Don’t be fooled by long term market returns.

In introductory finance courses and from various financial media you may have been taught that the stock market returns  around 8- 10% per year.

While this might be true historically when you’re talking about long-run, annualized average returns,it’s actually quite rare to have individual years that give 10% returns. In fact, regular 10% returns per year in the stock market are a myth. So are 9% returns and 11% returns. In reality, over extended periods, it is hard to see any pattern of stable annualized returns.

cd-9Source: Bloomberg

As of end 2015, the S&P 500 index has actually returned 15+% annualized . That’s certainly way better than the long term average of 8 – 10% returns.

What you must realize is that high and low returns in markets, occur in clusters, i.e. there will be a few years or even a decade even when the market returns are way above the long term average and then the good times are inevitably followed by long periods of negative returns.

Taking a simple long term average of these returns is not just meaningless but downright dangerous as you are expecting that you are going to be able to generate the long run average return just by buying and holding through these times. This is a fallacy as the outcome is completely dependent upon your starting and ending period. For example lets assume you had a 10 year horizon in year 2000 and you invested into the Nasdaq (4000-5000) at the beginning of 2000. Even in 2010, you so called “safe – buy and hold –  index investment” would have been down by over 40% and it would take another 5 years till 2015 to get back to the same levels (Nasdaq: 5000).

On the other hand if you had bought into the index in 2003 or in 2009, you would have seen amazing returns in less than 3 years after both of those starting points. This does not mean I am implying that market timing is easy  ( It’s not easy but its not impossible either…contrary to popular perception! Valuation based investing is essentially a version of market timing).

So next time some one quotes you a long term average return, the acceptable response is ” In the long term we are all dead!”

Smart Beta

Buy Low Sell High. Here’s How you do it!

Everyone talks about it but how do you actually do it? Introduction to some really simple technical analysis.

I am sure you are familiar with the phrase “Buy Low Sell High” when it comes to markets/investing and the reason why it is so popular is because in almost every finance/investment article or publication you would ever read, somewhere in there the author would have advised you to follow this principle. However, in most cases no one really ever tells you how to do it based on a set of specific rules and instead usually the focus in on general guidelines such as buying when the economy is doing well, buying at low valuations etc.

For those of you who have been doing investments in the past may recognize that making such a claim is way easier than it is actually to implement it in practice. There are many reasons for failure to implement it successfully over time but the primary among them are

  1. Emotional urge to sell in panic when market drops after purchase.
  2. Lack of any guideline on when is actually a good time to sell etc.

For individual stocks it is even more difficult to implement a buy low and sell high strategy as a cheap stock may become cheaper still or the company may even go bankrupt, so how low is low when making a buy decision and similarly how high is high before you should sell as many of us have watched with regret a stock continue to trend higher after we sold it off.

First of all, let me clarify that I do NOT have a magic formula and nor can I guarantee that the methodology I will share with you will work perfectly at all times. Secondly, I must categorically state that the method is designed to work with indexes (Index funds or ETFs can replicate Indexes) or diversified portfolios such as mutual funds.

Before I proceed further, please look at the charts for S&P 500 Index since 1975.


S&P 500 (normal scale)

If you have been an active investor, you would notice that although the markets are currently at their all time highs, there have been several periods of significant drops in value in 1980, 1987, 2000 and 2007 which are more apparent in log scale chart as given below.


S&P 500 (Log scale)

Although a buy and hold investor would be doing fine at this stage, the key to remember is how you felt in 2002 and 2008? Were you happy that you had exited earlier (sold high) and now were able to buy low? Or were you stuck holding paper losses wishing that you should have booked profits earlier? Or worse still, did you end up doing exactly the opposite and instead sold near the bottom of the marking due to panic and the fear that you may lose even more money?

So is there a system to help us in such situations and use it as a guide to help in making decision whether to sell or to buy? Well, the short answer is yes – there is, but as mentioned before, it works on diversified portfolios over long periods of time.

Buy Low (NOT LOWEST!)  and Sell High (NOT HIGHEST!)

The methodology is based on trend following technical analysis but the trick is to keep it simple (i.e. only use one indicator), and use it only for long term charts and not over short periods of time as it is almost guaranteed to fail.

Here is how it works:

  • Identify an investable index/diversified portfolio such as a mutual fund or an ETF.
  • Obtain a weekly closing price chart for the index. Google finance is a good place to start as it carries data for most indices and provides the required technical analysis tools.
  • Add 100 week Exponential Moving Average trend line for the selected price chart.

