Author: shyam

Predicting vs. Positioning

shyam January 17, 2015January 17, 2015

Predicting is a losers game

We have always maintained that financial prognosticating is harmful to your wealth (see: Prepare – Don’t Predict!) But the lure of prediction is too strong for most investors to ignore.

One recent example is the RBI’s “surprise” rate cut. The media went gaga over it, some pundits did a “I told you so” dance and you probably went and subscribed to a newsletter hoping that you too will be clued in when it happens next. The question is: did you make money?

Positioning your portfolio

Back in September last year, we had pointed out that with the consensus behind RBI rate cuts happening in early 2015, its time to look at long duration bond funds. We had picked the UTI Gilt Advantage fund as our favorite. Between 2014-10-01 and 2015-01-15, UTI – GILT ADVANTAGE has returned a cumulative 11.08% with an IRR of 43.61% vs. CNX NIFTY’s cumulative return of 6.90% and an IRR of 25.85%.

Heck, with the RBI getting serious about trampling down inflation, bonds have been rallying for almost the whole of 2014. Between 2014-01-01 and 2015-01-15, UTI – GILT ADVANTAGE has returned a cumulative 21.90% with an IRR of 21.01% vs. CNX NIFTY’s cumulative return of 34.79% and an IRR of 33.31%.

Good investing is boring

From the Wolf of Wall Street:

Mark Hanna: Nobody knows if a stock is going to go up, down, sideways or in circles. You know what a Fugazi is?
Jordan Belfort: Fugazi, it’s a fake.
Mark Hanna: Fugazi, Fugazi. It’s a wazy. It’s a woozie. It’s fairy dust.

The difference between trying to predict market events and positioning your portfolio is in the level of excitement you feel. If you feel very smart while putting your money to work, then you are doing something wrong. If you feel that your investments are a “sure thing”, then you are doing something wrong. Good investing will feel like a boring routine that you keep doing – like flossing your teeth – because it is good for you.

Process vs. Outcome

The end result of process oriented investing is a well positioned portfolio. Investors should give up on trying to figure out what the outcome is going to be. Who knows what the NIFTY IRR is going to be this year? Who knew that plain old bonds will give 20% returns in 2014? What is the one-day price target for anything?

Positioning your portfolio would have allowed you to actually realize the returns that the market gave. The alternative is all Fugazi.

Categories Investing Insight, Your Money Tags mutual funds

Weekly Recap: Big Bets

shyam January 17, 2015

Equities

Major
DAX(DEU)	+5.38%
CAC(FRA)	+4.80%
UKX(GBR)	+0.76%
NKY(JPN)	-1.94%
SPX(USA)	-1.44%

MINTs
JCI(IDN)	-1.31%
INMEX(MEX)	-2.57%
NGSEINDX(NGA)	-3.68%
XU030(TUR)	+0.10%

BRICS
IBOV(BRA)	+0.54%
SHCOMP(CHN)	+2.77%
NIFTY(IND)	+2.77%
INDEXCF(RUS)	+5.02%
TOP40(ZAF)	-1.25%

Commodities

Energy
Heating Oil	-1.82%
Brent Crude Oil	+0.95%
WTI Crude Oil	+0.96%
Natural Gas	+4.83%
RBOB Gasoline	+3.74%
Ethanol	-8.81%

Metals
Gold 100oz	+4.96%
Palladium	-5.39%
Platinum	+3.02%
Silver 5000oz	+8.54%
Copper	-4.66%

Currencies

USDEUR:+2.42% USDJPY:-0.89%

MINTs
USDIDR(IDN)	-0.45%
USDMXN(MEX)	-0.20%
USDNGN(NGA)	+1.90%
USDTRY(TUR)	+1.42%

BRICS
USDBRL(BRA)	-0.72%
USDCNY(CHN)	-0.01%
USDINR(IND)	-0.73%
USDRUB(RUS)	+5.82%
USDZAR(ZAF)	+0.58%

Agricultural
Corn	-3.20%
Feeder Cattle	-3.05%
Lean Hogs	-4.84%
Soybean Meal	-9.92%
Wheat	-6.01%
Cattle	-3.58%
Coffee (Robusta)	-1.52%
Cotton	-2.49%
Lumber	-3.34%
Sugar #11	+2.41%
Cocoa	-0.25%
Coffee (Arabica)	-4.38%
Orange Juice	+5.89%
Soybeans	-5.62%
White Sugar	+1.48%

Credit Indices

Index	Change
Markit CDX EM	-0.63%
Markit CDX NA HY	-0.40%
Markit CDX NA IG	+2.89%
Markit iTraxx Asia ex-Japan IG	+3.23%
Markit iTraxx Australia	+2.03%
Markit iTraxx Europe	+0.73%
Markit iTraxx Europe Crossover	+7.83%
Markit iTraxx Japan	+0.75%
Markit iTraxx SovX Western Europe	-0.74%
Markit LCDX (Loan CDS)	-0.43%
Markit MCDX (Municipal CDS)	+2.56%

Rajan surprised us with a rate cut. But the Swiss central bank surprised a whole bunch of FX brokers and punters by abandoning their peg against the Euro. Most developed country 10-year yields are either at zero or negative. Investors are paying the Swiss for the privilege of lending them money!

Nifty Heatmap

Index Returns

Sector Performance

Advance Decline

Market Cap Decile Performance

Decile	Mkt. Cap.	Adv/Decl
1 (micro)	+0.74%	70/65
2	-0.29%	74/61
3	+1.86%	73/62
4	+1.33%	68/67
5	+0.33%	68/67
6	+1.61%	73/62
7	+1.28%	66/69
8	+1.72%	70/65
9	+2.28%	71/64
10 (mega)	+2.90%	68/67

Large caps outperformed mid and small caps.

