May 15, 2014

Profit expectations from stock market

Several times, one experiences a situation where you buy a stock and another stock rallies. Or you wish you had stayed away from large caps and had invested in the smaller caps as they give better returns. One also learns through experience that half the trades fail or do not generate the expected returns.

In reality there is not much difference between different portfolios.  After the initial 20-30 stocks, investing in different sets or larger sets is unlikely to improve overall performance.

For this exercise, I used 2 trading signals:
1.Buy on 31-DEC and hold till date... returns are shown in YTD column OR
2.Buy at the lowest price of this year and hold till date... returns are shown in Best returns column.

This is basically a buy and hold strategy. The 2nd strategy is hypothetical (not possible in real life) but the returns give an idea as to the best possible returns if you were a genius. In reality, returns will be less by at least 10%.

The filtering is done by volume... so explorations are done with stock filter set at 5, 20, 50 and 100 crores average daily volume.

Results are as follows:

Average daily volume Rs 5 crores... 264  stocks.

Average daily volume Rs 20 crores... 132 stocks.

Average daily volume Rs 50 crores... 72 stocks.

Average daily volume Rs 100 crores... 37 stocks.

Average daily volume Rs 200 crores... 12 stocks.

As can be seen from the above tables, there is not much a variation between the returns across different stock categories. However the last category results may not be reliable as there are only 12 stocks and so sample size is small. A small sample size generally tends to skew results.

Moral of the story: do not chase returns.... make a basket of 30-50 stocks and trade all signals the next few years (for eg., nifty 50 or nifty junior or stocks > 100 crores volume etc). You will earn very decent money and your performance will not be much different from other portfolios.

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