Even if Assocham tells the industry to stop crying BEAR, it may not work. India’s six per cent growth suggests relative outperformance versus the two per cent global growth. Market participants just don’t understand relative performance. However, the very reason markets work is 80 per cent are always trapped in illusions and as behavioural finance says “biases”. And, it’s only the 20 per cent that make money consistently. This rule is everywhere, whether in “options exercised” or stock selection. Also, 80-20 means that 80 per cent of the market participants feel the BEAR is of the same size, large, dark and scary. Only 20 per cent can judge its size and measure how potent the current bear is. The rest are so busy with the colour and the fear that the only thought is “black”. Most investors never get to think whether the black bear is toothless, clawless or just a figment of imagination.
What price performance is to statisticians, price confirmation is for technicians. Performance leads to easy comparison. Here we have taken the YTD (year to date) comparison of our Orpheus Risk Manag-ement Index Long 10 components and all of these are in the positive. Barring one component HUL, which has underperformed Nifty 50, the rest have outperformed Nifty. And in the last five months, some of the components have diverged 90 per cent from the Nifty.
How is this possible? There are a few reasons. First, 90 per cent of market components don’t rise and fall with the market. Second, the large divergence between market and market components cannot be simply arbitraged away. Third, these divergences are easy to identify if one looks at seasonal patterns and performance cycles. Fourth, capturing these divergences needs counter intuitiveness, which works against conventional momentum, trending or news-based strategy. To give you an example of news versus patterns, Victor Niederhoffer published an article that sought to establish whether days with news of significant world events corresponded with days that saw big price movements. He tabulated all large headlines in The New York Times from 1950-1966. Out of the 432 significant world event days, 78 (18 per cent) showed big price increases and 56 (13 per cent) showed big decreases.
Even if all statistical evidence piles against information, 90 per cent of humans would still believe the news. Why is that? Counter-intuitive strategies are not for the majority, herding is easy, abandoning cause and effect for seasonality is rare. The reason majority of humans love momentum and are trend followers is why even a scientific approach on seasonality is for the few.
Now, the good part. This lack of popularity is one reason why cycle indicators will continue to work and second, minority means risk mitigation. It’s the trend followers who are more prone to a risk trap because they spend more time training to ride the trend, rather than spotting a reversal. The other thing about following counter intuitive cycles is that they force you to correct behavioural errors. Most behavioural finance errors happen to the trend following herders. This is why even if the bear may be black, the counter intuitive investor looks for the bull running on another highway.
The author is CMT and Co-Founder, Orpheus CAPITALS, a global alternative research firm
