please elaborate on the sell decision in the quant method.
Firstly, if you have followed / read the thread from the beginning you will realise that there is no “the quant method”. Quant is a way of defining your factors for investment in a numerical manner.
So, just as you have hundreds of ways of defining your numerical system to get in (buy), you will have an equal number of ways of getting out (selling).
For example, if you are using a quant method to buy high dividend yield stocks, your sell decision may be dependent on either one stock or the entire portfolio goes below your defined dividend yield threshold. Another common method for selling is time-based. You decide as a strategy to hold the stocks for a certain period (say 1 year) and then reshuffle after that period.
I have a philosophical viewpoint. Prima facie, biases and emotions are an endless loop- somewhat like 10 heads of Ravana, making thoughts go haywire Emotions play a big part in ruining investment returns. Quant system eliminates emotions and human biases. Thats the first major- major benefit.
Obviously the logic behind quant strategy, back testing , quant factors etc do have their share of importance in boosting returns for which expert advisors like you are the best guide.
Let me know what’s your thought on this.
You are spot on. Behavioral challenges are the most difficult to overcome as an investor, no matter how experienced. But having a rules based system helps in bypassing most (not all) of your biases.
The reason I say most is because some of your deep seated biases will most likely deep through into your system design … For example, because of my long term investment mindset, I can’t seem to work on very short term strategies.
I know so many experienced investors make a mess of market timing that it amazes me as to why more people don’t use a simple rules based system where they will be right more times than wrong and over a lifetime of making investment decisions that’s a fantastic edge to have.
@basumallick I keep reading this thread for some time and it is really knowledgeable, thanks for sharing great wisdom.
Rule-based investment - Should an Investor follow the basic guideline which should act as a boundary. For me, if I say I will invest in only Nifty 500 Stocks that is a guideline but if we go overboard and start building rules for all along system become very rigid with no risk-taking edge. Minimize the universe of choice for a decision so you concentrate on your precious bring a time for finding good decision in your accepted universe.
A programable system helps to automate strategy one want to apply - program too can have logical bise based on the creator but we could minimize the flickering mind relate to change of decision and you don’t need to keep hooked up in the system all the time to watch and make call buy and sell.
If I understand correctly there is no shortcut for the old school approach of deep research for stocks or strategy before one could apply it in the real system. Appreciate your input if I missing something.
Please go through the Quant thread for a better understanding of what a quant system comprises of. It is not just about universe selection. Universe selection is just one step. All steps of investing / trading can be quantified and systemised. The fundamental research of non-quantifiable nature like management quality and business quality are substituted by using some numerical proxy.
This is a complete misunderstanding. The paradigm of a quant system is that it actually can replace fundamental research completely. Whether as an investor one can follow such a system is up to to an individual, but if you have a well tested robust quant system, then fundamental research is superfluous.
Hello Abhishek sir, I am not sure whether we can use this place to ask questions but I will try my luck.
I was looking for resources on understanding the importance of independent thinking in investing. If you have come across some good material then please recommend.
I have started to notice that recently I have been getting bias towards ideas which people I respect own. Discussing ideas can be helpful and it helps in idea generation but when would one become aware that they have started to become bias?
I know being free of biases is not possible for a human but looking for suggestions to reduce to till a certain extend.
I guess, I can reply as I feel I can share a thing or two that pertain to your questions.
Independent thinking is not an uncommon practice for us, we all have our tastes, which some times are so unique. So it is not hard for us to cultivate our own thinking even in investing, particularly when there are abundant investment avenues available to explore.
Regarding biases, there is knowledge and then there is truth, different things.
Seeking knowledge is a lifelong endeavor. We keep on learning new things. One is good at FA, one could start learning TA. Understood what happened in the company, in the last FY from the AR, there are other ARs to look into.
Truth is not an endeavor, it is a state of mind. One that can be attained in one moment, or one that takes a great deal of practice, a lifetime for some, yet not attained, because of denial. Unless we are truthful to ourselves, we cannot get rid of biases. To get inspired, to gain vicarious experience is necessary but we should get rid of biases.
