Diversified Random Portfolio beats the Benchmarks Yet Again.

We have been doing Random Portfolio exercises for the last few years. We started looking at this interesting topic almost 3 years back and could make a template with the help of my friend Prashant Krish and now my team mate Harsh Doshi does the iterations for the last 1 year or so.

Every time we have a fantastic year we do this exercise to tone down the emotions which come along with a great year.

Random Portfolio Selection Filter

•The only filter was stock should be above 20 rs and listed on NSE. ( to remove unusual big movers or duds )

•25 stocks selected randomly ( rand function) with an equal weightage of 4%.

•Time Period – Last 6 months and Year to Date.

•No shuffling of stocks. Just buy and hold.

•No brokerage applied.

We created 5 random portfolios on the above selection criteria.

Recommend reading the Previous posts on this Topic.

1) Best time for Advisors to show Performance Reports/CAGR to sell their services – Part 1.( Oct 2014)

2) Best Time for Advisory Services to show Alpha 🙂 & sell Services/Equity Related Products ( August 2016 )

3) Now is the Best Time for Successful Investors to give Gyaan on Investing.

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

The calendar year started on a good base after a drop from 8950 to 8200 in the last 3-4 months of 2016 which was a flat year with Nifty barely managing a 5% return in CY 2016.

Apart from it being a great year there was not a single correction of more than 5% in the Nifty all through the year.

Nifty up 28.5%
Sensex up 28%
BSE Small-Cap Index up 59.5%
BSE Midcap Index up 47%
S&P BSE 500 Index up 36%
S&P BSE 100 Index up 31%
Nifty Midcap 100 up 47%

Nifty Small 100 up 57%

Lets look at returns of Random Portfolio for CY 2017.  ( Also have added Fy18 )

1st Iteration

  1/2/2017 12/29/2017  
Portfolio Initial Equity End Equity %  Returns
Random Portfolio 1 1000000 1417911 41.79%
Random Portfolio 2 1000000 1512804 51.28%
Random Portfolio 3 1000000 1580712 58.07%
Random Portfolio 4 1000000 1681879 68.19%
Random Portfolio 5 1000000 1450591 45.06%
Average Returns (%)   52.9%  
nooreshtech.co.in       

 

Click to Download - Excel Sheet   - Random Portfolio 1 -

2nd Iteration

  1/2/2017 12/29/2017  
Portfolio Initial Equity End Equity %  Returns
Random Portfolio 1 1000000 1646863 64.69%
Random Portfolio 2 1000000 1613824 61.38%
Random Portfolio 3 1000000 1400716 40.07%
Random Portfolio 4 1000000 1748309 74.83%
Random Portfolio 5 1000000 1598099 59.81%
Average Returns (%)   60.2%  
nooreshtech.co.in       

 

Click to Download – Excel Sheet – Random Portfolio 2 

NSE all stocks Performance

We also did an exercise on the Returns in all the liquid stocks listed on NSE in calendar year 2017.

  • There were almost 1683 stocks listed in Equity Segment as on 1st January.
  • Out of these 182 had no trade data for many days. So we excluded them.
  • Not included the new listings. May have missed a few demerger calculations.
  • Final list of 1501 stocks.

Another big myth is that there are 5000 plus listed companies in India. The reality is 2500-3100 stocks get traded on BSE and 1500-1800 on NSE which are also mostly listed on BSE. So the real liquid universe is between 1500-2500 stocks half of the assumed number.

nooreshtech.co.in 
% Returns No. of Scrips % of total population
Above 400% 20 1.33
100 to 400% 289 19.25
50 to 100% 327 21.79
10 to 50% 474 31.58
Upto 10% 121 8.06
0 to -10% 76 5.06
-10 to -50% 167 11.13
-50 to -100% 27 1.80
Grand Total 1501 100.00
nooreshtech.co.in 

 

Click to Download – Excel Sheet – NSE All Returns

  • 42% of the stocks gave a return of 50% or more.
  • 19% of the stocks gave a return of 100-400%. ( 1 out of 5 stocks doubled this year )
  • 82% of the stocks gave a positive return.

Conclusion

  • A diversified random portfolio would have given a return of 52-60% which is much higher than the Nifty/Sensex/BSE 500/Midcap etc and almost close to the BSE Smallcap/Nifty Smallcap even though the universe is almost all listed stocks.
  • A little more concentrated portfolio would have given much more higher returns.
  • 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 Demonetization – Nov/Dec 2016 would it really matter what stocks you selected ?
  • In such times it becomes easy for advisers, analysts, pms and mutual funds to show how superior their returns are to the benchmark – Nifty. If 42% of the stocks went more than 50% there is a good chance every smallcap/midcap pf made that sort of return as there will definitely be some outliers which went up 100% ( 1 out of 5 stocks doubled up )
  • The above exercise clearly tells us to be thankful to the market for being so kind in giving returns irrespective of whether it was luck or skill.

Wish you a Healthy and Wealthy New Year

Nooresh Merani

2 Comments

  1. Jatin
    January 1, 2018

    Simply superb. Honest confession by a professional. I salute your genuine approach.

    Reply
  2. Neal
    January 10, 2018

    Excellent analysis

    Reply

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