Category: Investing Insight

Investing insight to make you a better investor.

Pain is proportional to Frequency of Observations

Midcaps, proxied by the NIFTY MID100 FREE index, have given an annualized return of over 18% from 2001 through August-2016. That is a 12x return over 15 years. Sounds good when you say it that way, doesn’t it? Take a look at how Rs. 1 has grown over the years:

cumulative.returns.NIFTY MID100 FREE

Now, zoom into the bottom-most chart – the drawdown chart:

drawdown.p2p.NIFTY MID100 FREE

The point-to-point drawdown chart is horrific enough. Investors saw a 70% loss during the Global Financial Crisis (GFC) in 2008/09. 30% drawdowns occur with regular frequency. Investors make it worse by looking at their investments too often.

For example, if an investor saw the returns of his portfolio once every 1000 days (4-5 years,) he would not have seen more than 35 drawdowns during the period. Move the observation to every 200 days (about a year,) and the number ticks up to 138. The more you check your portfolio, more the number of losses that you see:

drawdowns.NIFTY MID100 FREE

New investors have rightfully taken the SIP route to saving in equities. However, they would be doing themselves a disservice if they expect a fixed-deposit like consistency in equity returns.

For the quant inclined, code for this analysis can be found on Github.

Related: Definition: Drawdown

Categories , Tags

Update 1: Mid N Small vs. Value Discovery

Back in January last year, we had taken a brief look at Invesco’s India Mid N Small Cap Fund and ICICI Prudential Value Discovery Fund and concluded that even through Religare is marginally better than ICICI, there was nothing there to swing the decision one way or the other. Here’s an update:

Between 2015-01-01 and 2016-08-11, Invesco India MID N SMALL CAP Fund has returned a cumulative 12.59% with an IRR of 7.64% vs. ICICI Prudential Value Discovery Fund’s cumulative return of 12.99% and an IRR of 7.88%. (http://svz.bz/2bf7jzy)

In terms of performance, they are still on top of each other. However, Value Discovery has had shallower draw-downs, making it an easier fund to hold.

Invesco India MID N SMALL CAP Fund and ICICI Prudential Value Discovery Fund drawdown

Invesco’s fund is way smaller than ICICI’s. For those who prefer a smaller fund, Invesco’s would be a way to go. However, overall, the status quo remains.

Categories , Tags

Doodh Ka Doodh Pani ka Pani

Recommendations on Media

Analysts, brokers and pundits often appear on financial media with a ready list of stocks that investors should buy. Some of them are collated into lists by the Economic Times, Money Control, etc. We turn these lists into equally weighted portfolios and track them. We call them Doodh Ka Doodh Pani ka Pani.

Doodh ya Pani?

We look at 260 trading days worth of returns of these portfolios and compare them with NIFTY and MIDCAP 100 FREE returns during the same time period. 260 trading days approximates to one calendar year — a tax-free holding period and an upper limit of an average retail investor’s patience with investment tips.

