Category: Investing Insight

Investing insight to make you a better investor.

Consumption-based asset pricing model

shyam August 26, 2014September 9, 2014

Most theories of how the stock market works are based on the idea that investors sit around thinking about what a stock might be worth. Together, by buying and selling stock, Mr. Market comes to some conclusion.

But the consumption-based asset pricing model says that’s not the way it works at all. Investors, actually, spend very little time thinking about whether a company’s shares are undervalued or overvalued. Instead, most investors make their investment decisions based on how much money they have and when they will spend it.

Source: How market selloffs happen

Origins of Stock Market Fluctuations

On a quarterly basis, risk aversion shocks explain roughly 75% of variation in the log difference of stock market wealth.
Over the long term, factors share shock that shifts the rewards of production between workers and shareholders plays a larger role in stock market returns.
By contrast, technological progress that rewards both workers and shareholders plays a smaller role in stock market fluctuations.

Read the whole thing:

Categories Investing Insight, Your Money

Do Superstitious Traders Lose Money?

shyam August 21, 2014September 9, 2014

Found an interesting paper (scribd embed below) where the authors hypothesize that superstition may be a symptom of a general cognitive disability in making financial decisions.

The authors constructed a “superstition index” and bucketed traders based on their trading activity in the Taiwan Futures Exchange. They found that the superstitious individuals (the top-quintile of the superstition index) under-perform their non-superstitious counterparts (the bottom-quintile of the superstition index) by 1.6 basis points within a trading day. The under-performance widens to 2.4 basis points for one day and 6.3 basis points for five days after the transactions.

Here’s an odd titbit: Did you know that India’s Independence Day falls a day after Pakistan’s because astrologers in India insisted that August 14, 1947, was an inauspicious day to become independent?

Categories Investing Insight, Your Money Tags behavioral-finance

IPOs: A Performance Update

shyam August 19, 2014September 9, 2014

We are not big fans of IPOs at StockViz (here, here). As an asset class, they are a bit like playing chutes-and-ladders. Even if you manage to roll into a few ladders, there are plenty of chutes that can take you down to zero.

To see if IPOs make sense as an investment, you should compare their returns to a broader index. On one hand, we have the S&P BSE IPO index that tracks the value of companies for two years after listing. And on the other, we have the BSE 100 index that tracks the top 100 stocks my market value. By comparing the returns of the two indices, we can get a fair idea of what we are getting into.

BSE IPO Index 2005-today

A buy-and-hold investor in the index at the beginning of 2005 would still be underwater after the bust of 2008. And to make matters worse, the BSE 100 index has trounced the IPO index.

BSE IPO Index 2005-2010

BSE IPO Index 2010-today

IPOs on NSE since 2013

8KMILES	2014-01-29	+130.05%
AGARIND	2014-05-26	-45.53%
AGRITECH	2014-01-28	-79.37%
ANKITMETAL	2013-03-14	-65.29%
ARCOTECH	2014-04-16	+109.74%
ATULAUTO	2013-06-26	+277.10%
BUTTERFLY	2014-04-28	-12.57%
CAPLIPOINT	2014-06-23	+123.21%
CASTROLIND	2014-03-14	+19.52%
CEREBRAINT	2013-06-26	-61.25%
CNOVAPETRO	2014-01-01	-9.73%
DUNCANSLTD	2013-07-05	+16.70%
FCEL	2013-07-04	+38.17%
FLFL	2013-10-01	-35.45%
GSCLCEMENT	2013-05-15	+71.76%
GULFCORP	2014-06-26	-13.61%
GULFOILLUB	2014-07-31	+17.04%
HATSUN	2014-06-20	+10.28%
IBULHSGFIN	2013-07-23	+38.09%
INTEGRA	2013-08-20	-64.66%
JPOLYINVST	2013-11-11	+40.20%
JUSTDIAL	2013-06-05	+183.46%
LYPSAGEMS	2013-11-05	+1.31%
MAKE	2014-06-30	+72.51%
MMWL	2014-03-26	+56.67%
MOHITIND	2013-03-14	-38.16%
NAKODA	2013-03-14	-58.05%
NATHBIOGEN	2014-01-28	+632.86%
NGCT	2013-11-12	-32.08%
NIBL	2013-04-09	+214.95%
ORBTEXP	2013-11-05	+112.96%
ORIENTCEM	2013-07-12	+105.70%
PFRL	2013-07-17	-33.22%
PILIND	2013-10-07	+230.77%
REPCOHOME	2013-04-01	+172.19%
SDBL	2014-03-18	-13.60%
SFCL	2013-10-24	+72.90%
SREEL	2014-01-01	-11.07%
SUJANATWR	2013-09-11	+103.87%
VIMALOIL	2013-05-21	+75.39%
VIVIDHA	2013-05-21	-3.51%
VMART	2013-02-20	+91.39%
WELENTRP	2014-07-11	+221.25%
WONDERLA	2014-05-09	+80.04%

