Markets had sustained momentum in July 2018, which led to stellar trading returns for the month. The trading performance would have been better had I not stopped trading commodities in June. I am still heavily underwater in bond futures too, though bank nifty futures gave marvelous performance in July.
Here is a tabulation of the returns over different time frames:
After the last investment performance of June 2018, markets certainly performed better in July 2018. Consequently all of the benchmarks 5.4% to 8.8% for the month, but my portfolio rose a nice 15.4% for the month. Being mid and small cap oriented, my portfolio has almost been flattish over the last six months, but that compares well to mid and small cap funds or PMS, though not so well with Large Cap Oriented Funds.
Here is information in the above graph in a easier to read tabulated form.
The last portfolio update was from April 1, 2018. The previous one was from January 11, 2018. You can see the posts to see how the portfolio has evolved.
The period between April and August ranked as a very quiet period for the portfolio. In the backdrop of a market which saw a most significant drop in mid and small cap stocks, I have kept a steady mind and not added to my portfolio significantly. And I practically did not sell anything.
So even if stocks like Cummins and CanFin Homes don’t show up below, it is not because I have sold them, but it is because they have dropped significantly in price
Of my portfolio stocks, Oberoi Realty, IDFC twins, HPCL, DCM Shriram, KRBL, CanFin Homes underperformed the market significantly. On the other hand, Bajaj FinServ, Reliance, Balkrishna Tyres gave excellent returns during this period.
After the last portfolio disclosure in Jan 2018, there were quite a few changes to the portfolio, but only in the ones where the holding was small. There were really no core changes to the portfolio since the last disclosure:
The last portfolio update was at a time when the market was at an all time high. The portfolio has shrunk then, both as a result of market correction, as well as significant pruning of the portfolio. Among stocks that did well, I would include Bajaj Finserv and Bajaj Electricals. The IDFC twins and HPCL did poorly.
Here I am, back after an absence of 3 months, with another report.
The trading performance in the last 3 months has been poor. Banknifty trend following has been ok, but the commodity momentum trading as well as Bond Futures trend following and discretionary options has led to a net loss in the portfolio. With no gains from BankNifty trend following, and large losses in the other three segments, the last 3 months saw a loss of around 8% in the overall trading portfolio.
2018-19 has been a strange year for trend following traders. While the market has continued to make new highs, the way it gets to the new highs, 2 steps forward, 1.5 steps back has played havoc with most “fast response” strategies, and has been excellent for those strategies which respond slowly.
With Bonds, I think banks played a game for the quarter ending Mar 2018, where to make sure that had smaller MTM losses in their gilts portfolio, they forced yields down by massive buying of treasuries in the last week of March, which led to trend reversal signals. These signals promptly reversed. Unfortunately, for me, I also increased the position size at this time, which has led to a huge loss, which will take years to recover from.
With commodities, the problem was me and my lack of faith in the momentum strategy. I stopped trading the commodities after losses, and the strategies started performing again. Now I intend to follow the success of the strategies on paper before restarting.
Below is a graphical representation of my investment performance in relationship to various benchmarks. Below that is a table showing the investment returns over the last year and more for my investment account, my trading account and various market benchmarks, including indices and popular mutual fund schemes as well as a decent PMS scheme.
Since Jan 2018, the markets have given a rocky ride, especially to those portfolios which are small and midcap driven. In fact, my performance is worse than any of the benchmarks over the last 18 months and over the last 12 months. This underperformance is quite disappointing, and another couple years of that, and it will be clear that I am not cut out for the investment game and am better off investing through mutual funds or index funds.
My portfolio was down more than 15% in the last six months, a figure which is only exceeded by the SBI small and midcap fund. But overall over 18 months, there is huge outperformance of the SBI Small and Midcap Fund.
Which were the stocks which performed the worst? I think KRBL, which got enmeshed in a scandal, IDFC Bank and IDFC Ltd. which just don’t seem to recover. Other stocks which did badly include CanFin Homes, Oberoi Realty (in absolute terms, rather than percentage terms), HPCL, DCM Shriram and EID Parry. The former because of rise in oil prices, and the latter two, due to the sharp downturn in the sugar cycle.
In the 3 months since my last report, my portfolio has been standstill, where I have not added or subtracted anything or bought or sold anything new.
This is a great article on the history and academic foundations on momentum and trend following. It gives a great explanation from behavioral science as well as information theory for why momentum works in markets.. Furthermore, it also integrates momentum and trend following, and explains why both are two sides of the same coin. The article is well grounded academically. A great read:
After a stellar performance in January, February 2018 did not turn out to be great from a trading point of view. This poor performance was also dictated by the fact that I behaved in a really stupid manner and in a discretionary way, I overrode my system for a considerable number of days. It was not very clever, and I think that the motivation was to protect the returns I made in January. However, the net effect, I believe was that it further depressed the results. I am not at all proud of this moment of weakness.
Here is a table of the trading returns for the month(Click to zoom in for a better view):
February 2018 was not a good month for investment returns. In my view, four things led the market to crack:
Imposition of LTCG on equity in the Union Budget. Totally unnecessary tax in my opinion, which was a huge sentiment burster for markets.
A sharp rise in commodity prices, as well as a sharp drop in Unemployment in developed economies, which portends the return of inflation, rise in interest rates, and diversion of funds to debt markets from equity markets
Loss of key byelections by the ruling party, which made the return path of Narendra Modi in 2019 somewhat hazier.
The Nirav Modi-Mehul Choksi Scam which did so many things-it totally destroyed whatever faith was left in PSU Banks, it was a huge whammy for the reputation of the NDA regime, and a huge blow to middle class morale.
Whatever the narrative may be, and you can believe or not believe any of the above, markets nevertheless fell, and sharply. The Bank Nifty, which was up about 7.2% in January 2018, fell by more than 8% in February. Mutual funds like HDFC Top 200 fell sharply. A PMS like Motilal Oswal did not do so badly, since it was invested primarily in ‘quality stocks’.
My investment performance, like always fell somewhere in the middle. Nevertheless, if Iook at performance over a year, I outperformed all the benchmarks, except the SBI Small and Midcap Fund.
In portfolio changes, I again spent some effort to prune my portfolio. Again, the timing was quite wrong, and it still makes me wonder about my psychological strength in coping with market rises and falls. Again the net implications are small (less than 1% of portfolio size). Nevertheless, the timing is certainly off.
The investment performance is summarized in the graph and table below. Click on them for a zoom view.
After a dismal few months, trading returns looked up in January 2018. A single month return was more than 50%, though it was a bit due to the fact that capital had been depleted because of the losses of the previous months. Nevertheless, that meant that for the year, we were now back to triple digit returns, which is great.
Trend following traders live for such periods, where markets trend strongly. In January, the Bank Nifty increased by 7.2%, which was simply great. It also meant that our trend following systems had a great performance.
Here is a tabular representation of the Trading returns for January 2018: