@gautham1 Betting against momentum is a poor strategy. Stock will keep falling and you will find the reason later. Value trap is another problem. Its always better to go with the trend.
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@gautham1 - Instead of thinking like a normal investor, lets us deconstruct what you have said in a systematic way and try to understand how quant systems work.
It is definitely possible. What needs to be checked in this case is if you are buying say 5 such stocks, would all of them start falling the day you buy? If no, then the next thing is what is the exit strategy for those stocks 5 stocks you bought?
So, learning #1 - you need to have a defined exit strategy.
The second thing we have to think about is what is the historical win-loss ratio for such a system. This needs to be validated based on data and NOT gut-feeling. Gut-feeling while creating trading/investment strategies has no value. Everything needs to be data-driven.
Here, we need to define, what is a âdecent companyâ? Unless we are able to define that properly, it is just a loose term. What is decent to one may be third-class to someone else. So, in a quant world, this statement has no meaning.
What is âearnings visibilityâ? Again, this is not defined. So, meaningless. But for learning purposes lets assume we define earnings visibility by parameters like capex or capital work-in-progress etc parameters, then we need to define a data range for acceptability. And then we need to run the model with the selected parameter and data range and check if it is making sense and what is the return profile, drawdown levels, won-loss ratio, median holding period etc.
Again, if you have followed the train of thought till now, you would by now realize that this is NOT your observation but your assumption that you have stated. And assumptions are just that, assumptions. Unless they are tested or stand the test of time in a systematic manner it has no validity.
With this example, I hope I am able to communicate the basic difference in thought pattern between a quant strategy and a normal buy-and-hold investment process. I am NOT passing a judgement of one over the other since I practice both, but it is essential to realize and understand the difference to proceed.
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I have seen a close friend from Gujarat do quite well with the approach mentioned by you by buying decent and often cyclical companies at 52 week lows or historical lows. And going by his gains over the years its a very profitable approach which he practises.
For this to happen, one has to have a mindset to invest in such a manner. The obvious traits are to have very high conviction levels in the company we own. This comes after doing big digging and I mean really deep and big digging. The other trait is to be stoic and not be swayed by short term gyrations by the stock price. There is often a lot of volatility within a stipulated range and price keeps bouncing back and forth and one has to be able to sit through these swings.
Most usual observation in markets has been that stocks that go up keep going up and those that go down keep going down.
e.g Yes bank. Again I refer to this thread as it is a great learning experience for any one aspiring to be a good investor. Just look at the kind of reactions of both pro and against group in the yes bank thread and see how often the narrative changes with price. What was once considered a decent company with a âvisionaryâ management turned out to be a can of worms. And all this while price erosion was telling the story for any one willing to listen.
Personally I have practised both approaches and found the approach I mentioned earlier easier to implement, may be because of the mindset i have.
Again would re iterate the advise to read especially the William O Neill book. Specially because he has a great track record to boast of and therefore knows what he is writing.
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âIf you you really want to improve the quality of decision-making, use algorithms.â
~Daniel Kahnemann
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Dear Abhishek dada,
Thanks for the shining light in this direction and I am very keen to try it out out for myself. I have built a screening and rating logic so universe and stock selection are taken care of. However the most crucial part is your back test this strategy and despite several attempts I am unable to obtain the right historical data.
Where can one find reliable historical:
- stock price series data (eg data from Yahoo Finance has many blanks for some stocks I tried)
- 10-12 years quarterly P&L, Cash Flow and Balance sheet data for the universe companies (eg. MCap>300cr)
I am willing to pay for data as long as it is reasonable cost wise and reliable quality wise. Any suggestions will be greatly appreciated!
Thanks 
Hi @gautham1
The father of the efficient market thesis - Eugene fama - a very accomplished academic has described momentum as an anomaly. Buying 52w lows in my view and as you pointed out is also rewarding provided one can identify the reason for the low and get an understanding for the near term trigger. In the small mid cap universe often one does not understand why the stock is hitting lows. But if one can separate the fact from the fiction I think one can benefit. A classic example is Avanti - which did precisely that and investors who had done their homework benefited from investing in the low. However, temperamentally itâs very difficult and stressful to buy a low in my view as most of us canât get a handle on the triggers. As Abhishek mentioned as long as one has a disciplined approach regarding stop loss one should be ok.
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Can you elaborate your point on this? I did not get what you meant.
Note: I have actually read the Eugene Fama follow-on paper on EMH and where he talks about momentum etc.
I remember reading that momentum was discovered in the same year by jagdeesh, Titman and cliff asness. Asness was a PhD student under Eugene Fama and when he went to him with his results it was Fama himself who directed him to publish it as the data was quite robust
Eugene fama and Ken French are popular for their 3 factors which explain 96% of the the variation in returns of a diversified portfolio i.e market cap, valuation (as measured by price to book) and market risk.
