Peepal Capital

In this part of the System Trading series I will talk about how Buy signals are generated. Suppose we built a consideration set of 'n' number of stocks. And now we want to pick a smaller set for entering long trades. Assume this system is a long only equity asset class system. For assumption sake let us take the Nifty 100 (N100) constituents as the consideration set. As far as I recall these 100 stocks constitute approximately 75% of the market capitalization of India. Let us also assume we are building a factor system with certain characteristics as explained below: 1. Low Volatility - Primary Filter 2. High Returns - Primary Filter 3. Trend - Secondary Filter 4. Growth - Sorting Criteria 5. Efficiency - Sorting Criteria 6. Value - Sorting Criteria 7. Solvency - Sorting Criteria 8. Promoter - Sorting Criteria We simply calculate Sharpe Ratios of all stocks in N100 for a 365 calendar day period. I have taken this system as 365 day momentum which is get...

I made a journal entry on my old site titled 'The Purpose of Duty' on Friday the 14th in June 2013. It has been almost 7 years since then and I feel the same today. The captain of a ship navigates his ship through the oceans. In doing so he faces strong winds and rough seas. Some ships go down while others survive to see another day hoping it to be calmer and quieter. A trader just like the captain manages his fund through the uncharted territories of future price movements. The captains never fight the winds and tides they simply adjust the sails. Similarly traders adapt to the market to live another day. The market can remain irrational longer than a trader can remain solvent. In hindsight I think this is something I still believe in. It is futile to go against basic discernible trends. Either we go through with it or sit it out. The current trends are not favorable for most of the types of investors. I would avoid making any new long term bets. 

Howard Marks came out with his new memo titled 'Uncertainty'. I usually do not read all of his memos & have read only one book of his. But what resonated with me this time was his take on the futility of predicting the future. I am in touch with very experienced investors and novice ones on a daily basis. One clear pattern I see is that the seasoned ones rarely make predictions. They try to look at history and then try to intuitively layout the possible outcomes. On the other hand novice investors especially the ones who have read a book or two and watched some videos on investing say with certainty that the market will be 12376.90 the day after Christmas in 2021. A series of quotes (inspired from the memo by Marks & mentioned there). It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so. - Mark Twain We have two classes of forecasters. Those who don't know - and those who don't kn...

I realize that many things determine if a stock is a wise buy. But I have learned that during a depressed stock market, if you can get a cost position in a stock’s bottom price range it will forgive a multitude of misjudgments later. During a market rise, you can sell too soon and make a profit, or sell on the way down and still make a profit. So, with so many profit probabilities in your favour, the best cost price possible is worth waiting for. This is an old article from Fortune Magazine published in 1978. It is so simple in its approach that it looks plain vanilla common. But it makes money. What are the stocks and sectors in the dumps today? Auto is beaten down to the ground. Banking & Financials is getting a beating. The top auto stocks would be Maruti, Bajaj Auto, Eicher and Hero Moto. What sectors are flying today? Pharma & 'Specialty' Chemicals Should you be investing in these sectors? I think the best time is behind us. Some investors have e...

The Coronavirus event has been taking a toll on human life since Nov-Dec '19. The world markets have taken a tumble and then recovered in the same period. I am not sure how many market participants have seen previous collapses in indices. I have seen only the 2008 as a student of Finance. The loss in human life and means to living has been devastating therefore the pain suffered in the markets is absolutely inconsequential so to speak. Here is the chart of Sensex since April 1979 both in absolute terms and on log scale. Here is the maximum drawdown in the Sensex. Here is now a look at three recent drawdown events in the Nifty 50 index. All charts are superimposed. Here is something called a 'Lake Chart' since the late 80s. The volume of water in each lake is essentially the pain one has to endure. Here is what I have devised on my own. I call it the 'Triangles of Pain' (ToP). It is a slight variation of the Lake ratio. Each of the right ...

In Part 2 of my notes on System Trading I wanted to outline two high level but very important areas of a trading system. Disclosure: I will be mentioning stock names for examples. I have traded in all of them and hold a few as trading positions. This is in no way an advisory. This is for theoretical purposes only. In summary: System Definition: These are the underlying principles of the system Consideration Set: What instruments are considered to be traded System Definition There are many ways to make money. A fundamental pure value based approach can be called a system. A momentum based strategy of picking up stocks which are in top 25 of a list of 100 stocks in a time frame can be considered a system or picking stocks basis modified Sharpe ratios. There could be mean reverting strategies or breakout ones. And so on and so forth. But in the example which I will build on we will consider the following simple properties. Long Only - In this system we will be onl...