set up (reward being 60% above current price).

And before I conclude, here is another chart which again seems to suggest that we aren’t in the topping out process as of now. This chart is a plot of the % of stocks trading above the 200 day EMA. To ensure that it doesn’t suffer from survivor-ship bias, I have used a database which has both running stocks and delisted stocks.

Between the first time it hit >70 numbers in 2009 till it finally made its high in 2011, Nifty appreciated by 40% and nope, it did not come without its fair share of drama :). And we had a negative divergence in his indicator to boot.

For quite some time I have held stead fast my belief that the time is not yet ripe for a rally of the kind we saw in 2003 or 2009 and have in an earlier post pointed out the same as well. One of my reasoning was that I felt that Modi was unlikely to become the next Prime Minister and markets will be dissapointed and be range-bound for the coming 2 – 3 years before we can see a massive rally.

But a look at the news as well as the odds supposedly offered for a Modi win seems to suggest that I am quite off the target in that prediction (though only the results can finally prove me right or wrong). The big question that needs an answer is, how shall the markets behave if Modi becomes a PM (since its more or less certain that markets will not take kindly to Modi not becoming a PM). Both in 2004 and 2009, markets surprised the expectations held by majority and this time shouldn’t be too different either. The only difference has been in the way markets have behaved in the months going into elections. While in the last two occasions, markets were more or less side-ways till the breakdown / breakout took place, this time, markets have already run up quite far and regardless of whether we fall from here or rise, we shall not see as much of a surprise as 2004 and 2009 was.

And now for bit of heresy 😉

Based on some statistical calculations, this is a note prepared for myself to see if Prediction is possible

Very High Probability (close to 100%) of Nifty falling 12% from its peak during 2014

50% Probability of Nifty falling 24% from its peak during 2014

11% Probability of Nifty falling 36% from its peak during 2014

Upper Range for Nifty – 7000 (High Probability), 9266 (Low Probability)

Assuming 7000 is reached and we form a peak round about there, we can then see a fall to 6160 (High Probability), 5320 (Medium Probability) or 4480 (Low Probability). Of course, all the above calculations are dependent on the peak we reach and changes as the peak value changes.

Adios for now, shall update my thoughts on Nifty after results are declared on the 16th of May.

The case for Draw-downs

The biggest worry for a Systematic Trader is the Draw-down number. Bigger the number, more he worries about his ability to trade the system since it can be psychologically difficult to maintain composure when a large part of the capital has been temporarily lost. I say temporarily because unless you throw the bath water with the baby, a good system will always see the previous high being re-claimed in due course of time.

Lets face it, you shall face a draw-down no matter which class of asset you put your money in (exception being Fixed Deposit). Equity Mutual Funds / Debt Mutual Funds even Real Estate face a draw-down at one or the other point if one takes in a sufficiently large time frame.

Many mutual funds for example had a draw-down of more than 30 – 40% when the financial crisis hit the market and this is un-leveraged. Many stocks on the other side hemorrhaged as they lost greater than 50% as the crisis dragged on. So, deep draw-downs are not uncommon no matter what class of investment you choose to make.

The reason for the thought to write about draw-downs came to my mind basically due the exchange of tweets regarding draw-down in Titan during the 2008 financial crisis between Professor Sanjay Bakshi & Debasish Basu (Link). The stock under discussion was Titan which between its high in 2007 and low in 2009 fell by around 62.75%. If a 62% draw-down lasting more than 15 months will not psyche out someone, I doubt anything else can.

Its amazing that while we face draw-downs everywhere, including in life. its only in financial markets that we become paranoid and unable to grasp the longer term picture. Of course, even in life, weak minded people facing a stiff draw-down think of ending the life to end the pain, but for the vast majority, we some how are able to make up for everything and get back to our feet.

Being a very strong believer in systematic based trading, I regularly test ideas that either I develop myself or read about it somewhere else. The one thing that is common in most winning strategies is the huge draw-down. You cannot aim and possibly get 40% return without being ready to risk a draw-down of 60% – 80%. While its easy to talk about Risk to Reward ratio being at least 1:2 if not more, when it comes to draw-down, its always inverse.

