Technical Analysis of Indian Equities by Nooresh

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Doubled your Money in Last 3 Years ? Skill or Luck ?

Nifty has hit a new all time highs and so have other benchmark indices.

There are a lot of advisers , AMCs, PMS companies , individual investors etc are boasting about their returns. A lot of them have something to either sell or to  show off Smile 

( Yours truly is also an adviser and has boasted about the returns in pastSmile

The Smallcap Index is up almost 50-70% in last 3 years and almost 170% in last 4 years. In the same period Nifty is up 30% and 60% respectively. Clearly shows the huge outperformance of smallcaps relative to the benchmark indices.

With such a performance in smallcaps there is a good chance a lot of portfolios would have doubled in the last 3 years and almost tripled in the last 4 years. Implying a CAGR of 25-40% !!!

Can this be attributed to Skill or Luck or how much is the contribution of each??

Lets try taking this question after the Random Portfolio Exercise.

So what has been your return in the following time frames 1 years, 2 years, 3 years & 4 years ??

Before reading the post ahead do note it down – It will be a fun exercise.

Yet again posting out our Random Portfolio Exercise

The Random Portfolio

The Random Portfolio idea started with my discussions with Prashant Krish . This process has also helped me get a good benchmark for our own returns comparison and strategizing

The thought was about how a chance portfolio performs against benchmarks. ( Read this old post )

Also read this older post -

Best Time for Advisory Services to show Alpha πŸ™‚ & sell Services/Equity Related Products

 

Random Portfolio Selection Filter

The workings on this exercise have been done by my +team member - Harsh Doshi 

  • 25 stocks selected randomly ( rand function) with an equal weightage of 4%. Decent diversification and equal allocation.
  • Selection only from NSE listed stocks.
  • Stocks above Rs 10.
  • No shuffling of stocks. Just buy and hold.
  • No brokerage applied.
  • Dividends not considered.
  • Start dates of 1 yr/2yr/3 yr/4 yr from 1st July. Just because the exercise has been done now.

5 Random Portfolios created

So to get a decent average and range of returns.

Here is the full File For Download

https://drive.google.com/open?id=0Bz8PBJAKG34mc250NlZwaEN4VW8

1 year Return 1st July 2016 to 30th June 2017

01-07-2016 30-06-2017
Portfolio Initial Equity End Equity %  Returns
Random Portfolio 1 1000000 1270742 27.07%
Random Portfolio 2 1000000 1488909 48.89%
Random Portfolio 3 1000000 1262996 26.30%
Random Portfolio 4 1000000 1605099 60.51%
Random Portfolio 5 1000000 1315056 31.51%
Average Returns (%) 38.9%
Nifty 8328 9521 14.32%
Sensex 27145 30922 13.91%
CNX Small Cap 5836 7311 25.28%
BSE Small Cap 11885 15411 29.66%
BSE Mid Cap 11858 14644 23.50%

2 year Return 1st July 2015 to 30th June 2017

01-07-2015 30-06-2017
Portfolio Initial Equity End Equity %  Returns
Random Portfolio 1 1000000 1519701 51.97%
Random Portfolio 2 1000000 1850200 85.02%
Random Portfolio 3 1000000 1619022 61.90%
Random Portfolio 4 1000000 1854120 85.41%
Random Portfolio 5 1000000 1606746 60.67%
Average Returns (%) 69.0%
Nifty 8453 9521 12.63%
Sensex 27800 30922 11.23%
CNX Small Cap 5400 7311 35.39%
BSE Small Cap 11236 15411 37.16%
BSE Mid Cap 10819 14644 35.36%

 

3 year Return 1st June 2014 to 30th June 2017   ( After Elections a little discretion in start date)

02-06-2014 30-06-2017
Portfolio Initial Equity End Equity %  Returns
Random Portfolio 1 1000000 2216611 121.66%
Random Portfolio 2 1000000 1789569 78.96%
Random Portfolio 3 1000000 2262012 126.20%
Random Portfolio 4 1000000 2541480 154.15%
Random Portfolio 5 1000000 2792720 179.27%
Average Returns (%) 132.0%
Nifty 7363 9521 29.31%
Sensex 24685 30922 25.27%
CNX Small Cap 4832 7311 51.32%
BSE Small Cap 9197 15411 67.56%
BSE Mid Cap 8651 14644 69.29%

 

4 year Return 1st July 2013 to 30th June 2017

01-07-2013 30-06-2017
Portfolio Initial Equity End Equity %  Returns
Random Portfolio 1 1000000 3501187 250.12%
Random Portfolio 2 1000000 2564909 156.49%
Random Portfolio 3 1000000 3951002 295.10%
Random Portfolio 4 1000000 3590804 259.08%
Random Portfolio 5 1000000 3878606 287.86%
Average Returns (%) 249.7%
Nifty 5899 9521 61.40%
Sensex 19577 30922 57.95%
CNX Small Cap 2653 7311 175.61%
BSE Small Cap 5753 15411 167.85%
BSE Mid Cap 6073 14644 141.16%

 

Observations from the Exercise.

