A simplistic approach to self managing your portfolios

(trading or investing)

Alok Jain

I probably don’t have anything new to share but my experiences may help you with some perspective in

your own journeys

Early Years

Straight out of college - with the help of some co-investors started off a NSE membership in 1996.

I did my own trading and investing alongside and also observed thousands of clients over 2 decades

- Very poor success rates among most traders- Investors success rates were also low- Luck seemed to be a large factor for winning investing clients. – Traders with simple strategies handled stress situations better – Disciplined investors had very high conviction

Complexity in Fundamental Investing …

Macro– interest rate cycle /inflation/oil/USDINR/Govt. policyUniverse for stock selection-S/M/LSector analysis – vast data Company valuation- various methodsManagement quality – Ever changing!Time frame – How long to holdLiquidity flows – EM/MSCI Entry/Exit decisions – based on whatPortfolio construction – Conc vs divers.Known risks / Unknown risks

TOO COMPLICATED 4 me!!

Complexity in Fundamental Investing …

Macro– interest rate cycle /inflation/oil/USDINR/Govt. policyUniverse for stock selection-S/M/LSector analysis – vast data Company valuation- various methodsManagement quality – Ever changing!Time frame – How long to holdLiquidity flows – EM/MSCI Entry/Exit decisions – based on whatPortfolio construction – Conc vs divers.Known risks / Unknown risks

TOO COMPLICATED 4 me!!

LearningSuccess was largely dependant on your ability to handle the complex multi-variable environment and stay disciplined about it

Complexity in the trading orientation

Watching many markets simultaneously – Anxiety!Global markets / Dow-HangSeng-SGX – insomnia!Universe for stock selection - ConfusionWhich Time frame to trade Money management/position sizingTransaction/impact costs -highScalability of strategy -limitedEntry /Exit decisions - TBDTrading edge – will it sustain -?Known risks / Unknown risks

Complexity in the trading orientation

Watching many markets simultaneously – Anxiety!Global markets / Dow-HangSeng-SGX – insomnia!Universe for stock selection - ConfusionWhich Time frame to trade Money management/position sizingTransaction/impact costs -highScalability of strategy -limitedEntry /Exit decisions - TBDTrading edge – will it sustain -?Known risks / Unknown risks

LearningSuccess was highly dependant on clearly defined risk managed strategy and execution discipline

It was clear to me that most strategies out there will work well. Strategy by itself was over-rated. Maybe only ~20% of the game

Discipline and behavior were highly under-rated. Maybe ~80% of the game

Behaviour at stress points seemed to be the key differentiator between consistently successful accounts and failures

So the trick was to find more about myself and see what style would suit me the best

Across all investing and trading styles : the common successful mantra was – Simplicity & Discipline

- To seek a non emotional and systematic way of investing, to have sort of a checklist.. (Non discretionary methods)

– Use the best practices of a combined approach with lessons learned from investing and trading

- Find an edge in the market and repeat the process infinitely

- Keep position sizing / risk managementas the centre piece of the design – Capital preservation

- Ensure that back-tests on historical datacan support my intuitive idea of the EDGE

- The last but most important decision was what should be the strategy – should it be fundamentally driven or price based or both.

Plan of action (for me)

Fundamental based strategy

Forecast performance of the asset, management & sector based on my own assumptions (Individual Psychology)

Value finds are dependant on price action to profit from

No WYSIWYG - Keeps you guessing inBull and Bear Markets (some lag)

When liquidity flows reverse –fundamentals take a back seat

“I know more than the market /I can lead the market “!

Price-action based strategy

Following the price-action which itself isbased on market participants’ behaviour(Mass Psychology)

Price moves are not dependant on value to profit from

Full WYSIWYG - Price action and strategy plan is crystal clear (no lag)

Price action is inherently decided by liquidity flows - Momentum

“Bhav Bhagwan Che’ –Price is God --I will follow the market “!

The crucial decision between…

Fundamental based strategy

Forecast performance of the asset, management & sector based on my own assumptions (Individual Psychology)

Value finds are dependant on price action to profit from

No WYSIWYG - Keeps you guessing inBull and Bear Markets (some lag)

When liquidity flows reverse –fundamentals take a back seat

“I know more than the market /I can lead the market “!

Price-action based strategy

Following the price-action which itself isbased on market participants’ behaviour(Mass Psychology)

Price moves are not dependant on value to profit from

Full WYSIWYG - Price action and strategy plan is crystal clear (no lag)

Price action is inherently decided by liquidity flows - Momentum

“Bhav Bhagwan Che’ –Price is God --I will follow the market “!

The crucial decision between…

The decision was a clear 5-0 for me in favor of Price based strategy !!

So I have been following what is called the momentum investing

style

-Buy High / Sell Higher- Sit in cash when no opportunity

-Chase Trends- Ride Winners / Ditch Losers early

Simply speaking my strategy is just this!

BUY what is going UP

SELL what is going DOWN

Lets looks at 2 examples of very simple strategies.

1. Relative Momentum Strategy

2. Absolute Momentum Strategy

Example 1– Relative Momentum

A equal weighted portfolio comprised of 20 stocks which is made up of the highest Rate of change in the last 12 months from say the CNX200 universe re-balanced monthly.

The 20 stocks that were originally in the portfolio stay if they continue to be in the top say 40 ranks else they are replaced by new top ranks

That is it. These are ALL the rules !

200 stocksJan 2018

Rank stocks

Top 20 ROC(12)

Feb 2018

Rank Stocks

Drop original picks if not in

top 40

Feb 2018

Rank Stocks

Select new stocks to fill slots

REPEATEVERYMONTH

Stock selection is relative to the others in the group

Results

Study over 5 years Sept 2013 to Aug 2018

Capital up 3.9X

CAGR 31.38%

Max DD 22.5%

137 trades / Average hold 5 months.

Wins 62% of trades

Avg Win 47% / Avg loss 12%

Results

Biggest Winners

EICHERMOT 390%SRF 260%TVSMOTOR 217%NBCC 210%MOTHERSUN 196%

Biggest Losers

PCJ -61%SUZLON -39%ABIRLAF -35%SPARC -30%TV18 -30%

An equal weighted portfolio of 20 stocks

Buy Rule : When price exceeds 200 DMA

Sell Rule : Price goes below 200 DMA

Whiplash filter 5%

liquidity filter > INR1Cr turnover only

If no opportunity money sits in interest bearing instrumentsExpenses built in. Rebalance Daily. Taxes not included

Example 2– Absolute Momentum

Results

Study of 200 DMA absolute momentum strategy over 2003-2018 period

Capital up 40X

CAGR 25.5%

Max DD 57%

461 trades / average hold 11 momths

Wins 31% of trades !!

Avg win 117% / Avg loser -13.5%

Results

GAINERS

KAVERISEEDS 987%MARKSANS 940%BHARTI 913%HCC 840%ABB 666%

LOSERS SEL 43%ZYLOG 38%GPPETRO 37%CENTURYEXTRU 34%ALPSINDS 33%

Assumptions in the examples

Survivorship Bias free results may be slightly different (not a whole lot though)

Dividends not included

Transaction costs assumed that of discount brokerage /includes all statutory costs

No slippages assumed

Taxes or advisory fees not included

Simplicity&

Discipline

When combined, can be explosive

Simple may not be easy&

Discipline certainly is not easy

So in general our minds tend to steer away from both of them

Simple may not be easy&

Discipline certainly is not easy

So in general our minds tend to steer away from both of them

Complex stories sell easily&

Being hopeful is also easy

For instance : when our stock is moving down our hope in the complex story keeps us wedded or the common narrative “everything will be alright in 3 to

5 years” keeps playing in the mind

One of the KEY factors both in successful and failed investing is the EXIT factor.

If you can master the EXIT, then any ENTRY is not really a problem.

Exiting either very early in profit or very late in loss is the biggest cause of underperformance

The (non) complexity of the exit decision and the discipline to execute it separates the

winning investors

A simple strategy is one that

Removes ambiguityGives you a sound sleep Has low Pain:Gain ratio

Has high Returns to Time spent ratio

Even if it comes at the cost of lower performance!

Lets observe some random charts

Look for how you would have played them in hindsight if you had a choice

What did we observe

There are strong trends in the markets and capturing even some parts of the trends can give us good profits

A long only portfolio makes money in up-trends hence capital sitting in losing stocks is wasting opportunity

The downtrends are very painful and stressful and ARE AVOIDABLE

Capital gets destroyed if uptrend doesn’t come back hence need to get out of losers fast

Can we achieve the following with simple rules

1. Always have mostly winners in your portfolio2. Never have losers for too long in the portfolio3. No worry on allocation within the pf4. No worry on how long the profit will run5. Clearly defined exit policies and exit points6. Just few minutes of work per week7. Total peace of mind and Good Sleep

Answer is YES to all of the above!

Can we achieve the following with simple rules

1. Always have mostly winners in your portfolio2. Never have losers for too long in the portfolio3. No worry on allocation within the pf4. No worry on how long the profit will run5. Clearly defined exit policies and exit points6. Just few minutes of work per week7. Total peace of mind and Good Sleep

Answer is YES to all of the above!

And let the star fund managers enjoy the limelight with slightly superior performance.

In the last 3.5 years this is what we have been able to achieve using similar simple strategies

Summing up

Key parameters for developing strategy framework

Funda vs Technical vs combined

Discretionary v/s Non Discretionary

Instruments /Mkts /Time frame

Asset allocation (Key)

4 Key Questions

What to Buy ?When to Buy ?

How much to Buy ?When to Sell ?

There should be answer to all of these at all times

I Thank you for this opportunity and your patienceto listen to me!

If you have any questions, I will attempt to answer

I am always available at alok@weekendinvesting.comif you would like to reach me