Meet this multibagger — an IIT grad who makes money from just 15 minutes of trade

Jain also runs an advisory service where he circulates the same output of his algorithm through which he trades. An active Twitter user, Jain also shares his learning and guides aspiring traders. He blogs on www.weekendinvesting.wordpress.com and tweets through @weekendinvestng handle.

In an interview to Moneycontrol’s Shishir Asthana, Jain talks shares some advice to first-time investors and shares his journey to becoming a weekend trader.

Q) Can you tell us the returns that you have managed this year?

We have three active products. Two are tweaked, if need be, on a weekly basis and one on a monthly basis. One weekly product that is a 25-share portfolio has posted 86 percent return between April to December 2017 and the second is a basket of 50 shares which has given a 35.33 percent return. The third product has 40 shares and has delivered 31.82 percent in the same time frame.

Q) How did an IIT graduate with an MBA from the US end up being a trader in India?

I have been in the Indian markets now for nearly 21 years. After my engineering from IIT Delhi, I went to the US like everyone else in those days and completed my Masters in Biotechnology. The opportunities for highly-specialised research work in biotechnology were not there in India, so I decided to take up an MBA program.

I came back to India in 1995, fortunately, that was the time the National Stock Exchange (NSE) was opening up and was looking for professional new members. We took up the membership and started with corporate and institutional broking. By 1999, we moved to retail as brokerages were crashing in the institutional space. Then we saw the dot-com bust as a result of which for the next three years there was hardly any work.

During this time, I started a BPO that transcribed earning calls for equity research companies in the US.

Post 2004, the markets picked up and so did the retail segment. We were always in the niche retail segment with select high net worth clients. By 2008, the markets crashed again and discount broking houses appeared in the picture. It was clear that consolidation in the industry would happen.

I was developing my own technical skills, watching the markets, watching charts. All these years I was watching the market inefficiencies and trying to capture them.

For example, between 2003 and2008 we did a lot of demergers play. We did in those days, what is now called the BTST (Buy Today Sell Tomorrow) trades. There were also arbitrage trade opportunities in those days based on the different settlements. NSE offered a five-day settlement and a three-day settlement which gave the opportunity to earn returns of as high as 40 percent annualized. This was a pure manual arbitrage trade with no risk.

In those days, I was also watching charts and did swing trading. A chart sense was developing and I started appreciating price behaviour. I tried my hand at investing also, but somehow being so close to the market and so close to the action all the time, the patience required to hold on did not develop.

Q) You mentioned a niche set of the client who would require some service. What was the service you offered in those days?

We gave technical based calls, value unlocking advisory, dividend yield type of plays or the type of stocks to buy during the run-up to the Budget. In fact, I incurred my biggest loss trying to catch a value-unlocking opportunity.

I entered confidently into a demerger story of a telecom company’s operating arm. But even few years later, the demerged entity never relisted.

We ran from pillar to post, we met market regulator Sebi, we went to the High Court, but under some pretext or the other, the company refused to list the other arm. I had put in a sizeable chunk of my capital into it because I assumed that by investing in such companies you can get two companies when they are listed.

This was a big learning experience. We learned that concentrated betting on a company can result in gains if it works, but a big loss if it does not. The second lesson is to invest in companies with good quality management. In this case clearly, we did not do that. This was a valuable lesson in de-risking.

Q) Did this event result in you moving towards technical?

Yes, this and the 2008 crash prompted me to search for optimal way to play this. I had seen two boom-bust markets in 2000 and 2008. I did make some money but I could not fully optimise.

I thought of developing a holistic system where I can keep the emotions apart. I worked on a system trying to marry investing and technical analysis. I wanted to have a system which could take me away from the screen.

Purely on a mathematical basis, if I had distributed allocations to 30, 40 or 50 stocks then even 50 trades in a year with 25 going right should fetch me a huge average profit, much bigger than the average loss on the other 25 trades.

I was a broker for 18 years and in 2013 I decided to trade/invest in my own book rather than continue with the broking business, and take life a little easier. So essentially, I created 2-3 products for weekly or monthly timeframe settlement and distributed across 20-50 stocks in each. The only criteria was price action and volume.

The biggest learning in my 20-plus years in the market is that exiting is the most difficult thing on the market whether it is in profit or in the loss.