One of the questions I am regularly asked is, How can I reduce the draw-down without it affecting the returns in a major way. Unfortunately, markets is all about give and take, you want to reduce draw-downs, you will face reduced returns as well. Just in case if you are wondering as to whether there exists strategies that have a very low draw-down while still having fairly good results, there are.

One is a heavily data-mined strategy which ensures that your historical draw-down is pretty low while compared to the historical returns. Of course, once you start trading that in real time you suddenly see that while the returns remain the same (at best), the draw-down goes completely off scale and unless one has prepared for it, chances of the system bankrupting the user is pretty high.

Second way is if you can game the system. While there is quite a bit of debate on whether HFT’s are gaming the system, I doubt you can have a record like that of Virtu Financial which had just one day of loss (and that too due to human error) while accounting for 1237 days of profit. While Arbitrage is said to be having low risk, this is something of a Zero Risk which is theoretically impossible (free money anyone?) unless they found a way to game the system.

Coming back, I believe that traders are more scared of draw-downs than Investors for two reasons. One, the trader is using leverage which easily balloons up the losses in a short span of time. Investors on the other hand generally have invested in full and would need to pay no more regardless of where the price goes. Getting a call from your broker to arrange for Marked to Market loss every other day can take a toll.

Secondly, a investor can avoid looking at the market for extended period of time during which the price may have come down and then bobbed up while a trader would be stuck to looking at every tick and hence pass through the emotions much quickly. If you are having a position which is under-water and loosing money every day and you hear the talking heads on TV giving out targets which would normally be preposterous, its tough indeed to sit quietly and wait till the things calm down.

Of course, does that doesn’t mean that a Investor is a winner in most situations while a trader is not since we have not accounted for a lot of cognitive biases that affect the way we look at things in life. I for one believe that a trader can compound money much faster than any investor (remember, Leverage is a double edge sword) but that is only if he is able to look at things not in the way its presented but in the way, its impact on the future is.

To Conclude, a Big Draw-down is not necessarily bad and in the same way a small draw-down may not be necessarily good. Its all relative to something else (all the time) 🙂

Nifty – Are we in a bubble / nearing a peak?

While we are once again testing multiple year highs, a question that was raised by a friend on twitter is whether stocks were up (rather participating) across the board or was this due to a few select stocks moving up the Index.

While there are various ways to check, I have chosen the easiest way. Using the list of stocks that composed Nifty as on 8-11-2010 (the last major high for Nifty before this series of tests), I calculated the moves of each of them till 11-03-2014 (recent day when the Nifty made its all time high).

An Index is just an Index of multiple stocks and hence there is no way that all of them will be outperforming Nifty. What would be interesting to note is how many outperformed Nifty (more the healthier) compared to those that under-performed.

The difference of Nifty btw the above dates comes to 3.80% (amount of gains since its last major high). Of the 50 stocks that comprise Nifty, we saw 21 stocks outperforming that with average gains coming in at 47.50%. 1 Stock was positive though it under-performed Nifty. 27 stocks gave negative returns with average return being -37.40%

Nifty is calculated on basis of Free Float. If one had instead invested unformly in Nifty Index as on 8-11-2010, as on date the gains would have been 0.82%. The difference of 3% in returns would be due to 2 factors

1. We would have given more weight to under-performer as compared to weight in Nifty and same would have held true for out-performer as well.

2. The Nifty value (end value) I am using is that of of Nifty which consists of 5 stocks which were included into the Nifty after November 2010. They being better performers would have contributed in a small measure as well.

Despite markets at all time highs, this is not a bubble as is evident from most people denying that markets are bullish as well as there being no euphoria in the retail investor arena.

Finally a couple of charts

Here is the performance (relative) of CNX Nifty vs CNX MidCap vs CNX SmallCap. See how Mid Caps and Small caps are strongly under-performing the main index

Here is the same comparison between 2008 (low) and 2010 high

and finally performance between 2005 (July) to 2008 peak

Notice how small caps were performing prior to the peak. Comparatively, this time around we are far from any such performance. While my own thought process is that we are unlikely to see a multi year bull run from here, that would not stop Nifty from moving to 7000+ or even 8K levels before turning around.

As long as the markets are bullish, I believe one should be biased towards long rather than trying to pick the top and missing the whole rally. To me, there is only one way to approach the markets. Be long with a plan B of where one would get off if the trend starts to reverse. Prediction is Impossible and attempting that is a fools errand.

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