  • The worst performing portfolio out of the 5 also outperforms the Nifty/Sensex by a factor of 1.5-2 times.
  • The worst performing portfolio out of the 5 outperforms the Midcap Index by a decent margin and is close to the Smallcap Index Return.
  • There are 2-5 stocks in most portfolios which have a drawdown of 20-90% and some 2-5 stocks which are 300-800% which change the return profile.

My Learnings from the Exercise

 

  • The first learning is Random Portfolio is the real and toughest benchmark. It also humbles you down even if you have had a great quarter, great year , great 3 years Smile 
  • A constant learning through all these exercises is that Selection is very important in a Concentrated Portfolio but in a Diversified Portfolio the Asset Allocation and timing plays the real tool. Consider if you had deployed more cash in 2013/2014 would it really matter what stocks you selected ?
  • In the debate of Concentrated and Diversified we forget the focus on Equity Allocation as part of Networth. ( You could be 5 % of your networth in Equities with a 3-5 Stock Portfolio and call yourself Concentrated. But does a Bull market change your networth )
  • In a good environment for Midcaps/Smallcaps all you need to do is ride and hope to get a few winners. Across portfolios we saw 2-5 stocks out of 25 making the big difference.
  • The toughest part of this to ride winners in a roaring bull market. Selling half when and investment doubles is the worst strategy in a roaring bull market. An investment can only go to zero but on the upside can you ride a 5x or 10x ?
  • To make outsized returns you need to concentrate and be able to ride out till the major part of the run without even booking partial profits or Free Of Cost etc. ( A 15% allocation stock up 5-10x may end up becoming 25-50% of your PF at cmp. Can you digest it.)
  • It is easy to beat the Nifty by buying a portfolio of midcaps/smallcaps/microcaps in good environments. Most AMCs, PMS thats why use Nifty as a benchmark.
  • The Market is supreme and provides the returns to even Bad Processes in Good TImes. Be careful.
  • The major learning is that we need to accept the element of Luck and Bull Sentiment in our Returns. One may only know about the Skill Factor in a Bear Market !!

Would love your comments and suggestions. Can also mail to nooreshtech@analyseindia.com

Cheers,

Nooresh Merani

Article by Nooresh Merani

Nooresh has written 2627 articles.

You can follow Nooresh Tech on Facebook and Twitter here.


{ 10 comments… add one }
  • Porinju Veliyath July 15, 2017, 08:42

    Well written Nooresh!
    Best regards….
    Porinju

    Reply
    • Nooresh July 15, 2017, 11:46

      Thanks Sir… Good to see your comment πŸ™‚

      Reply
  • Ajay July 15, 2017, 10:01

    What was the creteria to select stocks in these observation ?

    Reply
    • Nooresh July 15, 2017, 11:45

      Listed on NSE and above 10 rs.

      Reply
  • Rajeev gupta July 16, 2017, 14:27

    Eye opener.making money in a bull market is like standing on a moving turf.while turf is running you take credit for moving ahead.you have proved it with your randam nos.

    Reply
  • Murali July 16, 2017, 14:57

    Great article Guru, i am in the field 10 years, but not gained much, but after attending your workshop in 2015 i learned many things from you, especially what not to do?. You are the VIAGRA of Stock Market.

    Reply
  • Amul July 16, 2017, 22:55

    My pms returned 16.2% over the past 20 months. I’m exiting thanks to the clarity you bring Nooresh.
    Thanks.

    Reply
  • ANUBHAV CHATURVEDI July 17, 2017, 08:14

    Ultimate site full of knowledge and financial wisdom

    Reply
  • J R Ananth July 27, 2017, 12:58

    Very well done. I think if you take periods from peak to peak instead of trough to peak we will get more clarity on randum selections.

    Thanks,
    with regards.

    Reply

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