Eugene Fama however has on many occasions acknowledged that momentum is one anomaly that prima facie seems to work but has no explanation as to why it works. Still some of his PhD students - most notably Wesley gray who wrote a good book on it - have under his guidance published work on momentum with all kinds of data in support prompting Fama himself to say that momentum is the biggest embarassment to his theory of EMH.
In fact, the Nobel was shared with him and Hansen ( both EMH proponents) + Shiller ( a critic of EMH)!
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Shared some thoughts today on ET Now.
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@bheema You are right. EMH has actually been found wanting in a lot of factors. Momentum is one of them. In fact, data suggests that all the factors like deep value, growth etc have all outperformed during large time frames.
The 52 week low strategy that @gautham1 has suggested can also be made into a quant system. What would most likely be needed is a much longer reset period for the mean reversion to happen. So, maybe a 6-month or a 12-month reset period could actually work.
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Jim Simonsâ firm entered both short and long positions
In the book, apparently their success ratio was less than 50.6 %. The 0.6pc advantage they leveraged towards a huge gain
We are probably just at the beginning of coming out of bear market and any strategy I think should be immensely rewarding. There is a saying âWhen the tide rises all ships riseâ
However 90pc xirr is exceptionally good
Ps: someone mentioned excel as a good tool. I have worked extensively on excel, I think unless you use macros and use excel only to show results, excel will be very frustrating experience. Iâd say r is very fast for these things or python. Both have a lot of books to start someone on data analysis.
There are r scripts that can run on data and look for cup and handle pattern on the data without you having to open a chart.
For instance for cup and handle what you want is a drop in price for a certain period, maintaining that low price band and rise.
Any systems trading will not be on auto pilot. Jim had roughly 300 brainacs working on it some putting very long hours
If market is the ultimate test than as someone said earlier how you prepare to beat it is down to your individual strengths but there is no easy money.
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UPDATE:
November 2019: 17.85% ( To be closed on 1-Feb-20)
December 2019: 16.64% (In Progress. Sell Date 2-Mar-20)
January 2020: 16.33% (In Progress. Sell Date 1-Apr-20)
XIRR (till date - for 5 months since inception): 167.1%
The strategy continues to perform well and has been able to pick. Currently, with 10 new stocks for buying on 1-Feb the total number of unique stocks is 22. That is, 8 stocks are repeated from last 2 months. The market has been particularly strong in this last 1 month which has helped in the good performance of the portfolio.
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Hi @basumallick What is the logic behind selling after specific interval? If the price of that stock is in Bullish trend then you gain higher profit, why to sell and minimize your profit?
@nityanandparab pls see above where I have explained the strategy. If a stock continues to do well, it will come again in the next monthâs top 10 stocks. That is why there are only 22 stocks in 3 months instead of 30. 8 have been repeated.
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Wrote about my thoughts on frameworks and rigidity in following them. Putting a link to it here so that I can expound on them later, if I get around to it.
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Just to add to my thoughts to the above:
What is a good business? What is a quality business?
Lawrence Cunningham in his book Quality investing defines quality businesses as those which can generate high levels of free cash flow, return higher than cost of capital, is sustainable and can grow its earnings consistently over long periods of time.
In another excellent book, competition demystified, Bruce Greenwald talks about entry barriers. This actually roughly ties in with the sustainability of earnings point.
Michael Mauboussin writes this about good quality businesses:
A high-quality business is one that is profitable, typically as a result of high margins, has relatively low debt, a very capable management team, and a business that is unlikely to change abruptly in the near term. So essentially it is a business with a high return on invested capital and stable prospects.
And this about good management:
All roads in managerial evaluation lead to capital allocation. A high-quality management team is one that knows how to take resources, including capital and people, and put them to their best and highest use. Quality executives are ethical, open-minded, thoughtful, judicious risk-takers, transparent, and long-term oriented.
The challenge is all this is very difficult to figure out in real-time. Most of the time, tailwind or headwind in the business makes a management look far better or worse than they actually are. We, most of the times, have to go with our gut-instinct about the management based on a few interactions or how they speak etc.
Example - When Pidilite management is able to brand a commodity business they are termed after many years of success as visonary. Asian Paints was able to do the same. When Astral was doing it the same thing was being said. Now I hear the same thing for APL Apollo. But no one talks about all those other players who also tried creating brands and failed miserably (not for the want of trying). Nerolac, ICI, Dendrite etc. They remained marginal players in the same industry. Even DHFL used Shah Rukh Khan as their brand ambassador. A world of good it did for them!!
Next question is then how to distinguish between a good and a great business? Or conversely, between a good and mediocre business.
