Portfolio Disclosure August 2018

Portfolio as on August 14, 2018

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.

Portfolio Disclosure April 2018

Portfolio Dislosure April 2018

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.


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

Great Articles on Momentum and Trend Following

Great Articles on Momentum and Trend Following

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:

Two Centuries of Momentum

Trading Performance February 2018

Trading Performance February 2018

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):

Trading Performance
Investment and Trading Performance in January 2018

Investment Performance February 2018

Investment Performance February 2018

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.

Investment Performance
Investment Performance February 2018 compared to various benchmarks

February 2018
Investment and Trading Returns February 2018

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).