For the S&P 500 the chart would now look like this:


S&P 500 (Normal Scale) with 100 week EMA Link to this chart on Google Finance


S&P 500 (Log Scale) with 100 week EMA Link to this chart on Google Finance

The rule to follow strictly is as follows:

SELL when the index closing value falls below the 100 week EMA trend line”


BUY when the index closing value is above the 100 week EMA trend line”

That’s it! It is as simple as that! No need for complicated macroeconomic financial analysis or following financial news media on a daily basis. Market prices move in trends and long term trends last. Again, the method will NOT be effective for individual stocks! Reason for that is that individual stocks have much higher volatility range than an index and as such it may give too many exit and entry trades within a short interval.

Based on the rules above, you would be out of the US market in early 2000 and 2008 and save yourself a lot of heartache. Likewise you would be back in at 2003 and 2009. However as you may notice that it is not fool proof and there may be occasions when you sell and then may have to buy again a few weeks or months later maybe even at a higher price than you sold off. This is called a “whipsaw” in technical trading however over long periods of time the losses due to whipsaws are recovered by capturing majority of the trend with your investment.

Why does this system work and what is the rationale behind it is a huge topic by itself and not the intent of this article.

Some of you may also try to reduce the value of chosen EMA but as you do that although the potential returns may increase, the number of whipsaws will also continue to increase.

You can apply the same rule across markets and see similar patterns. For example (The titles are linked to actual charts on Google):


FTSE 100 Index


Japan Nikkei Index


Shanghai Composite Index


India Nifty Index

You can try using the system with some commodities as well however it becomes more volatile and primarily is usable only for gold and silver. Example:

image017 Gold – GLD ETF


 Silver – SLV ETF

As you can see from the examples above, a simple trend following approach with the decision making based on trend reversal confirmations would have saved you from most major bear markets and would have been a good exit indicator.

As I mentioned, no technical system is perfect for if they were, none of us would be reading such articles. The point is that the approach doesn’t have to be perfect for it to be profitable in the long run however the key is to stick with the system and not to stop following the rules if you get a few whipsaws at the beginning or in the middle.

About Trend Following

Famed Stanford University psychologist Leon Festinger once said, “A man with a conviction is a hard man to change. Tell him you disagree and he turns away. Show him facts or figures and he questions your sources. Appeal to logic and he fails to see your point.”

Although trend following has been one of the most successful trading strategies for decades, some critics downplay the massive profits accumulated by trend followers, arguing there are just a few chance winners — “lucky monkeys,” they claim. Not true. Large numbers of trend followers have found a way to outpace market averages. They have done so with hard work and the ability to stick with a trading plan — usually for a very long time. However, some detractors seem happy to snub their nose at success, perhaps even until they have wasted a lifetime on sub-par trading strategies. Others, however, choose to test, accept proof, and build toward a profitable life.

Who are some inspirational winners? The list of successful trend-following traders includes:

  • John W. Henry, who bought the Red Sox through trend following.
  •  Bruce Kovner, who is worth more than $4 billion.
  • Bill Dunn, who made $80 million in 2008.
  • Michael Marcus, who turned an initial $30,000 into $80 million.
  • David Harding, who is worth more than $690 million.
  • Ed Seykota, who turned $5,000 into $15 million in 12 years.
  • Kenneth Tropin, who made $120 million in 2008.

Most of these traders did not come from privileged backgrounds; many did not learn trend trading in college. They came from different disciplines, worked disparate jobs, and saved a nest egg to begin trading with trend-following rules. They are proof that anyone can rise to the top if ambitious enough.

The purpose of trading is to make money and not to be right about economy or market cycles — a distinction that separates trend-following from other trading philosophies.

– S.B.
Beta is good. Smart Beta is better.

Gold Miners update

This year has been phenomenal for Gold Mining stocks however after having risen over 150% from trough to peak, the stocks are overdue for a consolidation and the first phase of the overdue correction has already started over the past couple of weeks.



In my previous post in June I had mentioned that the market was likely to head higher and indeed it did so until mid august, since then however the market has turned a lot more volatile and in my view this correction would likely turn into a consolidation for a few months. Any asset class which rises 150% in 6-8 months needs to cool down for a healthy long term bull market to continue lest it turn into a quick boom and bust kind of bubble.  Fundamentally the valuations now are not terribly expensive but they are no longer in the dirt cheap category as they were in January.

These stocks are of course highly correlated to gold price and given the likelihood of a rate hike by the fed later this year, gold too may undergo a period of consolidation before another leg up. The trend in all cases remains positive and as such if you are a buy and hold type of investor then add on dips and keep holding. For the more short term oriented traders if you had exited earlier, you can start adding back in the weeks and months to come as the miners consolidate.

