A simple investment strategy to beat Nifty returns

ncube

Well-Known Member
#1
Many believe stock market is very risky and to succeed it requires super trading skills and a holy grail system which only a few successful traders have. I want to disprove this notion by sharing a system which is simple and can consistently beat nifty returns. However if the expectation is to generate super high returns this strategy will not help, please you may have to look for it somewhere else.

My objective of sharing this strategy is to help traders who are looking for a simple systematic investment strategy which will help them generate slow but steady returns over the years and build wealth without taking undue risks.

These days it is not difficult to get investment ideas, there are N number of experts and gurus around us who will gladly identify and share the next multibagger ideas with us. But the point where the retail trader gets trapped is not knowing when to enter and exit the trade, and usually end up being wrong. This is where a systematic approach with clearly defined rules will guide traders to take proper actions.

Here I use the words investing and trading synonymously as the strategy I am going to share is a mix of both. Next few posts I will explain the concept and reasoning behind this strategy as it will give the required confidence to follow the strategy and also help one to understand the process of building a systematic trading strategy on their own based on certain core concepts or ideas.
 

checkmate7

Well-Known Member
#2
Many believe stock market is very risky and to succeed it requires super trading skills and a holy grail system which only a few successful traders have. I want to disprove this notion by sharing a system which is simple and can consistently beat nifty returns. However if the expectation is to generate super high returns this strategy will not help, please you may have to look for it somewhere else.

My objective of sharing this strategy is to help traders who are looking for a simple systematic investment strategy which will help them generate slow but steady returns over the years and build wealth without taking undue risks.

These days it is not difficult to get investment ideas, there are N number of experts and gurus around us who will gladly identify and share the next multibagger ideas with us. But the point where the retail trader gets trapped is not knowing when to enter and exit the trade, and usually end up being wrong. This is where a systematic approach with clearly defined rules will guide traders to take proper actions.

Here I use the words investing and trading synonymously as the strategy I am going to share is a mix of both. Next few posts I will explain the concept and reasoning behind this strategy as it will give the required confidence to follow the strategy and also help one to understand the process of building a systematic trading strategy on their own based on certain core concepts or ideas.
Nice start :) looking forward for learning something new :up::up:
 

XRAY27

Well-Known Member
#3
Many believe stock market is very risky and to succeed it requires super trading skills and a holy grail system which only a few successful traders have. I want to disprove this notion by sharing a system which is simple and can consistently beat nifty returns. However if the expectation is to generate super high returns this strategy will not help, please you may have to look for it somewhere else.

My objective of sharing this strategy is to help traders who are looking for a simple systematic investment strategy which will help them generate slow but steady returns over the years and build wealth without taking undue risks.

These days it is not difficult to get investment ideas, there are N number of experts and gurus around us who will gladly identify and share the next multibagger ideas with us. But the point where the retail trader gets trapped is not knowing when to enter and exit the trade, and usually end up being wrong. This is where a systematic approach with clearly defined rules will guide traders to take proper actions.

Here I use the words investing and trading synonymously as the strategy I am going to share is a mix of both. Next few posts I will explain the concept and reasoning behind this strategy as it will give the required confidence to follow the strategy and also help one to understand the process of building a systematic trading strategy on their own based on certain core concepts or ideas.
Good see your thread on investment ideas, hope many investors benefit from this
 
Last edited:

gautam7821

Well-Known Member
#4
I am in . Keep posting ..:up:
 

ncube

Well-Known Member
#6
Types of Trading Strategies:

Almost all trading strategies can be classified into 2 types: Right Skewed Strategies and Left Skewed Strategies. They are based on exactly opposite concepts and risk-reward curve they generate. Understanding the key differences & limitations of these strategy types will help us design & explore new strategies as per our needs.

Right skewed strategies are very popular and one can find lot of literature on this. These strategies are based on the concept of taking many small losses but make up for it with few big winners. Examples are Trend following strategies, Break-out/momentum strategies etc, For these kind of strategies you will hear statements like keep your losses small and let your winners run, never average down losing trades etc etc

Left skewed strategies on the other hand are exactly opposite, here the strategies are based on the concept of taking many small winners and few bigger losses. Examples are Option writing, pair trading etc. These strategies are considered more risky as traders do not like the uncertainty of big losses and also one may not find much literature on it. Hence it is not as popular among retail traders. But if one understand the strengths and limitations of these strategies and have proper risk management in place he can easily exploit it to generate consistent returns.

Since left skewed strategies are not crowded I got interested to explore it to see if I can build a system around it that will provide consistent returns but with limited large losses/draw-down. I decided to apply this on equities cash segment as stocks have a higher probability of becoming winners in long run with time being on our side. Also stocks give us the flexibility to control the risk exposure by investing only the required amount in each trade and suitable for starting with smaller capital base.
 

ncube

Well-Known Member
#7
Developing the Strategy Idea:

Once I decided that I will build a left skewed strategy using stocks, the next step was to explore successful business models which are based on these concepts. I was pleasantly surprised to see there are quite a few business models which are left skewed and are quite successful. These businesses are Insurance Companies, Banking, Casino's etc. If one analyze their business model they are fundamentally left skewed. For example, Insurance companies generate regular small revenue through insurance premiums collected from their subscribers and their risks are occasional large claims that they need to settle, similarly banks give multiple small loans to their customer and profit from the interest they charge for it and occasional risks of NPA's.

