Well, the whole world is
crazy about investing considering the sharp pullback in global markets in this
pandemic. This article is all about the result of a strategy that I backtested.
I’ve been into financial markets since 9 months and luckily have observed both
peak and bottom(only if it doesn’t retest those levels of March). Being a
beginner, I have worked on something in the past 2 weeks and will be sharing
the insights of “Common Sense” investing.
Investing
We have been hearing this term for a long time. We have
always read the stories of Infosys, Amazon, Apple, etc. being the greatest
compounders in history. Anyone can get attracted to investing, the way it is
being portrayed on news channels, blogs, and what not. Everyone will say if you
had invested 100USD in Amazon, it would have been worth of 154,654 USD at CAGR of 37.61%.
This chart is showing the run of AMZN. Clearly, it is
leading NASDAQ in this rally after the COVID crash.
Common Sense, Sweet Investing
v1.0
Well, the whole world is crazy about investing
considering the sharp pullback in global markets in this pandemic. This article
is all about the result of a strategy that I backtested. I’ve been into
financial markets since 9 months and luckily have observed both peak and
bottom(only if it doesn’t retest those levels of March). Being a beginner, I
have worked on something in the past 2 weeks and will be sharing the insights
of “Common Sense” investing.
Investing
We have been hearing this term for a long time.
We have always read the stories of Infosys, Amazon, Apple, etc. being the
greatest compounders in history. Anyone can get attracted to investing, the way
it is being portrayed on news channels, blogs, and what not. Everyone will say
if you had invested 100USD in Amazon, it would have been worth of 154,654 USD at CAGR of 37.61%.
This chart is showing the run of AMZN. Clearly,
it is leading NASDAQ in this rally after the COVID crash.
But there is a lot of risk /analysis behind
these lucrative stories. Now, the question is how we would have guessed that
Amazon will rule the world? Well, we need luck, hard work, and common sense to
pick these kinds of multi-baggers. One needs to give time to study annual
reports, financials, and future prospects whatnot. Warren Buffett
bought more than $1 billion of Coca-Cola (KO)
shares in 1988, an amount equivalent to 6.2% of the company.
Let’s analyze the three factors:
Common
Sense: He assumed that no
matter what changes, people will still drink Coca-Cola.
Luck:
Assumption became true. We
are still drinking Coca-Cola with joy.
Hard
work: No one gives credit to Buffet over this factor. But the
reality is different.
Now, I’ll show one more example of why no one
is perfect in investing bets. Let’s study the case of one more investing bet,
airline stocks. Warren Buffett started investing in 4 Airlines Stocks in 2016
and we all know what happened due to COVID-19.
A similar trend is there for other airline
stocks which he bought.
Common
Sense: He may have assumed
that no matter what changes, people will still travel from countries to
countries.
Luck:
Unfortunately, Corona Virus
has impacted the airline industry the most. Speaking at the annual
shareholders’ meeting in 2020, Mr. Buffett said “the world has changed” because
of the coronavirus. He sold those shares.
Hard
work: This is still the same
in both cases.
This shows there is always a risk in
investing. Now, it is not possible for everyone to do this tremendous amount of
research being busy in jobs, businesses, and risk-taking appetite. There is one
simple solution for everyone, INDEX
FUNDS.
Being a Warren Buffett fan, I always admire
this quote.
“Index
funds are ‘the most sensible equity investment’ for most people”
Well talking about Index Funds, they are
simply the baskets of top companies as per market capitalization which keeps on
changing as new companies fit into them and dropping the laggards ones. So
basically, they keep on growing although not at Amazon pace but surely with
less risk. Every country has some famous indices like Dow Jones 🇺🇸,
Nifty 50 🇮🇳,
Sensex 🇮🇳,
DAX 🇩🇪,
FTSE MIB 🇮🇹,
etc.Talking about Nifty 50,
it is group of top 50 companies in India. It is managed by NSE(National Stock
Exchange). I searched a lot about the hypothetical Nifty 10 index but it wasn’t
there, so I created a one by using the Yahoo Finance database, NSE monthly
reports. Unfortunately, NSE had the monthly reports of the names of individual
stocks from 2010 only. So, I have backtested this on 10 years of data.