To give a live example, I got a trading idea from VP yesterday and I checked some charts, understood a thing or two, bought a few shares today morning, wanted to take a position but didn’t because I couldn’t, I did not have the conviction. I thought of preparing a note, did not do it, so couldn’t take the bet. Had I prepared such a note, had I made such an effort to make the idea my own, I would have happily taken the bet, I would have thanked the person who I took the idea from. Would I feel sad if this becomes a 25% profitable trade in a month, no. Am I at peace for letting it go because I did not feel convinced, yes I am. That is the beauty of truth, no dilution, just purity.
These behavioral, character traits, also play a role in not just an investor’s journey but they score high with managements too. Why does the street believe some management? Why does it give premium to some businesses, apart from the business related reasons, there is this aspect of untainted image that one has built over the course of decades. I know some may say, not everything is not black or white, but until proven otherwise, I would say yes there could be such thing as integrity in Indian companies, which demands a premium.
Becoming free of biases is entirely possible, for some it takes years of practice, for some it could be attained by a revelation. I am surprised when members who understand a business so well, say they are biased because they are invested. One could be hopeful, one could be optimistic, or one could even be certain, but one cannot be biased. Like Keynes said - when facts change I change my mind.
I cannot name any material or book, but from what little I know, I can say that there are instances in history where one particular incident, one particular moment changed a man’s life and made him the person as we know him today. Such men have attained a state of being which made them choose a path and not discard that path in rain or shine. Buddha, Ashoka, Gandhi come to mind right way. One cannot wish and wait for such an incident, such a revelation, such a life changing incident to happen in his life but one could definitely start at any point and practice till he reaches his desired state.
Sometimes people are focused on learning new things, that they forget they already know so much but are failing to just implement, practice. Like Munger said - take a small thing and be serious about it.
Knowledge is unlimited, one cannot possibly learn everything because human life in every sense and meaning is limited, but truth is like a feather, one that could be blown away without lifting a finger, but until one gets rid of the denial, unless one accepts, admits, that feather remains as a huge mountain, bothering, pulling back, becoming a headwind.
Hope I did not digress or pollute the thread.
Independent thinking has to be practised over time. It cannot be learnt from a book. Just like you cant learn swimming by reading a book. You need to actually get into the water and do it.
Books, and videos etc, help in creating a meta-framework - how to think about thinking. Any good behavioral psychology book would be helpful in this regard. The absolute BEST place to start is to read Charlie Munger’s Psychology of Human Misjudgement.
More importantly, now that you have realised your bias(es), just go ahead and do what you think is right. No amount of intellectualising will help. It seems you have, what is known as “authority bias”, which is you are getting influenced by people who you think are experts or authority figures.
The best way I have tackled my biases is to maintain a checklist for myself. If I am putting in serious capital in any stock, I go through that checklist. You could try it. Simple points like reading the entire VP thread on the company, waiting for 1 week from getting the idea to actually buying it, reading at least the last 3 yrs annual reports or last 3 concall transcripts etc can help you build conviction.
Also, force yourself to write a note on
i) what the company is about
ii) why you are investing in it and
iii) why you think it will do well.
The note need not be very long or elaborate. Even 2-3 lines answering each of the three questions is fine. But you must do it. The reason writing a note is important is you will probably feel really stupid writing down “X has bought it or suggested buying it” under reason for buying!!
I feel its the bull market which started to affect the process I follow combined with authority bias. A stock idea would generate and by the time I would finish the research the stock would be up by a lot.
I think stricter application of the process is required and just having a small note before starting a position makes a lot of sense because if I do that it will clearly show my authority bias.
I have saved this reply for future reference. Thank you for sharing your thoughts.
Thoughts on Sensex @ 60K
With the Sensex crossing 60,000 and Nifty within a handshaking distance of 18,000, there are a lot of questions on the valuations, or rather the overvaluation in the market.
Roughly 25%, 991 out of 4008 stocks, are still below their 200 day moving average. Although that does not mean much in terms of valuation, it does indicate that we are not in a completely gung-ho bull market.
Valuation is dependent on many factors but primarily on the intrinsic value and the transactional value of a stock. The transactional value tries to incorporate external factors such as market optimism/pessimism, liquidity conditions, demand and supply gaps etc. As we have seen there is a deluge of global liquidity that has been unleashed by central banks across the world. Large parts of that money have been transferred directly to retail investors which have found their way into risk assets like cryptocurrencies, commodities and equities. In addition, a lot of fresh money has also come into markets with the arrival of Gen Z. The pandemic has forced people to stay at home and trading has been a key way people have engaged themselves.
