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).



Portfolio Disclosure January 2018

Portfolio Disclosure as on Jan 11, 2018

Pls see below my portfolio (limited to those stocks which constitute at least 1.5% of the portfolio):

Ticker % of Portfolio %Gain
OBEROIRLTY 9.90 132.74
BAJAJFINSV 4.03 764.79
BALKRISIND 3.60 728.33
IDFCBANK 3.50 38.26
IDFC 3.28 -14.19
HINDPETRO 3.06 295.64
ECLERX 2.87 98.13
NESCO 2.84 114.28
DCMSHRIRAM 2.84 339.78
PIIND 2.78 138.99
SPARC 2.14 246.60
INDHOTEL 2.13 82.36
MCDOWELL-N 2.09 41.59
RELIANCE 2.01 124.17
IBULHSGFIN 1.92 196.66
OCCL 1.91 1117.00
BAJAJELEC 1.89 145.80
CANFINHOME 1.81 1100.05
SHILPAMED 1.79 526.03
KRBL 1.78 1200.07
NMDC 1.75 19.26
BHARATFORG 1.74 313.36
MUNJALSHOW 1.72 85.35
AKZOINDIA 1.69 64.44
CUMMINSIND 1.69 127.08
TATAINVEST 1.67 71.89
LT 1.65 75.55
IRB 1.63 86.47
HMVL 1.57 29.40

As before, for Canfin Homes, KRBL, Shilpa and Bajaj Finserv, the % gain is after including profits on sales carried out.

The only sales since the last portfolio disclosure have been in EClerx. This has primarily to do with the rise in the price due to Buyback announcement. I fully intend to purchase back the stock once the buyback record date is over.

There has been a sharp rise in the price of Oberoi Realty, IDFC Bank and IDFC. This accounts for the relative percentage increase. Similarly, there has been muted performance in Balkrishna Tyres. All of these are long term stocks, so the relative performance is not, per se, especially interesting.

Trading Performance December 2017

Trading Performance December 2017

My trading performance since August 2017 has been nothing short of disastrous. While I am still ahead for the year, at this point, had the same capital been invested in stocks, I might well be ahead. However, that is in the nature of the trading game. Most of the time, the returns are below the peak returns, and in addition, there are often sharp drawdowns in this business. This is where mindset, stoicism and capital come into play. I like to think that I have these in abundance. Then it is only a game of waiting. Markets will give you a sharp break on either side, which will develop into a nice trend to capture profits. It just requires the patience to hold on, till the ride comes along. But I can see why many people don’t succeed here.

Here is a table of the returns:

Trading Returns
Table of portfolio returns and trading performance for December 2017

Investment Performance December 2017

December 2017 was a great month for markets, especially in the small and midcap segment. The portfolio as a whole continues with its underperformance of the small and midcap space, and its outperformance of the large cap space. Financials did not have a great time in December, and given the high weight of financials in the portfolio, some level of underperformance was to be expected.

The SBI Small and Midcap Fund has a complete blowout. Even the Centrum PMS had a blowout month, with the result that its performance almost caught up with my portfolio returns.

Here is a graphical representation of the monthly returns:

Portfolio Returns
Graphical Representation of the portfolio returns in December 2017, relative to different benchmarks

Following is the same thing in the form of a table:

Trading Returns
Table of portfolio returns and trading performance for December 2017

Portfolio Disclosure- Dec 2017

Portfolio Disclosure

See below a list of stocks held in the portfolio.

Porfolio of Stocks
Largest Holdings as on Dec 18, 2017

My current portfolio is extremely diversified, but the top holdings (which constitute approx 80% of the total portfolio) is disclosed here.

Pls note that the total return here does not include dividends. In a few stocks-NMDC, AkzoNobel and HindZinc, accounting for dividends would have changed the return considerably.

In a few stocks, the purchase value is reduced by the profit booked. This is true of CanFin Homes, Shilpa Medicare, Bajaj Finserve and KRBL. This is why the return seems absurd. In any case, each of the stocks has returned around 10-15X, even if I don’t account for profits booked.

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.