Rakesh Pujara | An accidental trader

A voracious reader he munches on anything that has to do with markets, psychology, self-development and motivation. Though he loves playing a game of cricket to detox, spending time with family is a priority.

In an exclusive interview with Moneycontrol, he talks about his inspiring journey and trading strategies. An important takeaway is why diversification of strategies is as important if not more in trading.

Q: Can you walk us through your background and journey as a trader.

A: I realised early in life that education is the answer to all social ills. Coming from a humble background, where I spent the first 25 years of my life with my family in a 100 square feet room in Malad, Mumbai, I realised that I would have to educate myself out of the situation.

Since my father was an accountant, selecting commerce after schooling was natural. I wanted to pursue a course in Chartered Accountancy but as luck would have it after I cleared my entrance exam the authorities decided that one cannot pursue the course unless he or she is a graduate. Since I wanted to pursue a professional course I opted for ICWA (cost accountancy).

While I was in the final year of my graduation, I saw some of my friends indulging in share trading. The lure of making a fast buck for myself and my family made me jump in. I have been a risk-taker for the most part of my life. Even though I was not earning in those days I borrowed money to speculate in the market.

Those were Harshad Mehta days and making money was relatively easy. But when the tide turned I lost everything and more. It took me more than a decade to repay that money. I could only repay it after my marriage. To put the event in perspective, I was in debt even before I started earning. Naturally, my family did not know about my state.

Looking back the debt made me look for opportunities to make money, which has somehow stuck with me in my search for new strategies in the market.

Post-graduation I started taking odd jobs. I had a friend in Hong Kong who helped me with a job there. I was selling diamonds in Hong Kong but since my Visa formalities could not be completed I had to come back within 6-7 months.

Coming back to India I took up various jobs in accounting but because of the long hours, I had trouble completing the final two semesters of ICWA. I took me six attempts to clear the final two semesters. I could finally manage to clear the exams in 1994.

But it was only in 1999, that I came in close contact with the market again when I took up a job as Head of Accounts with Naman Securities.

Q: How did that help you as a trader?

A: For the first time, I was getting exposed to the market at close counters. The wheels of fate gave me this exposure when the markets were again booming in what we know as the Ketan Parekh tech boom.

The risk-taker in me was reborn. But this time I took a calculated risk. I again borrowed money but rather than taking blind directional bets I used the money to arbitrage between the cash and futures markets. I was exploiting the mispricing between the various segments.

Those were the days when we could borrow at 2 percent a month and make around 2 percent in a week in arbitrages alone. This period helped me make quick bucks and allowed me to focus on the markets and stand on my feet.

While I had gained in confidence as far as my trading was concerned, the dotcom bubble affected business in Naman Securities. Bad debts piled up as clients continued to stay away from the market.

Since the business was down and we were looking for ways of propping it up in an environment that was not conducive for broking, I suggested to the promoters that we should consider starting a jobbing (trading) desk allowing professional traders to come and trade with us. Call it providence or accident the proposal was not only accepted but I was tasked with setting up the desk, along with keeping the charge of the accounts department. That started my journey into active trading.

I started developing the business by roping in traders. In those days jobbers traded on an intra-day basis and were hopping from one broker to another as each broker were having a limited room by way of margins to accommodate them. We built a strong team of over 100 traders over the next 5-6 years.

But soon we were faced with our first challenge when the uniform settlement of the two exchanges was introduced. Earlier BSE and NSE had separate weekly settlements which resulted in arbitrage opportunities.

We altered our strategies and helped traders develop new strategies to change with the times. We also decided to take an over-night risk by allowing traders to carry forward their positions. The Buy-Today-Sell-Tomorrow (BTST) trades were working very well between 2004-07 and we exploited the most of it.

This was also the time when I developed an interest in technical analysis. Post office hours, I used to go to BSE building to attend lectures by Dr CK Narayan. It was clear to me that even simple strategies could make money.

By now (2006) I also started trading actively to get a feel of the actual market. But things changed in 2008.