Nifty 500, which is a broader market index, has a PE of 28 and PB of 4.3 along with a 1% dividend yield. This is at a time when the last 12 months of corporate earnings have probably been suppressed due to the pandemic. If you consider an average earnings growth of even 10% and inflation of another 6%, then the PE would shrink further going further.
The trick is not in trying to time the markets in an absolute sense. As an investor, you should be focused more on the businesses you hold and look at valuations, growth prospects and risks in them rather than fixate on index levels.
This was first published on Money9.
Came across this quant paper which may interest you. Some of it I got, rest not quite. But since you are a practitioner of Qant investing style, thought of sharing with you. If you find it useful do let me know.
Toolkit for investing
Michael Lewis is one of my favourite authors. And Moneyball, also made famous by a film starring Brad Pitt, is a classic in its own right. The story revolves around Billy Beane, an oddball character who is appointed as the coach of Oakland Athletics, a lowly placed baseball team. Beane has a very different notion from other coaches about how to value a player and instead of following the traditional wisdom of betting on those players who have a great technique or look good while playing, he focuses on data about players.
Beane started looking for specific skills and abilities in players to fit the purpose instead of paying top dollar for getting some of the top players in the league. The story goes on to document the triumph of the Oakland Athletics under Billy Beane.
The whole idea of narrating this story today is to highlight the simple fact that like in baseball, or any sport, using data instead of widely held beliefs amongst professionals, are better for decision-making and subsequent success. The story also narrates that, outsiders to the system, Beane and his teammate data statistician with zero knowledge of baseball, can actually bring in a fresh perspective that insiders lack because they are too used to do things a certain way.
Now map it to our investing world and you will realize that very few small investors in India actually use data or know how to use them. They still rely on tips from friends, and increasingly from random people on social media!! The main reason for that is years back data was hard to get and there was no systematic way of getting and using it. Today, things are changing. With the advent of social media, fintwit (in some parts), forums like ValuePickr help bring in scuttlebutt data from across the country to the small investor. Sites like screener, chartink, investing.com and others have democratized access to both fundamental data and technical charts. Trendlyne, Researchbytes and others are doing a great job in bringing concalls to all. So, very quickly, data access is being completely democratized for free or for a small fee. The edge that large institutions used to possess are diminishing. Now, with Covid, even AGMs are being held online, again greatly enhancing access.
So, here are my suggestions on how to go about the investing process:
- Understand the business and the industry you are planning to invest in. You should be able to explain to a layman in simple words what the business does to make money.
- Read the last 2-3 years annual report. Start with reading the management discussion and analysis section and the director’s report section.
- Go to screener and look at the last ten years financial results. Focus on a few things to start with: revenues, margins, profits, ROE, ROCE and debt-equity. See how these have changed over the years.
- Go to trendline’s channel on YouTube or Researchbytes and listen to the concalls for the last 2 quarters and maybe for 1 quarter a year back. If you like reading transcripts, tikr.com seems to have them. They are also available on the company websites also at times.
- Go to BSE or NSE site and look through all corporate announcements or investor presentations by the company.
- Have a written down investment policy as if you are running a large investment institutional setup like a mutual fund. Having clear rules for how many stocks you will buy in the portfolio, what will be the minimum and maximum starting allocation for a stock, what is the risk management policy you will follow, how you will prevent catastrophic loss, when you will sell etc are all things you should write down and follow. Once in a while, you should review your rules and update them based on your real-life experience.
If you follow a systematic, data-oriented, disciplined approach to investing, you can reap far better and longer-lasting rewards than someone who is buying and selling on Twitter tips.
This article first appeared in The Economic Times
Building Financial Resilience
Every bull market hides within it the seeds of a bear market. The market, as a whole, is mean reverting. So, a bulk of what goes up tends to come down, if not fully but to a large extent, wiping out all the temporary gains made in the process. And in between this going up and coming down investors make their reputation and fortunes.
