Author: shyam

Biggest Challenge is Convincing People NOT to Trust Their Judgment

As the amount of data goes up, the importance of human judgment should go down… We should turn many of our decisions, predictions, diagnoses, and judgments—both the trivial and the consequential—over to the algorithms. There’s just no controversy any more about whether doing so will give us better results.

–HBR

We have been discussing Behavioral Investing on our blog for a while now and whats fascinating is that study-after-study shows that humans are the worst decision makers out there. We have the mind of a Lemming, we over trade, and we fall for stories.

Entrepreneurs are often advised to write their business plan on pen and paper. They may not have a profitable plan, but the very act of writing something down clarifies thoughts. To act clearly and rationally, it seems, we need to write a program. The very act of programming an investment strategy leads to a deeper thinking and clarifies risk, uncertainty and reward.

In fact, 2 out of the top 5 performing Investment Themes have been quantitative portfolios.

3 month performance

Models beat experts. Models represent a ceiling, not a floor. Humans with a model improve performance, but underperform the model. Humans without a model are ineffective. Following a model, but then trying to add value via intuition, actually destroys the model’s benefit and causes investors to under-perform the market. Experts need to design the models, but COMPUTERS NEED TO IMPLEMENT THE MODEL.

–Turnkey

Investors should focus on writing a better model and developing the courage to allow it to do its job. If it fails on pre-defined statistical measures, debug the model and try again.

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Strategy Performance Roundup

We have been tracking different investment strategies through our Themes – a handy way to create, track and allocate capital to different investment strategies. As our frequent readers know, we do a “doodh ka doodh pani ka pani” theme whenever analysts come out with portfolio recommendations. Add to the mix our own value and quantitative strategies, and we have a fairly wide array of investment options for investors to choose from.

Here’s a roundup of how the different Themes performed, and the performance of ETFs over the same time-frame. Because at the end of the day, if the Nifty ETF out-performs the bheja-fry, why bother?

Three Months

From 2013-9-13 to 2013-12-13

Quality to Price +38.83%
Prabhudas Lilladher Midcap 10-Sept-2013 +24.02%
CS Midcap 28-Aug-2013 +17.48%
DB Rupee Depreciation 3-Sept-2013 +16.18%
Balance-sheet Strength +15.88%
Growth with Moat +12.13%
Financial Strength Value +11.60%
ADAG Mania +8.86%
Prabhudas Lilladher Largecap 13-Sept-2013 +6.85%
Momentum 200 +3.62%
Efficient Growth +3.20%
Market Elephants +3.01%
Magic Formula Investing +2.28%
Globe Monthly Monitor +0.22%
Value strategies are usually perceived to require a long time to pan out. But our Quality-to-Price portfolio left the nearest competitor in the dust. Also, you got rewarded for going down the market-cap tables.

Should you have invested in ETFs, these are the returns over the same period.

BANKBEES +11.56%
JUNIORBEES +10.57%
PSUBNKBEES +10.08%
NIFTYBEES +5.64%
INFRABEES +2.82%
GOLDBEES +1.71%
Not bad, but not very encouraging to the efficient market hypothesizers.

Two Months

From 2013-10-15 to 2013-12-13

Quality to Price +32.57%
Prabhudas Lilladher Midcap 10-Sept-2013 +11.44%
CS Midcap 28-Aug-2013 +10.28%
Balance-sheet Strength +10.12%
Growth with Moat +6.74%
DB Rupee Depreciation 3-Sept-2013 +6.36%
ADAG Mania +5.01%
Financial Strength Value +4.76%
Enterprise Yield +3.15%
Betting on Bharat October-2013 +3.04%
Magic Formula Investing +3.01%
Prabhudas Lilladher Largecap 13-Sept-2013 +1.74%
Globe Monthly Monitor +0.05%
Momentum 200 -0.91%
Efficient Growth -1.58%
Market Elephants -2.72%
Mid-caps continued to out-perform large-caps. But cheap stocks were probably getting fully-priced at this point.

Should you have invested in ETFs, these are the returns over the same period.

PSUBNKBEES +15.93%
BANKBEES +9.91%
JUNIORBEES +4.38%
NIFTYBEES +1.53%
GOLDBEES +0.20%
PSU Banks caught a bid after getting hammered relentlessly for over a year. But even the Junior Nifty couldn’t beat a quantitative or hand-crafted portfolio.

One month

From 2013-11-14 to 2013-12-13

Quality to Price +19.35%
Emkay’s Picks Nov-2013 +6.83%
Ashwani Gujral’s Top 5 Picks – Nov 2013 +6.41%
Microsec’s Diwali picks – 2013 +4.99%
Kotak Securities’ Diwali picks – 2013 +4.31%
Prabhudas Lilladher’ Diwali picks – 2013 +4.09%
CS Midcap 28-Aug-2013 +4.02%
Growth with Moat +2.81%
Betting on Bharat October-2013 +2.64%
Prabhudas Lilladher Midcap 10-Sept-2013 +2.60%
DB Rupee Depreciation 3-Sept-2013 +2.34%
Globe’s Diwali Picks – 2013 +2.28%
ADAG Mania +2.25%
Prabhudas Lilladher Largecap 13-Sept-2013 +1.14%
Enterprise Yield +1.02%
Balance-sheet Strength +0.78%
Momentum 200 +0.50%
Globe Monthly Monitor +0.09%
Financial Strength Value -0.38%
Market Fliers -0.65%
Velocity -0.74%
Market Elephants -0.89%
Magic Formula Investing -1.81%
Efficient Growth -1.83%
I think the take-way here is that forget about dedicated “Diwali” picks.

