10 Dec, 2019

Dalal Street Rules – Year 2013 and 2014

“We never believed our models reflected reality-just some aspects of reality.”

Nick Patterson, Cryptologist, Renaissance Technologies

2013 was a washout for the broader midcap space. But not for MIDAS. And 2014, the midcap index rebounded with a vengeance and the system followed suit. But what was the global and local backdrop.

The second half of 2013 was more eventful than the first. In September 2013, Narendra Modi was officially anointed the Prime Ministerial candidate for the BJP. This was not without its share of drama. But the old guard realized they had no choice. They had already lost in 2009 under Advani, so it was time to give way.

A legend called Sachin Tendulkar retired from all forms of cricket in November 2013. He played his last match at the Wankhede against the West Indies. Truly an era came to an end. There was no standing space nor a dry eye when Sachin gave his farewell speech. But he knew it was time.

In economy and markets, 2013 will be remembered for “Taper Tantrum.” In 2013, Federal Reserve Chairman Ben Bernanke announced that the Fed would, at some future date, reduce the volume of its bond purchases. There was an immediate negative response from equity and bond markets. However, on assurance from the Fed, about the health of the economy, markets quickly recovered its losses and moved on. In Sep 2013, Raghuram Rajan or RRR as the media dubbed him, took over from D. Subbarao as RBI Governor. Equity, Currency and Bond markets cheered his arrival. He held a press conference on taking over, and hit the ground running.

Factor Investing, Smart Beta – Old Wine New Bottle

Ajay Kaul, head and founder of Aks Capital, meanwhile came across an interesting research piece called “Understanding Smart Beta” by Willis Towers Watson, US based consulting firm (that in 2013 coined the term smart beta) that stated: “Smart beta is simply about trying to identify good investment ideas that can be structured better…. Smart beta strategies should be simple, low cost, transparent, and systematic.” As he read through he understood that Smart Beta was merely another term for risk premia, factors, alternative beta etc. and was meant to distinguish factors like value, size, momentum etc. from their well known counter part – market beta or simple beta. He didn’t pay much attention to it, but in the coming years, smart beta became a fairly catchy marketing tactic to sell factor funds. While there were some difference between factor investing which was traditionally understood to be long/short, Smart Beta could be long only, multifactor and multi asset in execution. It was different in execution from the plain market cap weighted index funds. It was rules based, transparent and had more turnover that the market index fund. But a lot of it was semantics also. More on this next time.

While 2013 was a negative year for the benchmark midcap index, Midas-R and Midas both managed to make double digit returns. Britannia Industries with 60% gain (and still holding) was the biggest winner and Ramco Industries with a 19% loss was the largest loser.

Many storied investors such as Bill Miller, Paul Tudor Jones, Cliff Assness. etc have spoken of the pain when a rules based system or a particular discretionary style of investing is not working. Asness says it ages a person 3x in 1 year. In bull markets, they call you a genius. In a bear market, you have lost your touch. Very few are able to navigate and swim through markets for decades, without getting fired. Which is why Buffett and Munger are considered legends not just for their outperformance, but also the length of their track record. But then they also have a unique structure, where firing them means selling shares of BH on the exchange. There is always someone on the other side to take the trade.

Modi + RRR = 2014 Rally

Markets bottomed out in Aug 2013 and started rallying since. Narendra Modi was finally officially announced as the NDA PM candidate and hence began the “Modi Rally” which well carried on to May 2014 when results were finally announced. The BJP surprised itself also. They had a rallying cry of Mission 272, i.e. the number of seats needed to get a majority in Lok Sabha (lower house), but that was more of an aspiration than a real target. But even they underestimated the anger and anti incumbency against the previous govt. BJP crossed 272 on its own and well over 300 with allies.

Having RRR in the RBI also boosted global sentiment towards India. It also helped that RRR was much more articulate and media savvy than most previous RBI guvs. An article by Shobha De, where she wroteRaghuram Rajan has put ‘sex’ back into the limp Sensex that makes him seriously hot” was quite over the top but never had the media, other than financial media, taken so much interest in an RBI governor before.

Barring a mild hiccup in Jun 2014, it was a fantastic year for markets. Political stability and having a savvy articulate RBI guv boosted sentiment. Midcaps were on a tear. And the portfolios had a blockbuster year, the kind of stuff dreams were made of.

Needless to say both Midas-R and Midas were fully invested. Page Industries was the biggest winner so far. This is how the portfolio looked at the end of December 2014.

Champagne flowed and the mood was one of unbridled optimism at Aks Capital’s annual year end party that year. Bonuses were sky high and investors were rejoicing. In short, it was the perfect Goldilocks scenario.

In 2013 India was part of the Fragile Five economies, and in 2014, it came back roaring. And that is where a systematic rule based quantitative approach helped. Most long only investors are optimistic by nature. The long term trend of equity markets are upward drifting. And that attitude helps tide through the bear markets, which are usually vicious and sharp, but are shorter than most bull markets. Buffett and Munger had seen at least three declines of more than 50% in their 50 year investing career, and numerous 10-20% garden variety declines. But most investors don’t have the perspective, emotional strength and temperament to navigate years like 2008 or down years like 2011 and 2013. With social media and fintwit, these emotions are at times exacerbated by self proclaimed gurus and experts.

MIDAS didnt know or care about any of these events. It had a set of instructions, it was programmed to follow. But importantly, a human who had oversight over MIDAS, was disciplined to let MIDAS do its thing. As Nick Patterson above said, models reflected some aspects of reality. There can never be a model that reflects reality perfectly. That is the weak link in most systems. There are no backtests for human emotions.

Disclaimer: Nothing in this blog should be construed as investment advice. This is purely for educational purposes only.  Please consult an investment advisor before investing.

(With inputs from Aayushi Shah)