Author: shyam

IPOs – Are they Worth It?

Warren Buffett had this to say about IPOs: “It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer(investors).”

How have Indian IPO investors fared lately? To answer this question, StockViz analyzed over 250 IPOs since 2010 and compared them to returns that an investor would get if he had bought the Nifty [stockquote]NIFTYBEES[/stockquote] or the Junior Nifty [stockquote]JUNIORBEES[/stockquote] ETFs instead. The headline: over 200 trading days, IPOs on an average tanked -20% while the ETFs were -0.1% and -4.5% over the same period. Obviously, performance varies depending on the scrip and IPOs, as a group, tend to exhibit volatile returns (a standard deviation, σ , of 0.66 vs. Nifty’s 0.12 for 200 day returns.) So much for “buy-and-hold.”

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How did the “flippers” fare? The 5 and 10-day returns are not that much better either: +0.5% and –1.7% on an average, with the Nifty faring better in both the cases.

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So why buy IPOs at all? If you look at the histograms, there are about 20-30 stocks that gave more than 30% returns. For example, Peria Karamalai [stockquote]PERIATEA[/stockquote] 200-day return is at 300%. Anecdotes about “friends-of-friends” making a killing in IPOs is a powerful motivation indeed.

Is there a way to play IPOs while managing downside risks at the same time? Turns out there is. If it’s a dog stock, you’ll know it before 5 days. Stocks that doubled 20-days from the day of listing exhibited an average return of 65% within the first 5 days. Stocks that doubled 50-days from the day of listing exhibited an average return of 50% within the first 5 days. The rule of thumb is: If it doesn’t pop within the first 5 days, chances are that it never will.

Follow the StockViz 5-day rule for IPOs and add that extra juice to your portfolio!

You can follow IPO related news by using your ipo smart tag: http://stockviz.biz/index.php/tag/ipo/
The spreadsheet analysis for this article is available on scribd.

 
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What Is Your Strategy?

StockViz proudly presents StockViz Strategies – an integrated experience to inspect, trade and manage stock option strategies like condors, butterflies and spreads.

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Select from a wide array of built-in option strategies, inspect P&L profiles, option greeks and market liquidity.

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Get a snapshot of how your portfolio is performing, mark-to-market gains, realized profit/loss aggregated across your trades. And when you are ready to exit a trade, a single click will do it!

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So, what is your strategy?

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Weekly Recap: What Recovery?

NIFTY 50.2012-07-02.2012-07-06

The NIFTY ended tepid, moving just -0.01% for the week.
Biggest losers were ASIANPAINT (-4.48%), JINDALSTEL (-3.14%) and HEROMOTOCO (-3.13%). And the biggest winners were DLF (+6.45%), BHARTIARTL (+5.33%) and JPASSOCIAT (+5.17%).
Advancers lead decliners 29 vs 19
Gold: +0.35%, Banks: +3.37%. Infrastructure: +1.05%

Friday saw a big miss in US unemployment numbers. The Dow ended -0.93% to 12777, after being down more than 1.38%. Gold -1.66% to $1582.70, in spite of late-day QE3 chatter. Europe gave up most of its intra-week gains: Stoxx 50 -2.3%, Germany -1.9%, France -1.9%, Italy -2.3%, Spain -3.2%, U.K. -0.5%. The Euro flirted with 2012 lows.

Unless there’s some strong reform measures coming out of the government next week, expect the markets to fade: corporate earnings are likely to be week, any growth in IT earnings are likely to be on account of the week Rupee and domestic growth will continue to be stagflationary.

Should we get ready for a post-capitalistic West?

“The domination of capitalism globally depends today on the existence of a Chinese Communist party that gives de-localised capitalist enterprises cheap labour to lower prices and deprive workers of the rights of self-organisation,” says Jacques Rancière, Professor of Philosophy at the University of Paris VIII.

Daily news summaries are here.

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The Rise of The Machines

Cover of "The Terminator [Blu-ray]"

Research by Daniel Kahneman, recipient of the Nobel Prize in Economic Sciences, shows that humans are better at thinking about rational decision making than actually practicing it. Is it any wonder then that securities trading, a field that requires fast, emotionless decisions are now increasingly being handed over to machines?

Institutional investors were the first to embrace algo-trading. It offered them the convenience of entering large orders and leaving the machines to divide these large trades into several smaller trades to manage market impact, and risk. Since then, algo-trading has spread like wild fire to encompass a wide array of trading strategies like statistical arbitrage and trend following. As of 2009, Algo-trading firms account for 73% of all US equity trading volume. And according to recent disclosers from the National Stock Exchange (NSE) roughly 30% of trading in the Indian equity market could be algo-based.

That terminator is out there. It can’t be bargained with. It can’t be reasoned with. It doesn’t feel pity, or remorse, or fear. And it absolutely will not stop, ever, until you are dead.

– Kyle Reese (Terminator 1)

The biggest draws of algo-trading is speed and objectivity. Machines can make calculations faster, and they can also monitor several markets more quickly than a human can for simple market conditions to occur in order to justify taking a position. Machines follow their programming in an objective and repeatable way. They also do not suffer from the emotional and health problems that human traders can have which can affect their objectivity when trading online.

Their biggest draws are also their biggest flaws. Unless proper risk management controls are in place and regular human supervision occurs, an otherwise successful trading algo can quite suddenly rack up a substantial set of losing trades if market conditions become especially unfavorable.

Why must the fate of the world always be in the hands of an idiot?

– Grim (The Grim Adventures of Billy & Mandy)

The bigger problem though is people not understanding how these algorithms work. A majority of domestic stock brokers do not have expertise to re-write their algos and use templates from third party vendors. They do not have expertise to track as to how their algos work. So, when the techniques are closely identical, it causes chaos. It is believed that this is why a buyer was offering higher price for a security than the seller intended to sell and trading was disrupted nearly for an hour on NSE in May.

After algo trading was considered the key catalyst for some of the recent instances of market crash, including a sharp fall in Infosys shares, the NSE and the BSE have imposed separate charges on the use of algos to curb excessive speculation, misuse of the technology and also keep a check on the pace of rise in algo volumes. The exchanges have now imposed a fee of one to five paise per algo order or modification of the trade. At least 50% of algo trading is expected to be affected by this fee.

Be that as it may, algorithmic trading is here to stay. The steady march of technology and cloud computing will ensure that machine trading will become more affordable and percolate down from institutional investors to individual traders and investors.

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