You need to, in a military-like fashion, be able to have an exit in mind even before entry and at every point after entry. So you build scenarios where you have an exit plan ready for any eventuality. Scenario-building before a trade is important because as far as things are good there is no problem, but in case of an improbability, we freeze when prices move against our holding. Then we take support from other sources to justify our holding. We should be non-subjective in our approach and keep our biases away.

Q) What is the status of your broking business?

Since brokerages were coming down we faced client’s pressure of reducing their brokerages. We decided to close the broking business and ported our clients to other well-known brokers. A better model we thought of was to advise our clients and charge a fee for it.

So after closing the broking business, I started the advisory service, which I did by creating a blog and a Twitter handle. In the process of disciplining myself, I decided that I will put everything in public domain for free for a year.

I put out everything on the strategy on the public domain. What it did was it made people aware of this type of structured investing. And secondly, since it was in public domain it gave me a sense of responsibility and discipline that I have to do it every week.

It is a weekly portfolio, the only interaction one has with the portfolio is once a week. It is designed for a person who does not have time but still wants to participate in the market.

Q) When did you get the confidence of going public with your strategy?

From 2013, I was doing it in my proprietary account. I had back-tested these strategies for around 15-18 years. I have tested it in all market conditions. I saw the performance translated into my own account. Then I went public with it.

Although markets have been buoyant since April 2016, there have been a few sharp corrections like that of demonetisation and Donald Trump’s victory in the US presidential election and GST, among others. The strategy has stood the test of time and market volatility.

Essentially, once you remove the emotions from buy and sell decisions it is relatively easy, provided you have complete confidence in your strategy.

Q) How did you build your strategy?

The whole idea of the strategy was to keep it simple. Even at the cost of a few percentage returns, we would rather not complicate things.

The idea of weekend investing was to look at the system only once a week. Unfortunately, during 2009-13 my father was very ill and was in the hospitalised for a long time. That's when i realised that my biggest asset was my time, I must get control over my time somehow. This is how the psychology of looking at the market only periodically, weekly or monthly, developed.

I had gone through most of the strategies, but I was not comfortable using any indicators (various oscillators, averages, and channels) or other parameters. I believe in the Gujarati saying that ‘Bhav Bhagwan Che’ – price is god. One should just keep your horse blinders on and not to get distracted by the noise like news and announcements and trade what the strategy tells you.

Coming back to the strategy development part, one needs to discover what type of strategy and timeframe suits you as an individual. This is not the only strategy that makes money, there are hundreds of strategies that make money.

Strategy is only 20 percent of the game, the remaining 80 percent is staying the course. The market is a huge psychology game. If you are confident of your strategy and are disciplined that any day you can beat the market.

Q) What were your inspirations in getting into momentum trading?

In the late 90s, I was inspired by The Turtle Traders (a group of random individuals who were handpicked and trained to become trend following traders in the US), Michael Covel and some more from Jesse Livermore. But frankly I am not so much of a reader, I like to see things on my own. But these books were definitely an inspiration.

Q) You said you base your decision on price and volume. How does volume affect your decision-making, because many traders either look at price or any indicators to trigger initiate their trade?

This is a strategy that is spread over 20 to 50 stocks depending on the product, so you will feel that you are running an investment portfolio. But we run it like a trading strategy where we do money management and allow our profits to run. So, volume is a mechanism which we use to filter out a subset of stocks that allow us to smoothly enter or exit without too high an impact cost. It is basically an entry filter.

Q) I was looking through your presentation and charts on your blogs, so your entries coincided with new highs, is that part of the strategy…

Basically, you can do momentum investing in a couple of ways. It can be done by choosing the rate of change of price over whatever period you like and you choose a subset of stock and then churn the portfolio in say six months, or, as some traders do, in three months.

The second type of momentum trading that we are doing is try to find good quality momentum stock and we distribute our money across them and then every week on Friday after 3.15 pm we take a decision how many of these are to be retained in the portfolio. So, ultimately what you are left with is that the well-performing stocks stay in the portfolio and the ones not performing are taken out. It is a sort of natural selection and you are left with the winners.

If you take an analogy that I want to go from point A to point B and there are these 1500 vehicles going in that direction. I will board the fastest vehicle of my choice and if after a time I find that it is slowing down or going backward I will get down and board the one that is moving faster. I have no love and affection for this vehicle.