By virtue of running an advisory, I get an opportunity to speak to a large cross section of investors. On Monday, I was speaking to one such person. He was extremely concerned about investing at “such all time high market levels”. He said that it had taken him many years to get to where he is today financially and he did not want to risk a large part of his networth should there be a large market crash. What was left unsaid was that he was also loath to let go of the opportunity in case the market kept going up. So, here is a classical dilemma.
This conversation got me thinking in multiple directions – the role of asset allocation, the need for a robust investment philosophy suited to oneself and of course where one is in one’s financial journey. All of this led to “financial resilience”.
Covid has taught us that resilience is crucial – whether in one’s physical or mental health or finances. So, how does one build financial resilience? As my guru Charlie Munger says, “Invert, always invert”. So, inverting the question and asking myself, how do we make our finances more fragile?
Here are some ways. None of this is rocket science. It’s mostly common sense but if you get it right it helps tremendously in building your financial resilience and will help you in facing a market downturn whenever it comes. These are as true for individuals as for families and also companies.
If you are working for some time and haven’t built up an emergency fund or some cash reserves that can cover expenses for a few months, then your financial life is fragile. The first thing to do is to build up some cash reserves for the rainy day.
Inadequate insurance cover
The biggest unplanned expense tends to be a medical emergency. You need to have adequate medical insurance for self and family to cover the costs. Having to pay for expensive medical treatment could derail, and at times completely ruin, your financial plans. The worst is if it happens during a time when you are otherwise financially weak.
100% of all bankruptcies happen due to inability to service a debt. Basically, if your income (P&L) does not support your debt (balance sheet), then you are in trouble.
If you are taking a loan to create an asset like a home, it is still understandable. But you should have sufficient cash savings and medical cover before you take a home loan.
Taking a loan for consumption should be a strictly no-no unless you have a reasonable amount of savings to cover for the loans. The problem is people who need loans for consumption are the ones who should not take it and those who can afford to take loans don’t because they already have the cash.
Similarly in a market crash, the stories you hear of people going bankrupt are those who are leveraged. You can at most lose a large part of your capital in stocks but in derivatives, if you don’t know what you are doing, you can get wiped out.
Single source of income
If you are dependent on a single source of income you are fragile. If your job or business is your sole source of income then you are financially fragile. Try to diversify your income stream. One reason I started investing was to be able to have another source of income over time. This is true for nearly all part-time investors who have a steady job or business. If you keep adding to your portfolio, over time it builds up into a nice source of income through dividends and interest payments
A lot of people have all, or large parts, of their networth in one single asset class or asset. Indians primarily have a house which dominates their networth. Others may have gold or fixed deposits or equities. At an extreme case, having investments in only one company like that of a promoter of a business, is also a cause of fragility. Adequate diversification into multiple asset classes, especially ones which are not correlated, and assets may reduce your returns sometimes, but has the definite benefit of enhancing resilience.
The challenge with personal finance is that it is personal. It cannot be generalized. You have to take a hard look at your financial situation and decide what you want. And then work out a plan to solve for it. What you want will also change over time as you age and life situation and priorities change. That is the way it is.
The important thing to remember is that you need to stay in the game for the long term. Resilience is key. Plan on every plan not going according to plan.
When in doubt, go back to first principles
Whenever you are in doubt of what to do with your investments, or scared of the market fall, or fearful of the market topping out, just ask yourself these two questions.
- What is my investment objective?
- What is my investment time horizon?
I have found that if you keep asking yourself these questions during moments of doubt, there is a lot of clarity that emerges. Last few days, the markets have seen some correction and the narrative amongst people has changed.
The last few days the rocket emojis and the “I-told-you-so” tweets & WhatsApp messages have gone missing and a large number of vocal participants, are observing a deathly silence. All this is because the fear of money is real. Prospect theory or loss-aversion theory is at play here. It is far more painful to lose money than to gain an equal sum.
So, when you have a fall in the prices of shares you hold, there is a real fear. The fear of losing the gains. Or the fear of losing your capital. That is when the answers to the two questions help you get centered back to what you really want. If you are investing because you want to build up a retirement nest egg or if your time horizon is 10 years or more then reacting to every 10% rise and fall is meaningless.
For example, here are my answers to those questions.
My investment objective is to generate an absolute positive return without losing capital permanently. The additional goal is to generate 10x in 10 years by compounding at a rate of 26%. Now that may seem low with respect to how the market has turned out in the last year, but I know if I am able to do this consistently over a 10-year cycle, I will be okay.