Till 2007 over 90 percent of our traders were profitable which started coming down and by 2011-12 there was only a small percent of traders who were profitable. Another market cycle had come to an end. And for us, at Naman Securities, it meant another round of structural change.

However, 2008 was also a Eureka movement for me as a trader. As we were momentum traders, the first sign of weakness saw us jumping off the ship. Most of our traders were light before the fall. I was happy to have developed the ability to read the market and helped save the company from what would have given us a big dent and taken us back by many years, as it did to some of our peers.

Those were early days for system trading. Few traders could understand it let alone trade it. I started meeting the few Algo traders there were in the market. As a fund allocator for the company, I started allocating funds to a few of them.

In choosing traders and their systems I would always look out for a small edge but more importantly the stability of returns. I was always more inclined towards stability.

Markets were also evolving and delta hedging and commodity trading were picking up and we were ready participants in them.

By 2012-13 I was planning to go independent and had bought an office to start my business. But the promoters of Naman Securities offered me a CEO position and requested me to continue.

In the role of a CEO, the first thing I did was cut cost. Loss-making traders were told to re-skill. They could not keep on doing the same thing every day when it is apparent that those strategies were not working.

In 2012 we started systems trading by following the long-short trading strategy. We went long on the strongest counters and short on the weakest ones. We selected our stocks from the highest beta ones (most volatile). In those days we were trading in Reliance Communications, JP Associates, Unitech – basically in stocks where the action was.

To this day I use the strategy which was tweaked and systematised by me. In the process, I learnt to select stocks that are to be traded and ones which need not be touched. In stocks like ONGC or PowerGrid no strategy would work. I use this strategy on a basket of 70 stocks. The strategy also goes through patches of drawdown but it always comes back and meets my condition of stability.

Through 2018-19 we made good money by trading in DHFL, Jet Airways and Infibeam by trading on the short side.

In the long-short strategy what we do is go long on the ones that are touching new high and short those that are weakest. We are the guys who pillion ride the big money that is taking prices higher or lower. This big money can be informed traders or people with fundamental knowledge of the stock. We are happy pillion riding the move. In this process, we may end up leaving a portion of the profit on the table, but that is ok as far as we can catch a big chunk of the move.

I also realised that indices are most difficult to trade if you are using a trend-following system. Stocks perform better under such a situation.

I also faced the same issues which most traders do -- getting stuck with a strategy when it is going through its bad patches.

One way of overcoming this type of situation is to back-test your strategy as far back as possible. I back-test all my strategies using slippages and including all cost. The trick is to get as many data points as possible. If the data shows that the strategy can bounce back despite the drawdown then one can stick to it. One should keep in mind the scalability factor while back-testing. Back-testing results of illiquid markets cannot be used to scale it up.

Also when one is trading it is better to trade more often. Trading is a game of large numbers and the real-life trades will sooner or later mimic your back-testing results.

But what worked wonders for me was realising that there is another way of overcoming a series of drawdown in one strategy and that is by trading several non-correlated strategies. When you have 12-15 non-correlated strategies running then you will have stable returns. I have been influenced a lot by Ray Dalio’s idea of trading in non-correlated markets to get stable returns.

Q: What are the factors you look for before selecting a strategy?

A: You need to understand why you need a strategy in the first place. It's your inability to predict the market that results in the hunt for a strategy which will work more often than not. You would want a strategy that even when it does not work it does not hurt much. This is where risk management comes into play. I have strategies which have a return to reward of 40-60 but their winners are much bigger than the losers.

I put the strategy through a rigorous test by back-testing and observing it closely before allocating funds to it. By the time a strategy is conceived and the final workable strategy is produced it would take anywhere between 4-6 months. In between the strategy may be tweaked many times.

The first thing that I look for before putting in money behind the strategy is what is my return to drawdown number on the strategy without using any leverage. I will look at how the strategy has done over at least 8-10 years in the past after providing for sufficient slippages and sufficient transaction cost. I would then work towards optimising it and reducing the drawdown.