Analyst Theme Created # stocks Nifty Returns MidCap Returns Analyst Returns Out perf. Wrt. MidCap
CS Midcap 28-Aug-2013
2013Aug29
10
50.61
78.67
126.56
47.88
Exporters – ET 2013-09-04
2013Sep04
10
46.27
70.81
71.65
0.84
Prabhudas Lilladher Midcap 10-Sept-2013
2013Sep10
8
34.74
65.09
105.12
40.02
Prabhudas Lilladher Largecap 13-Sept-2013
2013Sep13
15
36.06
63.04
41.15
-21.89
Bharat
2013Oct07
13
41.18
66.12
47.48
-18.65
Microsec’s Diwali picks – 2013
2013Nov01
9
35.16
63.66
45.71
-17.95
Globe’s Diwali picks – 2013
2013Nov01
10
35.16
63.66
44.51
-19.14
Prabhudas Lilladher’s Diwali picks – 2013
2013Nov02
5
36.53
64.02
61.71
-2.31
Kotak’s Diwali picks – 2013
2013Nov04
11
36.53
64.02
63.41
-0.61
Emkay 2013-11-12
2013Nov12
9
38.59
65.21
119.78
54.57
Ashwani Gujral 2013-11-12
2013Nov12
5
38.59
65.21
173.85
108.64
Sharekhan 15-Nov-2013
2013Nov15
11
32.88
60.08
30.37
-29.71
UBS 2013-12-04
2013Dec04
9
34.44
64.19
94.21
30.03
Morgan Stanley Fragmented Election 2013-12
2013Dec06
12
34.11
63.52
33.24
-30.28
Morgan Stanley Strong Election 2013-12
2013Dec06
13
34.11
63.52
29.55
-33.97
Merrill 2014
2013Dec12
10
33.50
65.36
122.21
56.85
Espirito Santo Silver Bullets 2013-12-26
2013Dec26
7
38.49
62.25
54.96
-7.28
IIFL Micaps for 2014 2013-12-27
2013Dec27
10
38.26
61.32
86.04
24.72
SMC 2013-12-28
2013Dec28
10
39.27
62.15
59.22
-2.93
Religare Top 4 for 2014
2014Jan01
4
41.40
61.99
58.37
-3.62
Macquarie – Midcaps 2014-01-21
2014Jan21
5
39.53
67.20
97.08
29.88
Mitesh Thacker Midcaps 2014-1-30
2014Jan30
10
42.97
74.34
55.54
-18.80
Dolat Capital’s 10 Hidden Gems 2014-02
2014Feb27
10
32.90
63.58
43.24
-20.34
Prabhudas Lilladher’s LargeCap Picks 2014-03
2014Mar21
10
30.11
58.61
30.01
-28.60
ET Top Midcap 2014-03
2014Mar21
10
30.11
58.61
77.74
19.13
ET 2014-04
2014Apr10
10
20.53
41.41
47.66
6.24
Religare Retail Lucky 13 mid-cap redux
2014May06
13
23.88
47.47
48.49
1.02
Nomura 2014-04
2014May06
11
23.88
47.47
52.66
5.18
Religare Retail Lucky 13 mid-cap redux
2014May06
13
23.88
47.47
71.38
23.91
Sharekhan 20 midcaps 2014-05
2014May21
20
10.06
23.15
24.99
1.83
Microsec Agri 2014-06
2014Jun30
10
13.43
23.13
27.99
4.86
Lucky 13 2014-07
2014Jul02
16
10.31
19.73
24.04
4.30
Hidden Gems 2014-08
2014Aug25
7
-0.43
16.06
48.18
32.12
Globe Diwali Picks 2014
2014Oct22
11
-2.66
12.41
-17.22
-29.63
Kotak Diwali Picks 2014
2014Oct22
9
-2.66
12.41
14.36
1.95
ET Diwali Picks 2014
2014Oct22
10
-2.66
12.41
-1.88
-14.29
SPA stock bets 2014-11
2014Nov24
16
-10.07
5.64
-23.78
-29.42
ET Top 10 Dec-2014
2014Dec22
10
-8.68
8.03
-6.34
-14.37
Beg Borrow Steal
2015Jan06
7
-8.67
-0.85
-33.05
-32.20
CLSA 9 for 2015
2015Jan06
8
-8.67
-0.85
-14.13
-13.28
Midcaps for 2015
2015Jan06
16
-8.67
-0.85
15.93
16.78
Espirito Santos Silver bullets Jan-2015
2015Jan12
8
-9.12
-1.37
-6.87
-5.49
Mixed bag 2015-01
2015Jan20
9
-15.05
-4.53
-29.21
-24.68
Rate Sensitive 2015-Jan
2015Feb03
15
-17.07
-8.89
-23.66
-14.77
Rail Budget 2015
2015Feb26
17
-14.09
-4.67
-26.97
-22.31
Sharekhan Top 12 April-2015
2015Apr06
12
-8.05
0.03
-2.88
-2.91
Smart City Stocks ET April-2015
2015Apr30
15
-4.87
2.75
9.00
6.25

Observations

Of the 47 lists we analyzed, the average out-performance was about +1.5% (vs. the MidCap index.)