The conventional wisdom is to buy low and sell higher. But we buy high and sell higher. Where we are entering a stock, most people would be conventionally afraid to enter.

Q) So the quality of management or the fundamentals of the company does not play a role?

No, they do not have any role. In two of our products, we chose the subset as CNX 500, where by default some of the quality issues are taken care of. Like I said earlier, we do not want any biases to affect our decisions. We have come across one or two bad stocks over a three-year period, but then even if one or two go to zero we have enough diversification to protect us.

In our study and experience, out of 100 investments in a year, not more than one or two would result in a 20 percent drawdown. But many would be multibaggers. Like in the current portfolio we have a Goa Carbon from Rs 100 odd (current price Rs 1,018), we have Graphite India from two digits (current price Rs 801) and these stocks are still running.

The differentiator for us is that our strategy is on a portfolio basis rather than on an individual stock basis, which is generally the norm.

Q) Do you enter and exit a stock when the signal says so in one instance or opt to enter and exit in a staggered manner?

Our entries and exits are at one go, but we trail our exits and get out at one go when our stop loss is triggered.

Q) So suppose a stock that was stopped out bounces back after a few weeks and shows up on your radar, will you take the trade?

This has happened in many cases. This is exactly what I am saying, you have to get out of all your biases. You have to shut down your brain and take the trade.

Q) How do you control the urge of not trading beyond the strategy?

In good old days, there were people who used to tear their physical shares of Infosys to prevent them from selling and send request for new shares when they really needed the money. People can go to that extent to control themselves. In my case, I have asked my broker to not allow any other facility like margin funding or derivatives in my accounts which have these strategies running. That prevents me from taking compulsive trades. This account is meant only for delivery trades.

Q) What is the kind of holding period in your various strategies?

In the case of the weekly portfolio period the average holding period is a couple of months. On the monthly product, it can go from 4-6 months. In some of the stocks in this portfolio, the holding period can go beyond a year.

Q) Is this strategy broadly applicable to all timeframes?

It is suited for longer timeframes. If you bring it down to the intraday level the choppiness of the market will result in higher churn which will eat into the return, but on a daily basis it is possible. For me, the whole idea of weekend investing was to have a system where I can look at the system once a week and enjoy my life for the rest of the week.

Q) Can anyone become a professional trader or special traits are required?

With experience anyone can become a professional trader. I do not think there is any skill that one is born with to become a trader. Over time you can develop skills to become a trader. You have to keep learning from your mistakes at the same time your goal has to clear that you want to become a professional.

Q) How does one know what type of trader or investor he is a momentum trader, a price action trader, a value investor or a growth stock picker?

I think these are full-time professions that one can reach only by trying and testing. Over the years when you have seen one or two market cycles, some pattern emerges. If you were able to identify good value company or are able to understand the balance sheet then you are going in that direction. Otherwise, if you are more prone towards price movement and technical. Your patience and other psychological parameters help you decide what is good for you.

Basically, you have to try and test it. You have to pay the learning cost in the market, otherwise, it is like free education that is given in the open universities, which as you know no one value.

Q) For an aspirant who wants to test his strategy, what would be your advice?

First of all, you should have a good data set. There are several vendors in the market select the one that has good data set stretched over a long period. Then check if the software has backtesting capability. I work with Amibroker, there are many free sources, communities that help you to work with Amibroker.

In terms of backtesting the strategy, if you see since 2003 onwards we have had only two negative years. So, it has been a good market by and large.

Going forward too if we see that the International Monetary Fund says that we (India) are going to grow at 6-7 percent for the next 20 years. And if we have that kind of growth for a long period, the index will grow at 1.5 times the economic growth. And in your own stock selection, you can easily grow two times of that. That is my core belief.

Q) If your strategy allows you to look at the market only once a week, what do you do for the rest of the week?

Apart from the health-oriented activity like walking, running or swimming in summers, I study the market. Social media (relating to market) takes away a few hours of my day.

Q) Any final words you would like to say to someone who wants to follow your footsteps to become a trader.

I think there are a lot of free resources available on the Internet. Twitter is a great channel where a lot of professionals are willing to help a seeker. There are a lot of books that have a step-wise approach to trading. Many trader meets are happening these days which one should attend to get a hang of things. I do my bit by helping traders on the Twitter with whatever little knowledge I have.