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Towards Value Investing

December 3, 2012
  • Be it in trend following or value investing, significant wealth is only created by inactivity,passivity and patience.
  • I have moved on from what I was doing- first from a trend following guy, to bringing quantitative approaches to it, to working with a  Mauritius domiciled quant hedge fund. Needless to say the focus of this blog has also changed quite substantially.
  • This blog will have the same focus as my portfolio rationale- towards investment operations with deep ‘value based’ rationale, investigation of a business from the perspective of a business owner, and a miserly one at that, backstopping the downside first(which was the same with trend following) and making very concentrated but high quality bets.
  • Any investment decision is and will be taken with an investment thesis in mind.

Over and Out!


Trendiness: An Study of Assets and Trends

October 21, 2010

Efficient Market Folks believe that price follows a random walk pattern, and hence any prediction into future price is impossible. In other words you dont have an “edge” to exploit. Technical “edge” i.e. The theory extends further more into saying, that all publicly made information is fully discounted into price, which implies that fundamental investing is dead. But then, salvaging fundamental investing from the grip of Efficient Market Hypothesis is not the agenda.

The agenda, precisely put is understanding what does trend mean and how to understand more about it. Efficient Market Hypothesis claims the daily price returns are fully normally distributed. That is the price follows a log-normal distribution.

Hence, the standard deviation of a sample of size N, will have \sigma^{2} /N

Now, interestingly, trending nature(which can be simulated by an Ornstein-Uhlenbeck Process) is when, the return on one direction is more than the return on other. That is, if a price asset is trending, it will have more instances of positive(or negative) returns than negative(positive) returns which generates a kind of “fat tail” distribution. A distribution which is not balanced around the mean.

So, in such situations, if we are able to find a price series with its variance more than a standard gaussian variance for a sample size of say k , then we can confirm that indeed we do have a trending asset.

Now, consider, if we have a price series, which is lognormally distributed. Its 1-sample variance (achieved by a simple 1 period difference in closing prices divided by the previous closing price-> squaring it up-> summing it up-> dividing by Numbers of Bars-1 {its an estimator} ) is say \sigma then, ideally its 4 bar standard deviation will have \sqrt{4}*\sigma which equals 2*\sigma .

If an asset which shows an N^{2} period standard deviation more than N times the 1 period deviation, we have a trending asset.

Any failure to do so, will give a fair idea as it being a “counter-trend” trading price series.

Going ahead,I have coded up a MATLAB code to do the same [you can get the code if you ask me for it].

Using this, let me analyse 800 period returns for three assets. US based S&P 500 based ETF (SPYDR),India based  S&P CNX NIFTY and NSE traded price series of Larsen and Toubro. If the reader wants me to analyse any further price series,do leave me a comment.

Each data set will be presented in the following way.

Expected Ratio* Observed Ratio**

Part 2 to be followed where the data will be analysed…
* Expected as in the case of Random Walk Theory (N^2 bar variance being N times a single bar return variance)
** Observed Ratio with N^2 bar variance divided by single bar variance

Volume Functions and Liquidity Filters

October 18, 2010

Usually when testing strategies, it becomes important to have a basic minimum liquidity at place.

A lot of people filter out their universe based on market caps, some on volumes and further still on average traded value. All of them can be fine. Some performing better than the others. But one deep problem remains, all of them throw out otherwise perfectly tradeable assets/price series. In other words false negatives.

Before adding liquidity filters, we must really have a perspective into what do we want.Or rather what are we looking for.

Are small caps a problem, because they dont have enough market cap? Or is the price series essential “jumpiness” an issue? For me, it has something to do with the quality of price discovery .Ideally, if a stock’s price is 10paise, I am perfectly okay as long as it behaves like or nearly like liquid blue chip stocks, like LT or NIFTY. No huge jumps, no one sided dominated days, i.e it puts shadows on both sides etc etc. Very often, we involve ourselves with filters, which throw away a lot of otherwise perfectly tradeable assets. We do want to trade a small cap, which is liquid enough so that it doesnt whipsaw unnecessarily throwing our systems performance haywire


Define Illiquidity



What about this?


I reckon, having a measure of the “jumpiness” can help. How much does an asset gap up or down on average, or how frequent. An indicator with that kind of metric can help. Add with it,how often does it put shadows (that is Low!=Open High!=Close or vice versa).In my opinion, if you can find a linear combination of these two, then you will almost be very close to that level, which just sets the bar for a tradeable asset

Volume Functions

In my backtestings, involving volumes or any function there of into making decisions can improve the performance of the system. Whether, in a counter-trend system, shorting at some particular new high,only when your basic conditions are met,along withan additional condition of  no significant surge in volume being noticed. Or the opposite for a trend following system.

It makes sense to not only use the four basic market generated variables, OHLC but also V.

I could extend it a bit further and stick my neck out, and say use OI as well, but OI has argely disappointed me on a systematic basis.

Cautious Optimism

October 13, 2010

Cautiousness and Optimism, Hope and Fear… a bit of doubt as well, but mostly hope

July-August-September Newsletter

October 8, 2010
View this document on Scribd

Oh did I say, that Tom Basso once released a report which said, investing in a hedge fund just after a lacklustre quarter returned much higher returns than if you do the opposite.

Coming Up…

October 5, 2010
  • July-August-September newsletter
  • My thoughts, ideas and others on the markets
  • Experiences with legal aspects and financial sector regulations
  • Investigation of some system ideas

For a break!

August 15, 2010

On the last weeks of July, I was talking with one of my old school friends, who is now the partner of Eden Projects, (I estimate it to be around 100million USD company), and to my surprise I found some very nice similarities from his perspective and mine.I am adding only three among many of the titbits we shared.

> Folks like us, should be focussed more on wealth generation than wealth consumption.

> Risk is an inherent part of the game, and life can only grow, when there is uncertainity.

> Professionals like us(he meant him and me) need a good solid break every quarter of so.

I especially seem to agree vociferously with him on this point. So I am in Bangalore now, since last week, and I am absolutely having a great time.

Spending my time, enjoying the cool climate, company of great friends, alcohol filled arguments, the illusion that my chess has improved(I have beaten “Chess Titans” 4times straight in Intermediate Level. )

In light of this, I couldnt update the July newsletter report. July for the sake of statistics ended flat.

I will be back at home by the end of this month, look out for August newsletter by then.

Till then,