Top Winners and Losers

BOSCHLTD	+10.24%
UPL	+11.37%
ULTRACEMCO	+12.48%
HINDALCO	-10.61%
PETRONET	-7.62%
SSLT	-7.00%

Miners got pummeled. The end of a super-cycle brings many deaths…

ETF Performance

PSUBNKBEES	+3.43%
JUNIORBEES	+3.38%
BANKBEES	+3.28%
GOLDBEES	+3.09%
NIFTYBEES	+2.99%
CPSEETF	-0.04%
INFRABEES	-0.60%

Go Rate-Cut Rajan!

Yield Curve

Bond Indices

Sub Index	Change in YTM	Total Return(%)
GSEC TB	-0.10	+0.18%
GSEC SUB 1-3	-0.48	+0.49%
GSEC SUB 3-8	-0.32	+1.36%
GSEC SUB 8	-0.28	+2.57%

The long-end continues to rock investor returns…

Investment Theme Performance

Growth with Moat	+6.31%
Efficient Growth	+5.06%
Market Elephants	+3.51%
Market Fliers	+3.33%
The Other Value	+2.71%
CNX 100 50-Day Tactical	+2.69%
Balance-sheet Strength	+2.60%
Momentum 200	+2.04%
Financial Strength Value	+1.90%
Old Economy Value	+1.67%
ADAG Mania	+0.36%
Enterprise Yield	+0.30%
Auto	-0.21%
Magic Formula Investing	-0.61%
Quality to Price	-0.67%

Green for the most parts…

Thought for the weekend

Concentration produces wealth. Diversification protects it.
Concentration produces innovation. Diversification produces mediocrity.
Make big bets, do fewer things, concentrate your resources.
Don’t hedge, commit.

Source: Making Big Bets

Categories Your Money Tags weekly

Correlation between Theme components

shyam January 15, 2015January 15, 2015

If you concentrate your portfolio, your mistakes will kill you;
If you diversify, the payoff from your successes will be diminished.
-Howard Marks

Investors can now look at the correlation (over one-year and one-month horizons) between stocks that make up an investment ‘Theme’ strategy. For example, here’s how the one-year correlation of the Financial Strength Value Theme looks like:

A lot of thick blue squares mean that positive correlations are high. Red squares mean negative correlations are high. Whites are the doldrums.

Happy Sankranti and Pongal!

Categories News, Your Money Tags correlation, theme

Nifty Cash-Futures Basis

shyam January 12, 2015

Fair value

Equity futures have a ‘fair-value’:

Futures Price = Cash Price [1+r (x/360)] – Dividends;
where x = days to expiration of the futures contract

Fair value is the theoretical assumption of where a futures contract should be priced given such things as the current index level, index dividends, days to expiration and interest rates. The actual futures price will not necessarily trade at the theoretical price, as short-term supply and demand will cause price to fluctuate around fair value. Price discrepancies above or below fair value should cause arbitrageurs to return the market closer to its fair value. – CME

Cash-futures Basis

You can see this in action when you plot the NIFTY index value with its futures:

Initially, x/360 is large, so futures’ trade rich to cash. As expiry approaches, futures and cash prices converge. This is the natural order of things.

Interest Rate

You can go one step further and back out the interest rate baked into these prices:

r is usually within a tight band; roughly around where short-term rates are.

So if you ever wondered why futures are trading higher than cash, now you know!

Categories Investing Insight, Your Money Tags introduction

The Golden Straitjacket

shyam January 12, 2015

One of Thomas Friedman‘s theses states that individual countries must sacrifice some degree of economic sovereignty to global institutions, a situation he has termed the “golden straitjacket.”

From his book, The Lexus and the Olive Tree:

To fit into the Golden Straitjacket a country must either adopt, or be seen as moving toward, the following golden rules:

making the private sector the primary engine of its economic growth,
maintaining a low rate of inflation and price stability,
shrinking the size of its state bureaucracy,
maintaining as close to a balanced budget as possible, if not a surplus,
eliminating and lowering tariffs on imported goods,
removing restrictions on foreign investment,
getting rid of quotas and domestic monopolies,
increasing exports,
privatizing state-owned industries and utilities,
deregulating capital markets,
making its currency convertible,
opening its industries, stock and bond markets to direct foreign ownership and investment,
deregulating its economy to promote as much domestic competition as possible,
eliminating government corruption, subsidies and kickbacks as much as possible,
opening its banking and telecommunications systems to private ownership and competition, and
allowing its citizens to choose from an array of competing pension options and foreign-run pension and mutual funds.

When you stitch all of these pieces together you have the Golden Straitjacket.

As your country puts on the Golden Straitjacket, two things tend to happen: your economy grows and your politics shrinks. That is, on the economic front the Golden Straitjacket usually fosters more growth and higher average incomes — through more trade, foreign investment, privatization and more efficient use of resources under the pressure of global competition. But on the political front, the Golden Straitjacket narrows the political and economic policy choices of those in power to relatively tight parameters. Governments — be they led by Democrats or Republicans, Conservatives or Labourites, Gaullists or Socialists, Christian Democrats or Social Democrats — that deviate too far from the core rules will see their investors stampede away, interest rates rise and stock market valuations fall.

Will the Modi-Jaitley duo make this budget the budget of the Golden Straitjacket? Or are they going to stick to the UPA/Congress playbook of rent extraction? Fingers crossed…

Categories Investing Insight, Your Money