Idea
of Strategy
NSE rebalances the Nifty50 on a semi-annually
basis with very mild changes. I have used the data of stocks in the index from
March 2010. I have used two methods of Investing: Direct and Annual SIP. Annual
SIP is just used to make calculations as normally Monthly SIPs are famous and
better. Idea is to compare Nifty 50 and
Nifty 10, not monthly SIPs and Annual SIPs. We will be buying the top 10
Stocks every 30th March of the year as per their weightage from the Nifty 50 index.
In Direct
Case, we will invest 100INR only once on 30th March 2010 and will look at
it exactly after 1 year. We will look at the updated Nifty 10 stocks, their
updated weightage and will reallocate the invested capital as per the new
parameters.
In Annual
SIP, we will be investing an additional 100INR every 30th March and will
reallocate the total capital on updated weightage as per new parameters.
So, on 30th March 2010, the top 10 companies
were:
Weightage2 is the weightage of stock in the
Nifty-10 index.Now, what matter most is the comparison of Nifty 10 to Nifty 50,
let’s observe this:
This simple performance has been repeated for
the next 10 years and I have calculated and plotted the same things for all
year. If one wants to have a look at it, it is available here.
Let’s come straight forward to 30th March
2020, let’s see how our NIFTY 10 looks
like,
Clearly we have some stocks which are still in
Nifty-10 which were there in 2010 too. That’s a good sign.
Now, let’s compare the performance of NIFTY 10 vs NIFTY 50 on various aspects over the past 10 years:
Why
Nifty 10?
The reason for adopting Nifty 10 was their
healthy weightage in Nifty 50 in comparison to the other 40 stocks... Let’s
have a look at the weightage on a YoY basis.
CAGR Comparison:
Now, let’s have an in-depth look at our 8
leaders which were always there in the Nifty-10
index.
Inspiration:
The inspiration behind conducting this
analysis is Warren Buffett (Patience), Peter Lynch(Common Sense), and Alok
Jain(Systematic Approach).
Disclaimer:
Due to some errors in Yahoo Database, HDFC has
some missing data for 2014 to 2016. It may have affected yearly return for
2014–15,2015–16 sessions by some margin, but considering the linear growth in
HDFC, the overall analysis might be affected by the tiniest of margin. All data
has been taken till 19th June 2019. Even after that leaders have played
important role to take Nifty over 11200. Don’t invest specifically on the basis
of this strategy, it has been working well from the last 10 years and one can’t
assure the same future returns. Please look at data from NSE too for your
confirmation of this study before investing. Annual SIPs are taken just for
SIPs reference, if I would be applying this strategy, I’ll be using monthly
SIPs for investment.
I have used Python and Jupyter Notebook to
perform this. Thanks to Vipin Joshi for fixing the bugs in codes. Some ideas
are taken from randerson112358
article. I’m passionate about Investing and Trading which is backed by data.
Hit me up on my social handles for chats on these topics.
But there is a lot of risk /analysis behind these
lucrative stories. Now, the question is how we would have guessed that Amazon
will rule the world? Well, we need luck, hard work, and common sense to pick
these kinds of multi-baggers. One needs to give time to study annual reports,
financials, and future prospects whatnot. Warren Buffett bought more than $1 billion of Coca-Cola (KO) shares in 1988, an amount equivalent to 6.2% of the
company.
Let’s analyze the three factors:
Common
Sense: He assumed that no matter
what changes, people will still drink Coca-Cola.
Luck: Assumption became true. We are still drinking Coca-Cola
with joy.
Hard
work: No one gives credit to Buffet over this factor. But the
reality is different.
Now, I’ll show one more example of why no one is perfect
in investing bets. Let’s study the case of one more investing bet, airline
stocks. Warren Buffett started investing in 4 Airlines Stocks in 2016 and we
all know what happened due to COVID-19.
A similar trend is there for other airline stocks which he
bought.
Common
Sense: He may have assumed that no
matter what changes, people will still travel from countries to countries.
Luck: Unfortunately, Corona Virus has impacted the airline
industry the most. Speaking at the annual shareholders’ meeting in 2020, Mr.
Buffett said “the world has changed” because of the coronavirus. He sold those
shares.
