Trading Performance June 2018

Trading Performance June 2018

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.

Trading Peformance
Trading and Investment Performance over the last 18 months


Investment Performance June 2018

Investment Performace June 2018

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.




Investment Performance in relation to various benchmarks
Graphical Representation of my Investment Performance till June 2018
Trading Peformance
Trading and Investment Performance over the last 18 months

Trading Performance January 2018

Trading Performance January 2018

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:

Trading Performance
Investment and Trading Performance in January 2018

Investment Performance January 2018

Investment Performance January 2018

January 2018 was an eventful month for investment. The first half saw the midcap and smallcap indices at all time highs. This also propelled my portfolio to all time highs.  My portfolio saw an all time high on January 11, 2018. After that the whole month of January 2018 was downhill and indeed, 31st January 2018 was also the low for the month for the portfolio.

It is to my dismay that I realized that I was buying stocks (albeit in small quantities) throughout January. In my defense, I was not buying expensive stocks-I was buying Muthoot Finance, Aarti Industries and Equitas Holdings (based on a Moneylife recommendation). Nevertheless, there is some foolishness in buying stock when markets are at all time highs or just below that. It is of small comfort that my total buying was not more than 1% of my portfolio. It is the psychological aspects of the purchase which troubles me.

Here is my investment performance as measured against other benchmarks:

Investment Performance
Investment Performance compared against different benchmarks

As can be seen from the graph and the table below, inspite of the rise and fall of the market in January 2018, my portfolio did not really move in the month, even though intra-month there was quite a good gap. The Centrum PMS did surprisingly well for the month, and I really can’t understand why. Nevertheless, except for SBI Small and Midcap fund (despite underperformance during the month), my investments did better than the other benchmarks.

Trading Performance
Investment and Trading Performance in January 2018


Anatomy of a Losing Trade

Today, I lost approximately Rs.4000 in a Sun Pharma Options Trade. It is worth examining the trade, because I think it gives valuable trading lessons.

On the face of it, why am I even talking about this trade? It is only one among the hundreds that I do every month. The amount involved is trivial. Losses are the part of life of any trader. So why worry about it? Forget it, and move on, just like a bunch of other losing trades.

I think, however, that this particular trade contains valuable lessons on what not to do while trading. And therefore merits a deeper examination.

I consider myself an experienced and sucessful trader. One who has a track record of success, who is diversified across instruments, and someone with (at my risk levels) who has access to unlimited capital, and a proven capacity to bear tremendous losses. Why did I get this trade wrong?

First, the logic of the trade and the trade itself.

At a time (10 a.m on 22 Feb 2018, expiry day) when Sun Pharma was trading at 528-529 (up nearly 0.75% on a weak market day), I entered into a 530CE/540CE ratio trade in the ratio 1:3.

I got the idea for such trades from Jeff Augen’s excellent book on trading options at expiration. In this book, Augen talks about two peculiar behaviors in options on expiration day. The first is the propensity for stocks to exhibit pinning behavior (getting pinned to a strike price, and jumping discretely from one strike price to another), and the other is the dramatic collapse of IV (or a dramatic time value decay, in an Indian context, because we have no after market). Augen suggests therefore that it makes sense to enter into call ratio trades in heavily traded stocks. What he suggests is that one chooses the long strike of the call ratio where the underlying is just out of the money or just in the money. And then he suggest selling a ratio at the next higher strike, which just allows for a small net debit or credit (and which usually results also in the trade being roughly delta neutral to begin with). If the underlying falls, the both sides of the ratio expire worthless, and all you lose or gain is the small debit/credit one started with. If the underlying rises, but not too much, the long side of the ratio will expire in the money, and the short side will expire worthless, resulting in a nice gain. And if the underlying does get pinned to the higher strike, then the profits will be tremendous. Breakeven is when the underlying rises by [Strike Price Spread + Strike Price Spread/ratio], which is usually a 3.5% or so move, which is unlikely in most stocks.  So the risk:reward characteristics of the trade are excellent.

Unfortunately, I have still not been able to build conviction that stocks in India also exhibit pinning behavior. Unfortunately, I still don”t have a database of minute prices in stocks, and so I haven’t been able to backtest this (am in the process of correcting this)

In this particular Sun Pharma Trade, I purchased one Feb 530CE at 5.2 Rs, and sold 3  Feb 540 CE at 1.9 Rs. This resulted in an initial credit of Rs. 0.5 or on the lot, a credit of Rs. 550. Nice. I was a happy camper.

There was a lingering fear at the back of my mind. Sun Pharma was due for some news flow (the FDA inspection of one its plants was ongoing). The risk was positive news flow which would result in a sharp price increase.

The second problem, as I see it, was that while I entered into several similar trades on other stocks around the same time, I was entering into call ratio spreads on expiry for the first time. And I was quite personally excited to see this work.

The third issue I think was that I had a successful run at options trading for the first time in the Feb expiry, with practically no losing trades. So I was actually quite eager to retain my profits (though my options profits/losses are a  much smaller component of my overall trading position, and these losses/profits are not material).