I don’t need the money in the near foreseeable future, so the main objective is to be able to compound the capital for as long as possible at as high a rate as possible without taking the risk of permanent capital erosion. So, it is safe to say, that my time horizon is 20+ years.
Every time I clarify to myself these answers, the short-term urge to do “activity” reduces. It pushes me to look for stock ideas or investment strategies that align with my objective and time frame. This is also why I don’t do very short-term trading or use quant systems to do so. Because it gels with neither my objective nor my time horizon.
THE IPO FRENZY
The IPO market in India is sizzling. Some notable IPOs that are open now or was issued in the recent past. But what has caught the imagination of the investors are the new-age tech startups. The notable ones are as follows:
- One 97 Communications (Paytm)
- PB Fintech (Policybazar)
- Fino Payments Bank
- FSN Ecommerce (Nykaa)
Let me state it upfront. I believe that the Indian new-age IPO market is in a bubble. A big one at that. And promoters are rushing head over heels to bring their loss-making enterprises to market to secure their own futures. No one is questioning how much of the IPO is an OFS (offer for sale) where the existing promoters and investors are dumping their own holdings onto public shareholders.
But are they to blame? Why are investors ready to pay 30-80 times sales for companies which are not profitable, neither have a path to profitability or where competition is so stiff that whatever meagre profits are being earned can disappear in an instant from external competition or regulation?
The answer to that probably lies in the fabulous run of big tech (FAANG etc) in the US. Indians have seen the phenomenal performance of Amazon, Facebook, Google etc and feel that this time they can make money from such new-age tech stocks. After all, wasn’t Amazon loss-making for a very very long time?
There are two fundamental problems with the Amazon example. And nearly always, Amazon is the example
- Amazon wasn’t doing very well on their retail front but AWS, which was something no one knew would come along, came in and started spewing cash with a vengeance. That cash is what helped the stock reach the commanding heights it has done today.
- Amazon is and always was a dominant global player which could use its scale to reduce its cost. It built its business on being a low-cost, consumer-friendly operation that passed on a large part of its scale-gains back to the customer thereby creating a virtuous cycle. People got low prices because of Amazon’s scale and more people bought more goods on the platform which in turn increased its scale. But even this is not enough, because a lot of other players did the same in the offline world – like Costco, Walmart etc. Walmart tried replicating the same in the online world as well but wasn’t very successful.
Look at the Big Tech stocks – can you think of normal lives without Google (search, youtube, Gmail, maps, translate)? Is any of India’s tech companies as dominant in its space as Facebook or WhatsApp? Or have fierce loyalty as Apple? Do we have a Netflix equivalent or a Tesla? Nearly all the US Big Tech have global dominance.
When you dissect each business that is IPOing in India today, you realize that none of these businesses is new. They have been in business for a number of years and are still struggling. Their claim-to-fame is the media PR, which is probably paid for by the companies themselves, and mainly deals with how much money one has raised from its investors. Can you live if Paytm is down for a day? Of course, you can. Most probably you won’t even miss it. Can Zomato be profitable if labour regulations harden or if (and when) restaurants start their own ordering app?
And in the typical incentive-caused bias of media and sell-side analysts come in. Nobody wants to put their neck out and say that these IPOs are priced ludicrously. Investors are happy if they get an allotment and get an initial pop. No one is looking to buy and hold these businesses for the next 10 years. In fact, for a lot of promoters, bringing their company to market is the end-game and not really a step along the long and arduous journey of building an institution.
I am not someone who obsesses over valuations. I think good things are always expensive. But paying a scaringly high price for buying something where the promoters are willingly selling and which have a questionable business model with a very hard-to-fathom path to long term profitability scares the hell out of me.
Since I come from a middle-class background and believe that capital is sacred and irreplaceable, I am very sceptical about the entire IPO scenario in India today. The bubble is there, it is acknowledged in hushed tones but no one wants to leave the party. For the simple reason that no one knows if the party s nearing its end or just beginning. I am not applying for any of these overpriced and overhyped IPOs as of now. I am ready to forego of listing gains and looking foolish (in reality, can’t actually be sure if I am foolish or not!!).