There is no doubt these are successful business models as they are in business for a long time, but the secret here is to see how to apply this model to stock investing. The key commonality I found among these business models are that they make multiple small bets which will ensure sufficient revenue to manage the occasional losses but at the same time make profit in the process. They never make large bets as with larger bets in a left skewed strategy the risk of ruin increases exponentially. They do not worry much about individual bets, but focus on the business as a whole to ensure there is right balance.

I come from a family of bankers, so I will try to explain the strategy and system with an analogy of Banking model.
 

ncube

Well-Known Member
#8
The Strategy:

Since we are going to invest in stocks, we are the bank and will play the role of the Bank owner. The stocks we are going to invest are our prospective customers. The amount we invest is the loan we give to our customers to meet their immediate credit requirements. As we do not take deposits our investment capital resource is limited, hence as a bank owner we need to use this capital very efficiently by doing proper due diligence and well defined risk management plan.

Hence we need to have a clearly defined plan of action as follows:
1. Selecting right customer to give loan.
2. Process for Loan dispersion with margin of safety.
3. Process for Loan recovery with interest.
4. Process to mark loan as NPA and book loss.
5. Regular monitoring and audit of loan book.

The reason I am using the Bank analogy is that it will help traders to look at this as a business rather than just speculation and will give more confidence to see the bigger picture.

General Strategy Info:
1. In this strategy we are either fully invested in the stocks or if not enough opportunities are available the capital is not kept in cash with broker rather invested in either liquid ETF or short term fund. Currently I am using Franklin India Ultra Short Term fund to invest the spare capital where one can get about 7-8% returns.
2. Since this strategy is run based on end of day and done manually, I prefer to invest in not more than 10 stocks and the investment in these 10 stocks are not done in 1 shot, rather at pre-defined levels and usually in 3 installments. Hence there can be maximum 3 X 10 = 30 trades active based on the opportunities and market condition.
3. Capital Requirement: Since there will be max 30 trades, I would recommend a minimum trade amount of 10K as 10K is decent enough to generate sufficient returns after excluding trading costs. Hence for 10 stocks one would need about 3 Lakh capital, Higher the better. But if 3L is a constraint, one can reduce the number of stocks to 5 instead of 10 in which case the capital requirement will reduce to 1.5L. This is left to individuals to decide if they want to select 5,10,20 or more stocks based on their available capital.

In the following posts I will explain the strategy rules and execution process.
 
Last edited:

ncube

Well-Known Member
#9
Selecting the right customer to give loans:

As a banker I would not want to risk giving loan to non-credit worthy customers. Similarly when I am investing in stocks I would like to make sure the stocks I select have a proven track record. There are many ways by which we can select the stocks for investment, such as by fundamental analysis on value or growth parameters or even through technical analysis. ST Da usually provides a list of good growth stocks to invest. However I do not have the time to analyze the fundamentals of the stocks and hence I take a shortcut. The stock universe I select is either NIFTY 50 or NIFTY NEXT 50. These are large-caps with good liquidity and there are less changes of price shocks and manipulation.

Stock selection process:
1. Since I need top 10 stocks from the universe, I use a simple method for ranking the stocks based on the last 1 year returns. I have automated this process, but one can easily find this list from various financial websites. I found that the 1yr return list in NSE is sometimes not correct, so you can use any other site such as economic times website and just sort the 1yr return column to get the list of top 10 stocks.
2. We also use a filter of 200 day ema to make sure we do not select the stocks which are in downtrend. This filter is important as we do not want to be invested when the market is in downtrend and this simple filter will also ensure that we are out of market during these periods.

1568108921899.png


https://economictimes.indiatimes.co...?sortby=yearlyPercentageChange&sortorder=desc

To summarize, we select the top 10 stocks in universe (NIFTY 50/NIFTY NEXT 50) based on 1 yrs returns and above their 200 day ema. We repeat this process again later only when a stock that we have invested falls below its 200 day ema.

The reason we select the top 10 stocks in the universe is that we want to select the top performing stock in the universe as we want to beat the index and selecting the top stocks will ensure we are invested in those stocks which are showing momentum at that time.
 
Last edited:

ncube

Well-Known Member
#10
Margin of safety/Error is usually used in relation to value investing, value investors prefer to invest in a stock when its price is below its true value. This gives them an additional buffer to negate any valuation errors. We can use this concept in technical charts by buying only when there is a minor pullback and not when the price is extended. This gives us a margin of safety to know that there were buyer above us similar to a bank which would want people to pledge something of higher value before giving the loan.

When trading timing the trade is very crucial and it is very difficult to do it consistently, Also many times we would have observed that when we initiate a new trade, the trade would immediately go against us, hit our stop loss and then go back in the original direction. However this is not a major concern when investing as time is on our side as we are not forced to exit the trade. Hence we will make full use of this advantage in our strategy as we dont have to place stop loss every day.

There are many technical analysis methods one can use to analyze and identify trading signals. However I believe in keeping things simple and just use price action to identify trading signals. Hence In this strategy we will not be using any technical indicators and just use a simpler version of candlesticks charts called Heiken-Ashi charts.
 

Similar threads

Broker Special Offers

Intraday Higher Leverage

Save up to 90% in brokerage and get higher leverage for intraday trades.

Name:Phone:
Email:City:
State:
Are you a day trader?