Smart Beta

Where are the markets headed?

Gold miners update

A few weeks back I had written about an impending correction in gold miners and although the correction did happen, the miners went up a fair bit after my call and then corrected back to the levels at which I had exited.  Hence a small time and price wise correction is now in and the market has formed a base while working off the overbought condition. Since then the miners have now started to rally again and at this stage I believe that the miners are headed higher as the market is not as overbought as it was in April. A bigger correction will come but probably only after the miners have made a new high. In any case this is a long term bull market in miners after their worst bear market on record and it is far better to be in an experience some downside than to sit out and miss all potential upside. The valuations remain reasonable and the long term trend remains positive.



Global Equities:

According to most surveys and fund flow trackers, majority of people continue to remain bearish on equity markets globally, the sentiments are the same for emerging market equities as well as those near all time highs like S&P500.

3As a contrarian view, when bearishness is so pervasive, the likely path for the market is to head higher. I realize that US markets are trading at high valuations and as such the upside may not be much, nevertheless any breakout from the range that the S&p500 has been stuck in for almost 2 years will be quickly self reinforcing as the money on sidelines rushes in (valuations be damned!). Having said that, I personally don’t have any position in the broader US market as valuations just don’t appeal to me. However its the mining, agriculture and the oil space that I am quite bullish on due to their horrendous performance in the past few years.

Emerging markets on the other hand have started to move somewhat from their extremely low valuations and my personal view is that trend will only get stronger in weeks and months to come. The valuations and the dividend yields are just too tempting to be ignored in a world of negative bond yields.


The regions I favour in the EM space are: BRIC (F#$% you Goldman!)  and also Singapore, Korea and Vietnam.

My favorite play in the equities space right now is the natural gas related equities which were the worst hit in the oil rout over past 2 years. There are also indications that natural gas may replace coal in the years to come as the primary source of fuel for power plants.

4FCG is an equally weighted ETF focusing on companies engaged in exploration/production/distribution of natural gas. The sector has been devastated by the collapse in natural gas prices with current prices near 25 year lows

6and the current valuation of : p/b =  1.3 is stil low by historical standards. The bottom of the cycle was at p/b = 1 in Jan 2016.


There’s a lot happening with other commodity markets too (Silver, Steel, Food Grains, Oil) and I’ll cover that in  a separate post soon.

Smart Beta

Beware! The gold rush of Q1 2016

Earlier this year (Jan 28th to be precise) I had posted about my investment methodology and highlighted Gold Miners as an investment opportunity that I was allocating aggressively to at the time.  The timing of that article turned out to be extremely accurate as gold miners went into an amazing bull run  pretty much from that point onwards. That has since made them the best performing asset class so far this year.

First and foremost, let me be honest and confess that the timing of the article was pure and blind luck. I do not have any crystal ball and I did not see this coming . I do not profess any special skill in timing that trade.

However, this does not mean that there was no skill involved. The skill part of the trade was demonstrated when I had first highlighted gold miners as an investment opportunity after they had crashed in July 2015. That original article, highlighting GDX/GDXJ as great bargains is where fundamental and technical analysis techniques helped me identify the opportunity. The july levels turned out to be pretty much the bottom and the market stayed around those levels till earlier this year.

Having clarified that, I am now getting quite nervous about the speed and magnitude of the rally. The valuations, while still cheap by historical standards, are not in the dirt cheap category anymore.  Apart from valuations, in the near term its the speed of the rise that is a danger sign. To rise higher, a healthy bull market must have regular and meaningful corrections or the rate of the ascent should be moderate. In the current scenario, the mining stocks have risen across the board and in many cases doubled from their lows in a matter of weeks.

At this stage, gold miners are ripe for a price (15-20% drop ) and time  correction (lasting a few months). Of course, I don’t mean that this is guaranteed to happen or that the bull market is over. I am simply stating a scenario that is statistically highly likely as is typically observed in markets with similar moves.

Latest charts (22 April 2016 – morning)



Beyond the correction, the valuations remain reasonable and the long term bull market should continue. However in the near term prices are looking extremely deviated from their weekly moving averages and more often than not, such moves are not sustainable. I would be more comfortable buying a calmer market even if it turns out to be at a higher price (although unlikely that I would need to)

I have exited my positions in GDX and GDXJ and will reenter the trade when prices are nearer to the trend-lines, whether that happens via time or by price (or both) remains to be seen.

Smart Beta