But let this be my caution to you. Participate in this frenzy only if you know what you are doing.
This article appeared on The Economic Times
INFLATION AND INVESTING
I am writing this the morning after the budget. The budget has slowly become a non-event, which is exactly what it should be. It is only the financial media which, more driven by TRP – a form of incentive caused bias, keeps it at the center of events. In essence, the budget has two components. The first is a presentation of finances for the ongoing financial year. The next is a plan of allocation of financial resources for the next year. That’s it. The plan for the next year is an intent. It is not cast in stone. And the plan also is updated based on updated situations during the year. At most the budget can give a feeler in terms of the intent of the government for the following year.
Even without the pronouncement during the budget, most of those who follow the financial sector, knew that the focus is on infrastructure building which in turn leads to what economists’ term as “crowding-in effect”. That is when government spending is followed by private spending due to a rise in overall economic growth. Overall, this leads to a rise in jobs, wages and hopefully, more prosperity all around.
The other areas of government expenditure are social spending under various names and heads and a push for “Atmanirbhar Bharat”.
Perhaps the biggest threat to global equities today is inflation. Some economists say it is because of temporary supply side constraints whereas others believe it to be more structural in nature and occurring due to the massive injection of ‘helicopter money’ by central banks post the pandemic.
I am not an economist. So, my thoughts are more theories based on my observations.
When I look at production of any commodity, I don’t see any dip in supply.
I cannot find any industry where supply is way below what was there before the pandemic began. Even the most well-known case of semiconductor shortage, the aggregate production has not really gone down. It is just that the demand has increased sharply and also some companies like Intel are also now outsourcing their fab work to TSMC and their likes till their own expansion is in place. (ref: https://www.gizmochina.com/2021/09/22/intel-explains-why-it-is-outsourcing-chip-manufacturing-to-tsmc/)
The second fact that can be seen is the “Great Resignation” in the US. Literally millions of people, more low wage workers than their higher paid counterparts, are leaving the job market. There are many reasons being cited. From being overworked and underpaid to location constraints.
THE AGE OF DEGLOBALISATION
The last thirty odd years had seen a major shift in production of goods and services. For various reasons which are now well known, both manufacturing and services shifted to Asia (China, India, Vietnam, South Korea, Thailand, Philippines, Malaysia etc). This was presented as a win-win as it helped customers in developed countries tide over labour shortages and get their products cheaper than producing it at home. The global supply chain started working in a completely optimized and efficient manner.
Additionally, the Asian countries have also developed in this period and the cost of production has started growing there are well. Wage rise and reduced working hours in China is a classic example. Stricter adherence to environmental norms is another such example.
Another phenomenon that started taking shape parallelly was the rise of inequality across the world. People with higher education earned more and over three decades the gap that has been created has become substantial. This has many repercussions. We have started seeing social unrest across the globe. Countries and political parties have started becoming more hardline to protect domestic jobs and a lot of countries have started incentivizing domestic production. Free movement of labour across borders are also now being met with lot of skepticism and protectionism.
DEGLOBALISATION AND INFLATION
The net result of all these is that the manufacturing and services is likely to shift away from its lowest cost production centers globally in the next two-three decades. China+1 is just one such example. Similarly, we have seen Indian IT companies hiring significantly more in US and other “nearshores”.
INVESTING IN AN INFLATIONARY WORLD
We should witness a persistent inflation that is higher than what we are accustomed to in the past.
Governments straddled with mountains of debt would want to run a few years of high inflation and negative real rates.
The best part of all this is that companies that adopt technology which tends to have a disinflationary characteristic, are able to pass on cost increases to its customers (preferably global), are likely to benefit the most in the future.
This post first appeared in The Economic Times
Just a random post that may help some.
Sometimes we wonder if there is a way to follow a person on ValuePickr.
There is no easy or direct way of doing it. There is a workaround though…
For example, if I want to follow Hitesh Patel, I will have to go to his profile page: Profile - hitesh2710 - ValuePickr Forum
Then copy this URL and add it in some RSS reader. I use Feedly.
It will show up something like this in Feedly:
How does one get to profile page of any valuepickr user? Please guide
I hope you are not joking.
You click the username of a member and you are taken to the profile page.
Here is yours - Profile - seshukumar - ValuePickr Forum