Take for example the strategy I use based on the fundamentals of a company. This strategy gives me a return of 24-30 percent but the drawdowns of this strategy are also similar. To protect the returns of this strategy I give it a cover fire by combining it with another strategy that will take short trades during bear phases. Using this combination my drawdown came down below 20 percent.

If I combine it further with the long-short strategy my return would increase to 50 percent, primarily because of the leverage, but my drawdown would be in mid-single digits. The low drawdown is possible because of the non-correlated returns of all the strategies.

This was at ample display during the recent budget. If you were holding a long-only portfolio your return for that day would be negative. But if you had a short strategy piggy-backing it then the overall portfolio would have given a positive return despite a 1,000 point Sensex fall.

The solution for lower drawdown is the diversification of strategies. Mix a trend following strategy with a swing trade or a pattern trade, add mean reversal trades to it and the overall portfolio will give a steady return. Each strategy has a different pay-off and may work at different times.

A portfolio of around Rs 10-12 crore can easily earn 22-24 percent per annum on the risk of 4-5 percent by trading a basket of strategies.

Q: Coming back to your career path, when did you decide to start your own business and what do you do?

A: I started my own company -- Compounding Wealth Advisors in 2018. I am a Sebi Registered Investment Advisor and offer my services to various clients by way of offering trading strategies. Execution of the strategies is done by the clients. Understanding their risk profile I offer them strategies that would be best suited for them.

I run multiple strategies presently. Some are run only on indices while others are specifically for stocks and some others are a combination of both.

I am working on automating some options strategies which will be included in the next 4-6 months. These would be mainly non-directional strategies.

While I have a bouquet of 40-50 strategies I will select a few that will be running at any point of time.

I do not have a crystal ball to tell me which phase the market is in, so I allow a set of strategies which have a low drawdown individually to run simultaneously. Though my return gets diluted a bit by doing it my risk-adjusted return improves dramatically.

Q: What are some of the strategies you offer?

A: In stocks, I am currently running three strategies. One is a stop and reverse strategy, which means I am always riding the stock, either on the long side or the short.

The second one is a target based strategy where my entry and exit points are defined well in advance. And the third type of strategy is in shorting stocks but using indices as a hedge. This strategy performs well when the indices are strong. But when the indices are weak and stocks are performing it is always better to go long on the stock future.

People say that taking a long future position is risky, but so is holding a portfolio. The difference is you have to write a cheque when the price of the future goes down but in the case of the portfolio, your mark-to-market value goes down, which does not pinch as much.

In my overall approach to trading, selection of what to do when also plays an important role. I understand the lay of the land and then devise a game plan to take the maximum advantage from it with the lowest risk.

I have found that diversification of strategies also works in intraday. If you have more than one strategy at play, each not being correlated with the other, then you can expect a steady return even from intraday trading.

Q: What are your plans going forward?

A: I plan to set up a structure for fund management. My trading models are in place but I working on creating a structure. The Category III AIF structure does not work given the 42 percent tax. But this is a work in progress.

Secondly, I am also considering ways to expand the advisory business.

Finally, in some future date, I want to give back to the market what I have learnt from it by getting into education. This would not be a two-day weekend seminar but a properly structured program where a student who may be a graduate is taught different ways of trading and investing. He can choose from using fundamental, technical, quant, options or other forms of trading. It will be a professional course just like any other professional courses.

In any case, most traders pay a fee to the market in the formative years. It would be better if they are formally trained which would improve their chance of succeeding. From the current success rate of 5 percent traders turning profitable, if we can increase it to 25 percent it would be a good endeavour.

Q: Any words of advice to a retail trader?

A: For the retail trader, I would like to say that if he or she has a job in hand and is looking to make incremental money by trading then it is fine. But I would not advise anyone who has no source of income and is coming to the market to earn his daily bread.

The important thing is to find your objective setup and trade it continuously. Jumping between strategies is one of the biggest reasons for failure. Do not trade on a haunch rather take a strategy that suits you.