Saving the long-only trader

The first opinion is that markets can never crack. We say, “This is India, the crack is a correction, every dip is an accumulation.” This is followed by “Oh! it does not stop. What to do now? There are political, corporate rumours. We have already seen bad news. There are a few negative events like bank rates and industrial growth.” What’s next on the cards?

Well, if there is someone who really needs to be saved in the markets, it’s the long-only trader. The sad part is that the long-only trader is genetic. Silencing genes is expensive. And every time there is an opportunity to learn, the market moves up and the demarcation between the brains and the bulls gets blurred yet again. The long-only people are not value investors. They suffer from momentum investing and assume markets move only one way: up. They don’t understand hedging and risk. Some assume hedging is not for them. Risk is a post-event realisation. Till Sensex 16,500 breaks, there is a lower chance that Sensex could fall till 13,500. But in case of the 16,500 break, Sensex will fall till 13,500, which makes investing in India from 2008 a painful experience for long-only traders. They buy late and get out late. It’s a hard life.

We kept insisting that volatility was a threat and the markets could correct 20 per cent from the 2010 highs. It came a bit early. We talked about the Rieki hedge. On September 12, we explained how “The Rieki Hedge” strategy lets us pick up the best value from a universe of stocks. Second, it reduces risk by giving us the opportunity to short potential underperformers, hence reducing portfolio risk by creating a strategy hedge. Third, it increases our holding period for the overall portfolio. We can hold and accumulate the long spot for a longer period of time and similarly, we can hold futures beyond the intra-day volatilities.

Performance is cyclical like everything else; even portfolio risk is cyclical. There is a time the portfolio needs hedging and sometime it does not. The three things a long-only trader (who can’t hedge or short) can do are: first, to learn to be in cash as a percentage of portfolio; second, to understand sector rotation, be in relatively outperforming sectors and be out of relatively underperforming sectors; third, to learn to diversify and use Nifty ETF for allocation.

Markets are headed into a wall of worry. Sensex was supposed to underperform Dow, it did. Markets have reached conventional supports and I think a bounce is due before any further negativity happens. This is the only solace I have for the long-only trader.

The author is CMT and co-founder, Orpheus CAPITALS, a global alternative research firm