We created two Themes out of the stocks in ‘Religare Retail Lucky 13 mid-cap redux.’ One was a minimum variance portfolio and the other one was an equal-weighted portfolio. The minimum variance portfolio out-performed the equal-weighted one. Food for thought.

Morgan Stanley had come out with two lists before the General Elections – one was supposed to do very well if Modi got elected and the other if he didn’t. Ironically, ‘Morgan Stanley Fragmented Election 2013-12’ out-performed ‘Morgan Stanley Strong Election 2013-12’ but both under-performed the Midcap Index.

Espirito Santos Silver bullets turned out to be blanks.

Kotak should do a better job with their Diwali picks.

What next?

We hope that these guys continue to put out lists so that we can track them. We admit that 47 is too small a sample to draw any conclusions. If you come across any such lists that are ‘subscription only’, i.e., not available on the ET or MC websites, please send them to info@stockviz.biz. We would love to track them all.

Categories , Tags

Investing in Micro-caps

The Size Factor

All things being equal, micro-caps outperform mega-caps in the long-run — investors are compensated for the higher systematic (business cycle) risk that they take when they invest in micro-cap stocks. One way to boost relative performance vs. a market-cap weighted index is to invest in an equal-weighted basket of stocks that are in the index. Alternately, investors can add a basket of micro-cap stocks to their portfolio to juice overall returns.

Market-cap Deciles

We had discussed how we can divide the universe of listed stocks in deciles based on their free-float market cap here. Given our ability to automate systematic investment strategies, we created an auto-rebalanced Theme each for every decile.

Investors can now gain exposure to an equal-weight portfolio of micro caps by investing in the Decile 9 Theme and mega-caps by investing in the Decile 0 Theme. Returns and risk go down as you climb up the market-cap ladder. Our Market Dashboard gives an idea of how returns have been distributed across the deciles:

decile returns

Notice how the drawdowns are deeper with micro-caps:
decile drawdown

Investors who whethered the steeper drawdowns of micro-caps have experienced returns an order of magnitude larger than mega-cap investors. Check out the ‘Size Factor’ in our Investment Themes page for other Market-cap based Themes.

Categories , Tags , ,

Systematic Buy-the-Dip

Introduction

We often hear the term “buy-the-dip” whenever the markets are correcting. However, here are some questions that face an investor:

  1. What exactly is a “dip?”
  2. Where does the cash come from?
  3. How much should I buy?

The answers to these questions will determine how much alpha you will generate by employing this strategy.

What is a “dip?”

A dip is a percentage loss from a near-time peak (also called a drawdown.) For example, if the NIFTY posts a 50-day cumulative loss of 5%, then that is a 5% dip over where the NIFTY closed 50-days ago. To get a sense for how these 50-day dips/drawdowns are distributed, we do a density plot.

drawdown.density.NIFTY 50

drawdown.density.NIFTY MID100 FREE

As we can see, most of the NIFTY dips are at around 5%. A more than 10% dip is a “back the truck up” event where we deploy all our cash. For MIDCAPs, it is around 10% and 15%.

The back test

Every day, an investor has Rs. 1 that he needs needs to invest. He can either buy the NIFTY/MIDCAP or he can park it a short-term bond fund/savings account. Additionally, if it is a “back the truck up” dip, he can liquidate the bond fund and buy the NIFTY/MIDCAP. Let’s tag this as DIP.

In a DIP, the investor only buys NIFTY/MIDCAP if it is in a dip. Otherwise, he buys Rs. 1 worth of bonds.

The base case is that the investor buys Rs. 1 worth of NIFTY/MIDCAP every day. Let’s tag this as SIP.

Should you buy the dip?

Yes, buying the dip allows you to build a bigger corpus, if your transaction costs are zero. Here are the NIFTY and NIFTY MIDCAP buy the dip (DIP) vs. daily purchase (SIP) final corpus:

dip-sip

Given how small the alpha is, net of fees/commissions/slippage/taxes, this is a losing proposition. You are better off with a SIP.

Categories Tags ,