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  

( 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