The NSE does not have an IPO index. So we had a look at all the stocks listed since January 2013.

There have been twice as many winners as losers since 2013 and the chatter around the ‘IPO market heating up’ has been getting louder. However, investors would do well to keep the big picture in mind before jumping into that hot new IPO that their brokers are selling.

You can track the latest IPO news here.

Categories Investing Insight, Your Money Tags ipo

Two Relative Strength Index (RSI) Strategies that Do Not Work

shyam August 17, 2014September 9, 2014

Definition from StockCharts:

RSI oscillates between zero and 100. Traditionally, and according to Wilder, RSI is considered overbought when above 70 and oversold when below 30.

A naive implementation of it would be exit when RSI > 70. Lets see how it worked out vs. a simple buy-and-hold.

A simple B&H strategy was miles ahead of one that exited the market whenever RSI indicated “overbought.”

How about being long only when the index is an uptrend (> 200-day SMA) and RSI is not ‘overbought’ (< 70)?

Using RSI was a net negative – it under-performed both a buy-and-hold and a SMA-200 strategy.

Would it work on other indices?

NIFTY: NO

CNX BANK: NO

Conclusion

The naive RSI strategies described above are money losers. The gains are nowhere near enough to compensate for the losses. A simple buy-and-hold strategy ends up outperforming the RSI.

Categories Investing Insight, Your Money Tags technical analysis

FII Investments

shyam August 13, 2014September 9, 2014

Yesterday, we saw how FIIs have pumped in closed to $12 billion this year alone. Lets see what stocks they have been buying up.

Since September 2013

Increases
Increases	SRTRANSFIN	40.34
JSWSTEEL	22.23
HINDPETRO	12.5
POWERGRID	10.27
YESBANK	9.95
UPL	8.45
TECHM	6.47
ZEEL	6.01
PETRONET	5.7
AXISBANK	4.9

Decreases
Decreases	DABUR	-1.02
BAJAJFINSV	-1.06
ACC	-1.17
CONCOR	-2.22
EXIDEIND	-2.55
BANKINDIA	-3.38
FEDERALBNK	-6.86
HINDALCO	-11.09
GLAXO	-21.24
MCDOWELL-N	-31.47

FIIs have been active across the board. With no single sector being overly favored…

Since March 2014

Increases
Increases	ZEEL	48.68
YESBANK	7.06
KOTAKBANK	3.41
TATASTEEL	2.96
CANBK	2.53
TATAGLOBAL	2.42
PETRONET	2.23
UNIONBANK	2.2
IDEA	2.12
HINDPETRO	1.85

Decreases
Decreases	WIPRO	-0.73
CAIRN	-0.75
IDFC	-0.80
BAJAJFINSV	-0.99
CONCOR	-2.27
BHARATFORG	-2.29
EXIDEIND	-2.32
FEDERALBNK	-3.77
HINDALCO	-11.55
MCDOWELL-N	-29.26

… However, they seem to have made up their minds on getting out of CONCOR and FEDERALBNK. And do we see a concentration among banking stocks?

Investment Strategy Implications

The data is delayed due to quarterly reporting and we get to hear about activity in bits and pieces, days after they occur. No sure if playing a guessing game as to what FIIs will buy or sell next will add any alpha to your portfolio. Its just nice to know what they have been up to…

Categories Investing Insight, Your Money