One thing I have firmly seen is a consistently good return on capital (whichever way we measure it - RoE, ROCE or ROIC etc) for a good business. But a good ROCE does not automatically mean that the business or its earnings are sustainable for long periods of time. Or that the business cannot be disrupted materially by external or internal conditions over a short period of time.
Back to Mauboussin. On source of competitive advantage.
The closest thing Iâve seen to an empirical study of this question is the work by Michael Raynor and Mumtaz Ahmed, consultants at Deloitte, that was discussed in their book, The Three Rules . They analyzed thousands of companies going back to the 1960s and suggested that superior performance, results that are above and beyond what luck allows, is the result of companies following two rules. The first rule is âbetter before cheaper.â In other words, do not compete on price. The second rule is ârevenue before cost.â Successful companies focus on increasing sales rather than cutting costs. The title suggests a third rule, which, irritatingly, is that there are no other rules.
Those rules seem closer to a differentiation strategy than a cost leadership strategy.
So, question to ponder is this â is there genuinely a way/model/framework possible that is going to help drill down business quality into its components? Or is it just a chimera we are running after?
I will end this with the following study done by McKinsey on the 50 companies appearing in the 3 seminal books - Good to great, Built to last and In pursuit of excellence.
Performance of the âexcellent,â âlastingâ and âgreatâ companies vs. the S&P
| "In Search of Excellence" | "Built to Last" | "Good to Great" | |
|---|---|---|---|
| (1982-2002) | (1994-2004) | (2001-2016) | |
| Stars (more than | Wal-Mart | Philip Morris | Phillip Morris |
| 5 percentage points | Intel | Marriott | Nucor |
| better than the market) | Merck | ||
| Johnson & Johnson | |||
| Outperformers (more than | Procter & Gamble | American Express | Kroger |
| 2 percentage points | Avon Products | Johnson & Johnson | Wells Fargo |
| better than the market) | Walt Disney | IBM | |
| DuPont | Wal-Mart | ||
| 3M | Nordstrom | ||
| 3M | |||
| Middle | Dow Chemical | Procter & Gamble | Gillette (a) |
| Bristol-Myers Squibb | Boeing | Kimberly-Clark | |
| Boeing | Walt Disney | Walgreens | |
| Amoco (a) | Merck | Abbott Labs | |
| Emerson Electric | Hewlett Packard | ||
| McDonaldâs | General Electric | ||
| Caterpillar | |||
| Texas Instruments | |||
| Underperformers (more | Maytag (s) | Ford | |
| than 2 percentage points | Hewlett-Packard | ||
| worse than the market | IBM | ||
| Delta Air Lines (s) | |||
| Failures (more than 5 pct. | Schlumberger | Citicorp | Pitney Bowes |
| pts. worse than the market) | Kodak (s) | Motorola | Fannie Mae |
| Raychem (a) | Sony | Circuit City (b) | |
| Key | Amdahl (a) | ||
| (a) Acquired during | Dana (s) | ||
| evaluation period | National Semiconductor (a) | ||
| (b) went bust during | DEC (a) | ||
| evaluation period | Data General (a) | ||
| (s) subsequently acquired | Kmart (b) | ||
| or went bust | Wang Labs (b) |
We came to some interesting, even surprising, conclusions.
Great companies were more likely to do really badly than really well.
Their odds of outperforming the stock market were 52-48, hardly better than a coin toss. But there are more big losers than big winners on the lists. Just eight companies outperformed the index by more than 5 percentage points, while twice that number underperformed by the same percentage.
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Seeing Ray, Reich and Midnightâs children in you list, I wish to suggest a work based in Bengal : The Wicked City by Sumanta Banerjee. The sub title of the book is misleading. It spans the vast cultural canvas over 300 years. In turn, Sumantaâs book reminds me of âLondon Triumphsâ.
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âThe investorâs chief problemâand his worst enemyâis likely to be himself. In the end, how your investments behave is much less important than how you behave.â ~ Ben Graham
The most important aspect of investing is to reduce or eliminate behavioural biases.
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UPDATE:
December 2019: 7.90% ( Closed on 28-Feb-20)
January 2020: -0.82% (In Progress. Sell Date 2-Mar-20)
February 2020: 1.19% (In Progress. Sell Date 1-Apr-20)
XIRR (till date - for 6 months since inception): 54.5%
The last 1 week has eroded a significant part of the gains for all 3 blocks. That is as expected. The strategy is designed to outperform during bullish phases.
The January block has slipped into negative after being up nearly 20%. The February block is still in the positive. Next 1-6 weeks I think will be interesting to observe.
Notes to self: Need to start working on a market-neutral strategy for a part of the portfolio and test to see if it can be made to work systematically.
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Just wanted to note down some thoughts on the possible impacts of the current Coronavirus pandemic and the resultant global market crash. I am not an economist, neither a political analyst but merely an observer of human and system behaviour.