Should you have invested in ETFs, these are the returns over the same period.

BANKBEES +5.11%
PSUBNKBEES +4.72%
NIFTYBEES +2.01%
INFRABEES +1.50%
JUNIORBEES +0.61%
GOLDBEES -2.82%
Very little to talk about here except point out that during all three periods, gold was the worst investment to make.

Conclusions

Well, three months is a very small window to draw any meaningful conclusions but here are some observations:

  1. Quantitative Value had 2 in the top 5 performers over the last 3 and 2 months. It is as close to “Investing Without Emotions” that you will ever get.
  2. ETFs turned in some very meh returns.
  3. Banks and mid-caps have been out-performing.
  4. Gold lost its luster – but don’t tell that to Indian house-wives 🙂
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Weekly Recap: *This* Much

weekly nifty performance heatmap

The euphoria of anti-Congress soon gave way to the reality of stagflation: Nifty ended the week -1.46% (-2.19% in USD terms)

Index Performance

Risk off… Infra and Banks took it on the chin.

weekly index performance chart

Top Winners and Losers

HCLTECH +4.84%
SSLT +5.27%
INDHOTEL +6.97%
BHEL -9.80%
PFC -9.72%
ADANIENT -9.47%
High beta, industrial and power stocks got thrashed…

ETFs

GOLDBEES -1.00%
NIFTYBEES -1.71%
JUNIORBEES -2.20%
BANKBEES -2.92%
INFRABEES -3.98%
PSUBNKBEES -4.50%
I think this is the first time I’m seeing ALL ETFs in the red… there really was no place to hide except for IT.

Advancers and Decliners

advancers and decliners

Yield Curve

Rate hike priced in. The only silver lining is that it has a positive slope…

india yield curve

Investment Theme Performance

Quality to Price +1.83%
Financial Strength Value -0.67%
Balance-sheet Strength -0.91%
Momentum 200 -0.93%
Velocity* -1.10%
Efficient Growth -1.10%
Enterprise Yield -1.30%
Growth with Moat -1.32%
Market Elephants -1.47%
Long Term Equity* -1.48%
Consistent10* -2.16%
Magic Formula Investing -3.36%
ADAG Mania -5.03%
Market Fliers -6.34%
Whacked across the board…

*Contributed Themes

Sector Performance

weekly sector performance

Thought for the Weekend

One forecast that is almost certain to be correct is that market forecasts are almost certain to be wrong. As a species, you humans are terrible about making predictions. Forget forecasting big events that are not in your control, such as the economy or the market, you cannot even forecast your own behavior. If you could, the fitness and diet industries would be bankrupt.

Source: Why Do Forecasters Keep Forecasting?
Related: Forecasting is a Sham – Prepare – Don’t Predict!

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Apollo Tyres: Buyer’s Remorse, Part Deux

We had written about Apollo Tyre’s acquisition of US based Cooper Tyre & Rubber here. It looks like the delay is causing Cooper to shit the bed…

Cooper Tire says in a new court filing that Apollo Tyres still doesn’t have an agreement in place with the United Steel Workers. The company also says it doesn’t know for sure when its Q3 financials will be finished due to issues it can’t control. (SA)

cooper tire chart

While the market seem to like Apollo Tyer’s trying to back out of the deal…

APOLLOTYRE chart

Stay tuned!

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Morgan Stanley’s Heads or Tails Portfolio

Morgan Stanley has created two sets of investment portfolios to “play” the poll results (MoneyControl)

Heads

The first is if there is a strong election result. Is basically a basket of high-beta, high-leverage, cyclical, strong short momentum stocks likely to outperform as the market gains conviction in a strong poll result.

Theme: Morgan Stanley’s Strong Election Picks Dec-2013

This portfolio’s beta is around 1.14. But if you are going to be bullish, why hold yourself back? The Market Fliers Theme does a better job of pushing the pedal to the metal, so to speak, with a beta of 1.84. High beta has been flying lately, the theme is +14.89% since inception, vs. the Nifty’s +4.31%

Tails

And the second is if there is a fragmented election result. Basically a good quality GARP basket, low PEG, high ROE, low beta and strong long-term momentum.

Theme: Morgan Stanley’s Fragmented Election Picks Dec-2013

This portfolio’s beta is around 0.54. But if you are going to play defense, commit! The Market Elephants Theme, with a beta of 0.27, barely has a pulse but beats the Morgan Stanley portfolio on both Sharpe and Information Ratio.

So, dood ka dood, paani ka paani!

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