Trading Performance November 2017

Trading Performance November 2017

Trading Performance in November 2017 was on the muted side. The last three months have not been great for my trading performance, which has actually been negative, and substantially so, even though markets have been positive. Over the year, returns are a fabulous 150% on my invested capital. These large fluctuations in trading returns are a function of the trading systems I use. In fact, in November, trading the stock markets has not been that bad, but commodities have given horrendous returns, which has led to a low performance overall.

I am now trying to introduce options into the mix, and in November, I had a profitable month trading options. I have still not deployed substantial capital for options trading, but I will over a period of time.

Here is a table of my trading performance(as well as investment performance) for the month of Nov 2017, and for longer periods:

Trading Performance
Table showing my trading performance(as well as investment performance) compared to different benchmarks

Investment Performance Nov 2017

Investment Performance Nov 2017

November was not a great month for markets. The Nifty actually declined slightly, while the broader indices were in the green, but just so. Portfolio investment  performance was similarly muted, with the portfolio having returned just 2.77%. It has been more than a year since I started keeping track, and the overall returns for the year till Nov 2017 have been 37.66%. It seems optically great till one considers that Nov 2016 had the demonetization even and subsequent sharp fall. So comparisions are bound to be favorable. Also, one has to consider that the SBI Small and Midcap Fund returned 61.12% during the same period. So good portfolio performance, but not great.

One swallow does not make a summer, and so also 1 year does not represent a lifetime of investment returns. It gives only a snapshot of lifetime performance, and it does not say anything about the risks taken to derive the investment returns. Nor does it say anything about the future course of returns. However, as we keep up this exercise of tabulating returns, month after month, for several years, hopefully, we will be able to derive some conclusions.

In the meantime, I am sticking to my general investment style. Low churn, buy low valuations, catch falling knives when the company’s survival is not at risk. Keep a trend towards concentration.

What can say about a year’s returns? My portfolio outperformed all the indices I track, as well as the HDFC Top 200 Fund. My portfolio also outperformed the two PMS schemes by a considerable margin. And the portfolio grossly underperformed the SBI Small and Midcap Fund. It has been a great run for small and midcap stocks. However, we will see how these perform as time passes.

Here is a graph of the returns:
Investment Returns
Investment performance of my portfolio, as well as those of several benchmarks

A table representing the same data is part of the next post, which will talk about trading returns.


Trading Performance-October 2017

Trading Performance-October 2017

October 2017 was not good for my trading activity. The market kept whipsawing between rises and falls, and though the Bank Nifty on which I primarily trade went up 4 % in the month, I suffered a considerable drawdown.

Here is a table showing my trading performance relative to other benchmarks.

Table showing my Trading performance in relation to other benchmarks

As you can see, my trading performance has resulted in a nearly 25% fall in the overall return in the last 3 months, of which 14% was in October alone. I do hope the tide changes soon.

Overall though, I am still ahead of all other benchmarks for the year. This is the nature of the trend following trading game. Huge outperformance for brief periods, and then steady attrition in returns for long periods. Hopefully, it means that you come out ahead of the investment pack in the long run.

However this large volatality in trading returns makes me more and more inclined to include options strategies as part of the trading mix. i am currently engaged in developing the technical expertise to analyse and develop Options Trading Strategies. It will take a long time, perhaps as long as a year or two. But I convinced that that is the way to go.

Investment Performance-October 2016

Investment Performance-October 2017

Here I am with another edition of my investment performance. This was a month in which the market, especially, Small and Midcap Stocks went up considerably, after a relatively muted August and September.

While the markets were strong, my own stocks did only ok. IDFC and IDFC Bank continued to do poorly, while certain other stocks, like CanFin Homes, EClerx and Ajanta also did poorly. On the other hand, Oberoi Realty, which is by far my biggest holding, did fine, and so did Bajaj Finserve/ A whole host of smaller holdings, like DCM Shriram, BKT, Indiabulls Housing Finance also did well.

Overall, of all the benchmarks, my porfolio did marginally worse than the Midcap Index, and considerably worse than the SBI Small and Midcap Fund, which had a blowout performance. Otherwise, on both a monthly and yearly basis, my investment performance was marginally better than the performance of the HDFC Top 200 fund,  and was considerably better than the indices as well as both the PMS schemes I own, the MOSL “Value Strategy” fund, as well as the Centrum Deep Value Fund. One must wonder why anyone should invest in these PMS’s and give managers a fee, when one can have a reasonable portfolio and do considerably better.

Investment Returns
Graph showing my investment performance in relationship to other benchmarks


I have also tabulated the results:

Investment Returns
Table showing my investment performance in relation to other benchmarks

Trading Performance-September 2017

Trading Performance-September 2017

The Yo-Yo of markets during the month was not at all good for performance of my trading activity in September. I use mostly trend following strategies, across different time frames, and sideways markets did not do much for the returns from trading activities, and in fact, there was capital loss.

I am still up for the financial year, and quite well. But the whole situation is testing my patience now. These are the periods when stoicism is valuable as a philosophy, and I am as stoic as they come. So we will continue the same, no matter what the state of my patience.

Here is a tabular representation:

Investment and Trading Performance
Comparison of investment and trading performance of my portfolio and trading activity relative to various benchmarks