Supply chain optimisation likely to incorporate redundancy and failover
The current global supply chain is optimised based on cost and time. That is manufacturers tend to get their components or parts built in places where it is cheapest t produce and ships it to the factories just-in-time. With a large-scale pandemic like situation, which comes right on the heels of US-China trade war, large (and small) corporates will rethink their supply chain and dependency on China. They will now need to build in inventory costs as the supply chain would need to factor in redundancy and supply disruption constraints. This will, in turn, increase the cost structures and reduce margins. Some industries, like electronics, which ran of wafer-thin margins, may find it very difficult to survive or will need to take price hikes.
Move from globalisation to localisation may get accelerated
The last few decades had seen an unprecedented wave of globalisation with free movement of people and products. This is increasingly facing headwinds as resistance builds up in local communities leading to economic and social strife. The rise of the right-wing globally and Brexit are manifestations of these social shifts. As more business shifts inwards, global companies will need to have a better local presence in countries they wish to do business in. Second-order impacts may include a decline of tax havens and higher taxes for global companies as they would need to pay taxes for profits in each individual country they operate out of.
New work culture building up
Working from home was prevalent in only a few industries like IT. With a lot more people getting used to working from home, it is likely that more companies will realise that they can actually run their businesses when employees do not come to one centralised office. This is a very profitable move for companies as they would be able to reduce expensive office space, maintenance, electricity and other such costs. Second-order consequences are too many to list here but a few prominent ones are negative sales impact on auto, petroleum, real estate prices. Shorter-term it would also have a negative impact on all crowded places like restaurants, shopping malls, movie theatres.
Ecommerce likely to get a boost
Online sales have already started getting bigger and is likely to expand much further once more and more people hesitate to go out in public places like crowded shops and malls.
Government & Central Banks have limited options
Respective governments and central banks essentially have two policy actions that they can use â fiscal and monetary. That is, they can tinker with taxes, government expenditure and interest rates. The issue is you cannot fix a supply-side issue with a demand-side solution. That is, if you are running say an automobile factory and donât have the necessary supply of engines from China, then reducing interest rates will not solve your problem. This is the same reason why when food inflation shoots up, you canât really do much by cutting rates, simply because the food is just not there. Similarly, neither does cutting taxes, both corporate and individual, help in any way. What these measures do is to price the risk in the market. With reduced interest rates, central banks (and governments) push the people to invest in riskier assets or fuel consumption or both. The last option that the government has is spending out of this problem. Government expenditure has the potential to create employment, provide a sense of security to corporates and basically spur the economic engine to start working once again, with the hope that it leads to a positive spiral of higher consumption and sustained growth coming back.
The Indian government gets a Godsend as crude prices collapse
India, as a major crude importer has just received a Godsend with crude oil prices collapsing due to the fight between Russia and OPEC (Saudi). The government finances are in a mess with no money to spend at all. With this fall in crude, the government can potentially use the money saved and channelize into infrastructure development. There are large areas where India can and should invest in for future global competitive advantage. Now is the time to get into those areas like green energy, increasing healthcare facilities, schools, colleges, railways, airports, inland waterways, ports, defence. The list can go on.
China is in a precarious situation
China is a very insulated country. But rumours are that the banking system in China is under stress and the coronavirus has only exacerbated the situation. Unless it can demonstrate that it has been able to successfully contain the outbreak and are getting back to normalcy, they will be the biggest sufferers as the global manufacturing supply chain will readjust and leave them behind. This will have a large long term impact on the social and political situation in China. But with an authoritarian government in place, it is likely that China will be able to show the resolve required to quickly get back to normal.
First global crisis in the age of social media and fake news
This is perhaps the first major global crisis in the age of social media. Social media amplifies and distorts messages, so the impact of people is very different from when all media was state-controlled or influenced.
Flight of capital to safety
There is a flight of capital towards safety and security. Unfortunately, in India, last 2 years has seen multiple critical situations in the banking and financial sector, one of which is currently underway. This has severely eroded the faith that investors have in banks. With a possibility of further rate cuts from RBI, bank deposits will become more unattractive. IN such a scenario, gold and US dollar tends to do well.
Investment horizon reduces during crashes
Market crashes have a way of reducing our time horizon from decades or years to weeks and days. If an investor just sticks to thinking about the underlying businesses and how they can get impacted by the change in the context, and maintain the long-term horizon, it will perhaps help in reducing the stress and anxiety.
Better to stick to your investment plan
All crises finally come to an end. This too shall pass. And when there is a global crisis, governments tend to take coordinated action. I would be very surprised if we do not see significant quantitative easing (reduced interest rates) and other policy measures announced by governments across the world.
So, fasten your seat belts and enjoy the ride. After a few years, you will probably tell the next generation of market participants, âHeck! I lived through that!â
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