Invest Without Emotions
An analysis of daily returns of the NIFTY 50 index between 1998 and 2015 shows that:
Further reading: An Anatomy of Calendar Effects (SSRN)
When we back-test a strategy against the historical prices of an instrument, say, the NIFTY 50 index, we have to keep in mind that historical values are just one path of the many paths that the instrument could have taken.
For example, 10 tosses of a fair coin can result in TTTTTFFFFF and TFTFTFTFTF with equal probability. If your strategy is path dependent (as most strategies are,) then just because it was successful in one trial (historical prices) doesn’t mean that it would have been successful in all (or majority) of them.
The simple thing to do after a successful back-test against historical prices is to run a Monte Carlo simulation to check if the strategy comes out ahead in most of them. This can be setup by assuming returns are normally distributed and running a simulation using the mean and standard deviation of the sample.
For instance, in the recent past, daily NIFTY 50 returns have exhibited a mean of -0.0003742873 and std. dev. of 0.01079387. When you run a simulation and plot the results over the actual closing prices of the index, you get the resulting chart:
How many of these paths will result in a total equity wipeout of the back-tested strategy?
| MINTs | |
|---|---|
| JCI(IDN) | -0.14% |
| INMEX(MEX) | +0.12% |
| NGSEINDX(NGA) | -0.96% |
| XU030(TUR) | +2.39% |
| BRICS | |
|---|---|
| IBOV(BRA) | +7.81% |
| SHCOMP(CHN) | -2.18% |
| NIFTY(IND) | +1.44% |
| INDEXCF(RUS) | +4.38% |
| TOP40(ZAF) | +0.72% |
| Energy | |
|---|---|
| Natural Gas | +9.63% |
| Brent Crude Oil | +19.35% |
| WTI Crude Oil | +18.78% |
| Ethanol | +7.67% |
| Heating Oil | +16.52% |
| RBOB Gasoline | +12.21% |
| Metals | |
|---|---|
| Gold 100oz | +4.91% |
| Silver 5000oz | +16.23% |
| Palladium | +9.91% |
| Copper | +3.65% |
| Platinum | +10.43% |
| MINTs | |
|---|---|
| USDIDR(IDN) | -0.45% |
| USDMXN(MEX) | -0.99% |
| USDNGN(NGA) | -0.03% |
| USDTRY(TUR) | -0.91% |
| BRICS | |
|---|---|
| USDBRL(BRA) | -4.40% |
| USDCNY(CHN) | +0.38% |
| USDINR(IND) | +0.12% |
| USDRUB(RUS) | -3.34% |
| USDZAR(ZAF) | -3.57% |
| Agricultural | |
|---|---|
| Cattle | -13.57% |
| Lean Hogs | +14.21% |
| Soybean Meal | +22.41% |
| Feeder Cattle | -10.82% |
| Wheat | +1.48% |
| Coffee (Arabica) | -5.56% |
| Coffee (Robusta) | +5.78% |
| Corn | +11.55% |
| Cotton | +8.51% |
| Lumber | -5.54% |
| Orange Juice | -12.86% |
| Soybeans | +12.23% |
| Sugar #11 | +6.16% |
| Cocoa | +7.24% |
| White Sugar | +5.30% |
| Index | Change |
|---|---|
| Markit CDX EM | +0.60% |
| Markit CDX NA HY | +0.89% |
| Markit CDX NA IG | -4.40% |
| Markit iTraxx Asia ex-Japan IG | -6.15% |
| Markit iTraxx Australia | -9.74% |
| Markit iTraxx Europe | -1.61% |
| Markit iTraxx Europe Crossover | -9.50% |
| Markit iTraxx Japan | -21.20% |
| Markit MCDX (Municipal CDS) | +0.33% |
| GOLDBEES | +5.98% |
| BANKBEES | +3.70% |
| JUNIORBEES | +3.05% |
| INFRABEES | +2.94% |
| CPSEETF | +2.69% |
| PSUBNKBEES | +1.03% |
| NIFTYBEES | +0.49% |
| Sub Index | Change in YTM | Total Return(%) |
|---|---|---|
| 0 5 | -0.05 | +0.77% |
| 5 10 | -0.06 | +0.92% |
| 10 15 | -0.04 | +0.94% |
| 15 20 | -0.12 | +1.75% |
| 20 30 | -0.08 | +1.50% |
| Quality to Price | +9.29% |
| Enterprise Yield | +8.01% |
| Velocity | +5.67% |
| High Beta | +5.47% |
| Magic Formula | +4.77% |
| Momentum | +4.70% |
| Low Beta | +4.23% |
| Low Volatility | +4.11% |
| Balance Sheet Strength | +4.00% |
| Financial Strength Value | +3.56% |
| Acceleration | +3.11% |
| High Alpha | +2.64% |
| High Sharpe | +2.57% |
| Tactical CNX 100 | +1.76% |
| HighIR Momentum | +0.44% |
FII’s seen renewing their love affair with Indian bonds…
Gilts are in the process of normalizing.
Is spread between 2s and 10s calling a bluff on a Fed rate hike?
Chance plays a far larger role in life outcomes than most people realize. And yet, the luckiest among us appear especially unlikely to appreciate our good fortune. Wealthy people overwhelmingly attribute their own success to hard work rather than to factors like luck or being in the right place at the right time.
That’s troubling, because seeing ourselves as self-made—rather than as talented, hardworking, and lucky—leads us to be less generous and public-spirited. It may even make the lucky less likely to support the conditions (such as high-quality public infrastructure and education) that made their own success possible.
Source: Why Luck Matters More Than You Might Think
What I Learned Losing a Million Dollars:
Part I, Part II of the series.
A portfolio of ~150, equal-weight, small-cap stocks, rebalanced monthly, gave a return of 111% from 2015 through now.
While a similar portfolio of mega-cap stocks gave a return of 11% during the same time frame.
Returns from the small-cap portfolio are accompanied by larger volatility.
Is the alpha accessible? Given the meager volumes in the small-cap space, narrow circuit breakers and intra-day volatility of prices, small-cap alpha is hard to access. The impact cost of trading 150 small-cap stocks every month would be pretty high for large positions.
However, a portfolio with an exposure of Rs. 10,000 – Rs. 50,000 per stock is doable. So, theoretically, you can size the portfolio between Rs. 15,00,000 – Rs. 75,00,000 to access this alpha.
Cumulative wealth charts for each decile (both cap- and equal-weighted): (a)
Box plots of cumulative returns of stocks in each decile: (b)
| MINTs | |
|---|---|
| JCI(IDN) | +1.51% |
| INMEX(MEX) | +5.97% |
| NGSEINDX(NGA) | +2.95% |
| XU030(TUR) | +9.00% |
| BRICS | |
|---|---|
| IBOV(BRA) | +16.69% |
| SHCOMP(CHN) | +11.96% |
| NIFTY(IND) | +10.39% |
| INDEXCF(RUS) | +0.37% |
| TOP40(ZAF) | +4.08% |
| Energy | |
|---|---|
| Brent Crude Oil | +10.30% |
| Ethanol | +4.44% |
| Heating Oil | +8.39% |
| RBOB Gasoline | +38.22% |
| Natural Gas | +13.84% |
| WTI Crude Oil | +11.73% |
| Metals | |
|---|---|
| Palladium | +15.93% |
| Copper | +2.35% |
| Gold 100oz | -0.06% |
| Silver 5000oz | +4.73% |
| Platinum | +5.15% |
| MINTs | |
|---|---|
| USDIDR(IDN) | -1.56% |
| USDMXN(MEX) | -4.16% |
| USDNGN(NGA) | +0.00% |
| USDTRY(TUR) | -4.86% |
| BRICS | |
|---|---|
| USDBRL(BRA) | -9.97% |
| USDCNY(CHN) | -1.35% |
| USDINR(IND) | -3.18% |
| USDRUB(RUS) | -9.94% |
| USDZAR(ZAF) | -7.24% |
| Agricultural | |
|---|---|
| Cocoa | -2.75% |
| Feeder Cattle | -0.55% |
| White Sugar | +8.29% |
| Cattle | -4.71% |
| Coffee (Robusta) | +9.77% |
| Corn | -1.27% |
| Lumber | +21.75% |
| Orange Juice | +17.57% |
| Sugar #11 | +4.72% |
| Coffee (Arabica) | +11.78% |
| Cotton | +2.76% |
| Soybeans | +7.00% |
| Lean Hogs | -2.05% |
| Soybean Meal | +4.55% |
| Wheat | +5.96% |
| Index | Change |
|---|---|
| Markit CDX EM | +2.89% |
| Markit CDX NA HY | +3.28% |
| Markit CDX NA IG | -27.66% |
| Markit iTraxx Asia ex-Japan IG | -6.67% |
| Markit iTraxx Australia | -15.03% |
| Markit iTraxx Europe | -26.80% |
| Markit iTraxx Europe Crossover | -98.68% |
| Markit iTraxx Japan | -9.45% |
| Markit MCDX (Municipal CDS) | -14.58% |
| Decile | Mkt. Cap. | Adv/Decl |
|---|---|---|
| 1 (micro) | +0.54% | 70/61 |
| 2 | +9.38% | 82/48 |
| 3 | +10.53% | 91/39 |
| 4 | +9.03% | 82/48 |
| 5 | +7.85% | 84/46 |
| 6 | +6.78% | 85/45 |
| 7 | +10.83% | 83/47 |
| 8 | +7.10% | 83/47 |
| 9 | +12.46% | 81/49 |
| 10 (mega) | +1.97% | 74/57 |
| TATAMOTORS | +29.00% |
| RELINFRA | +30.19% |
| CAIRN | +30.44% |
| LUPIN | -15.69% |
| APOLLOHOSP | -9.19% |
| COALINDIA | -6.13% |
| PSUBNKBEES | +19.47% |
| BANKBEES | +15.43% |
| INFRABEES | +12.76% |
| NIFTYBEES | +11.70% |
| JUNIORBEES | +9.02% |
| CPSEETF | +8.08% |
| GOLDBEES | -3.22% |
| Sub Index | Change in YTM | Total Return(%) |
|---|---|---|
| 0 5 | -0.22 | +1.22% |
| 5 10 | -0.24 | +1.91% |
| 10 15 | -0.30 | +2.56% |
| 15 20 | -0.35 | +3.94% |
| 20 30 | -0.37 | +4.59% |
| High Beta | +17.65% |
| Magic Formula | +16.77% |
| Acceleration | +14.99% |
| Quality to Price | +13.49% |
| Velocity | +13.19% |
| Enterprise Yield | +13.04% |
| Financial Strength Value | +12.79% |
| Momentum | +11.93% |
| Balance Sheet Strength | +11.37% |
| High Alpha | +9.86% |
| Low Volatility | +9.14% |
| HighIR Momentum | +8.08% |
| High Sharpe | +7.67% |
| Low Beta | +7.34% |
| Tactical CNX 100 | +3.39% |
Why do amateurs believe they can outperform the professionals — or even identify those pros who will outperform? (Performance of individual mutual funds cannot be predicted with any greater degree of accuracy than individual stocks or bonds.)