Author: ashish

Talk to any investment guru and you will hear from him that low risk comes with low returns and high risk comes with high returns. While this may be true till a year back but with emergence of Artificial intelligence a new category has evolved which is low risk and high return. AI is the new warren buffet of capital markets and if used carefully it can create some new products which human intelligence can’t.

It has unique ability to analyze large number of stocks in a completely unbiased manner based on data. We all know that data driven decisions have much higher probability (mostly defined) of success. All this is something which human with all their experience and knowledge may not achieve. If you look at the average performance of a small cap fund over a long period of time (5+ years), the return will be similar to a large cap fund. This is because most aggressively managed (At least the good ones) small cap funds perform really well in bull market but in bear market they tend to give up most of their gains. This is typically what happens in a high risk and high return scenario.

Our ” Momentum with safety” portfolio tries address this concern leveraging AI algorithms. The objective is to build a portfolio which can give you returns similar to smallcap index in bull market but in bear market it should outperform the index (small cap or even Nifty) by good margin. So, in the longer term the returns are much higher than most conventional portfolios (Aggressive or safe) and that too with a much lesser risk. This eliminates the need to worry about market fluctuations (especially after big bull run) , timing he market or returns generated over a longer period of time.  The portfolio is highly dynamic in nature and considers the future return and risk potential of a stocks. This will keep changing and hence it will need periodic rebalancing which may be 10-12 times a year.

Let’s understand the stock selection process with an example. Abbott India or HUL are considered safest stocks however they are not a part of our portfolio since April 2020. Reason is that our algorithm considered their medium-term return potential as “low” and even with a lower risk which they carry it could not justify their selection. The portfolio is not only about low risk only but high returns as well.

Now let’s have a look on the portfolio performance as on 10^th Jan 2021

Portfolio/Index	1 month	3 months	6 Month	1 year
our MWS portfolio	13%	28%	47.30%	80%
Nifty	6.45%	20.25%	32.80%	20%
Small cap 100	10%	26%	54.17%	26.53%
Midcap 100	8.60%	29.44%	45%	30%

From this table it’s clear that outperformance of our portfolio becomes bigger in 1 year. This can be attributed to the fact that we had covid 19 driven market crash in march 2020 where all the indices fell heavily but our portfolio had limited fall due to its unique algorithm-based limited risk selection criteria. This led to widening of performance gap further.

To explore more about our portfolio visit : prudentcap.smallcase.com

After making all time high post the epic crash of covid 19 investors especially retail investors are feeing jittery. They are worried of a market correction or crash which may take away their profits. At the same time the way markets are making new heights daily, they are not willing to get out of it completely. Market has its own way of dealing with our investments. At times market surprises us with its bull run and we have FOMO (fear of missing out). Finally, we enter the market (unfortunately when it’s at euphoria) only to see it crashing down. We finally book losses and move out of market and vow to never come back. Some of us are sharp enough to call markets as gamble. Well for a minute let me agree with you on this. But why only markets anything which is done without proper training and experience is gambling only e.g. driving a car. This why retail investors make money only in bull (because almost every stock will rally) run only to give it back in the crash. So what can be do to make sure that we don’t lose money in crash? Invest heavily and pray to god that there should be no market crash? Nahh this is what is called gambling.

Like after every summer we have rains and followed by winter same happens with markets. After every bull we have bear and sideways market. The cycle repeats.  So instead of praying to god that we should not have winter better keep some woolen cloths. That’s all you need to ace the markets. Bottom-line is  instead of wasting time in predicting when this will happen we should focus on things which are in our control.

Now the “How” part. How to accomplish this?

We at prudentcap use our propriety developed machine learning (AI) algorithm based on past 1-year data of stocks to create a portfolio which has risk of around 60% of market risk for bear markets. This means that if the bear run starts and market falls by Rs 100 our portfolio is designed to fall around Rs 50-60. On the other side if we are in a bull run with no major correction and market goes up by Rs100 the portfolio should move up by Rs 95-120. This makes sure that the portfolio beats the market in long (1 year+) run by good margin. We periodically rebalance the portfolio which is roughly once a month to remove the stocks which no more fit in our objective. The whole idea of this “momentum with safety portfolio is to protect your capital during market crash and at the same time provide you with good capital appreciation. Now let me give you some live examples of what actually happened.

Let’s consider both bull and bear scenario of this year

 

Period	Market direction	Nifty	Momentum with safety portfolio
Feb 28 2020- April 3 2020	Market crash	-27.80%	-13.80%
Nov 12 2020 – Dec 12 2020	Market rally	6%	10.50%
last 6 months from 12th Dec 2020	Big bull run	36.48%	38.60%

 

For more information on covid 19 crash and our portfolio please visit our earlier blog post.  This is the portfolio design framework enabled with artificial intelligence and although chances result on the expected lines are high but the outcome cannot be guaranteed. This portfolio service is provided on small case platform so please visit prudentcap.smallcase.com to explore more.

COVID-19 is the biggest human tragedy in many decades and has impacted almost every aspect of our life. So how come stock market remain immune to it. Year 2020 is unique for stock markets in 2 ways.

1. Sharpest ever market crash in 2 months’ time.
2. One of the biggest market recoveries after that.

Unfortunately, many of the retail investors got trapped and they did the worst which was selling their portfolio during peak of market crash thus making their losses permanent. Many of you enquired about our portfolio’s performance during covid19 crisis. Our momentum with safety portfolio aims to maximize returns at relatively lesser risk. The objective is to outperform the market during both bull and bear run.  We will consider the performance during march 2020 when COVID-19 driven market crash was at it’s peak. On 4^th April 2020 our portfolio was rebalanced and the performance picked up very sharply. So below are the performance details.

Our Portfolio Stock	Price on 28th Feb close	Price on 3rd April close	Returns
HINDUNILVR	2174	2154	-0.9%
SANOFI	7293	6655	-8.7%
Nestle	15578	15104	-3.0%
AtUL	5358	3897	-27.3%
SFL	1627	1240	-23.8%
ABBOTINDIA	15718	15810	0.6%
AKZOINDIA	2350	2066	-12.1%
MindTree	944	701	-25.7%
BERGEPAINT	566	449	-20.7%
MCDOWELL	686	456.8	-33.4%
IPCA	1361	1385	1.8%
Portfolio return			-13.9%
Nifty return	11201	8083	-27.8%

 

As already mentioned, we try to identify stock with high return potential within a limited risk limit and most of the identified stocks fulfilled the criteria. Here are some of the highlights.

1. Of the 11 stocks identified by our algorithm 10 performed better than nifty.
2. Overall portfolio loss (-13.9%) was half of what nifty (-27.8%) incurred during the same time.
3. Two stocks still managed to deliver positive returns while one remained flat.

The portfolio was also made public on 3^rd March 2020 to help retail investors on our twitter handle @prudentcap  (Check tweet on 3^rd march 2020) . Additionally, below is the whatsapp screen shot of the recommendation. For more information about momentum with safety portfolio  please visit  prudentcap.smallcase.com as it is now offered on smallcase platform.