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
( Yours truly is also an adviser and has boasted about the returns in past )
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 🙂 & 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
- 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
10 Comments
Leave a Reply
July 15, 2017
Well written Nooresh!
Best regards….
Porinju
July 15, 2017
Thanks Sir… Good to see your comment 🙂
July 15, 2017
What was the creteria to select stocks in these observation ?
July 15, 2017
Listed on NSE and above 10 rs.
July 16, 2017
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.
July 16, 2017
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.
July 16, 2017
[…] When the environment is positive, everyone rides the wave and we cannot able to say which one is better. (Good article – Doubled your Money in Last 3 Years ? Skill or Luck ?) […]
July 16, 2017
My pms returned 16.2% over the past 20 months. I’m exiting thanks to the clarity you bring Nooresh.
Thanks.
July 17, 2017
Ultimate site full of knowledge and financial wisdom
July 27, 2017
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.