Hard
work: This is still the same in
both cases.
This shows there is always a risk in investing. Now, it is
not possible for everyone to do this tremendous amount of research being busy
in jobs, businesses, and risk-taking appetite. There is one simple solution for
everyone, INDEX FUNDS.
Being a Warren Buffett fan, I always admire this quote.
“Index
funds are ‘the most sensible equity investment’ for most people”
Well talking about Index Funds, they are simply the
baskets of top companies as per market capitalization which keeps on changing
as new companies fit into them and dropping the laggards ones. So basically,
they keep on growing although not at Amazon pace but surely with less risk.
Every country has some famous indices like Dow
Jones 🇺🇸, Nifty 50 🇮🇳, Sensex 🇮🇳, DAX 🇩🇪, FTSE MIB 🇮🇹, etc.Talking about Nifty 50, it is
group of top 50 companies in India. It is managed by NSE(National Stock
Exchange). I searched a lot about the hypothetical Nifty 10 index but it wasn’t
there, so I created a one by using the Yahoo Finance database, NSE monthly
reports. Unfortunately, NSE had the monthly reports of the names of individual
stocks from 2010 only. So, I have backtested this on 10 years of data.
Idea of
Strategy
NSE rebalances the Nifty50 on a semi-annually basis with
very mild changes. I have used the data of stocks in the index from March 2010.
I have used two methods of Investing: Direct and Annual SIP. Annual SIP is just
used to make calculations as normally Monthly SIPs are famous and better. Idea
is to compare Nifty 50 and Nifty 10,
not monthly SIPs and Annual SIPs. We will be buying the top 10 Stocks every
30th March of the year as per their weightage from the Nifty 50 index.
In Direct Case,
we will invest 100INR only once on 30th March 2010 and will look at it exactly
after 1 year. We will look at the updated Nifty 10 stocks, their updated
weightage and will reallocate the invested capital as per the new parameters.
In Annual SIP, we
will be investing an additional 100INR every 30th March and will reallocate the
total capital on updated weightage as per new parameters.
So, on 30th March 2010, the top 10 companies were:
Weightage2 is the weightage of stock in the Nifty-10
index.Now, what matter most is the comparison of Nifty 10 to Nifty 50,
let’s observe this:
This simple performance has been repeated for the next 10
years and I have calculated and plotted the same things for all year. If one
wants to have a look at it, it is available here.
Let’s come straight forward to 30th March 2020, let’s see
how our NIFTY 10 looks like,
Clearly we have some stocks which are still in Nifty-10
which were there in 2010 too. That’s a good sign.
Now, let’s compare the
performance of NIFTY 10 vs NIFTY 50 on
various aspects over the past 10
years:
Why Nifty
10?
The reason for adopting Nifty 10 was their healthy
weightage in Nifty 50 in comparison to the other 40 stocks... Let’s have a look
at the weightage on a YoY basis.
CAGR Comparison:
Now, let’s have an in-depth
look at our 8 leaders which were always there in the Nifty-10 index.
Inspiration:
The inspiration behind conducting this analysis is Warren Buffett (Patience), Peter Lynch(Common Sense), and Alok Jain(Systematic Approach).
Disclaimer:
Due to some errors in Yahoo Database, HDFC has some
missing data for 2014 to 2016. It may have affected yearly return for
2014–15,2015–16 sessions by some margin, but considering the linear growth in
HDFC, the overall analysis might be affected by the tiniest of margin. All data
has been taken till 19th June 2019. Even after that leaders have played
important role to take Nifty over 11200. Don’t invest specifically on the basis
of this strategy, it has been working well from the last 10 years and one can’t
assure the same future returns. Please look at data from NSE too for your
confirmation of this study before investing. Annual SIPs are taken just for
SIPs reference, if I would be applying this strategy, I’ll be using monthly
SIPs for investment.
I have used Python and Jupyter Notebook to perform this.
Thanks to Vipin Joshi for fixing the bugs in codes. Some ideas are taken from randerson112358 article. I’m passionate about Investing and Trading which
is backed by data. Hit me up on my social handles for chats on these topics.
Wow...
ReplyDeleteGreat analysis...