Scalable Investing is greater than a Trading Strategy !!!

Photo by Mathieu Stern on Unsplash

Is your “let’s get wealthy strategy” actually scalable? or is it something that has simply been working recently?

Let’s Understand

As traders have recently been boasting about magnificent returns viz- a few %points a day. How far is that scalable?

Warren Buffett, the Oracle of Omaha has only managed to compound at roughly around 20% since 1965 over a 252 day year that’s less than 0.08% a day. However, his strategy has been scalable starting from a humble $7 million to currently over $269 Billion (value of listed holdings only).

But you’ve been trading and it’s worked well? But can you scale up?

Assuming you can generate 1 % each day starting with a Rs. 100, after a 252 day year you would have 12.27x 100 or Rs. 1227. Let’s make it slightly more realistic imagine we start with 1 lakh, that would be 12.27 Cr by the end of the year. Let’s say your trading strategy actually does work wonders so the next year you would have 150.55 Cr by the end of next year and for another year you would have 1,847.25 Cr.

To sum that up, if you could generate 1% a day for 3 years. Starting with 1 lakh at the end of the third year you would have 1,847.25 Cr.

If this were possible, at least one person in the world would’ve been able to achieve it and the entire world would know who that were.

The highest sustainable annualised growth has been 66% since 1988, generated by Jim Simmons, which is also ~0.261% a day.

Pursuing high returns

While, it may seem easy let me highlight why its mostly not.

  1. The Metaphorical Turkey~ Nassim Nicholas Taleb

“Consider a turkey that is fed every day,” Taleb writes. “Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race ‘looking out for its best interests,’ as a politician would say.

Comparing a turkey with a trader, most traders who probably compound the longest are exposed to the risk of loosing everything or most of their capital abruptly, similar to the turkey who is being fed everyday and has their faith on humans grow each day only to be finally slaughtered.

2. Strategy Concentration

While, a trading strategy may seem scalable what happens when your capital base increases to a point where its actually bigger than the average traded volume of the instruments required. This is a major concern with most “arbitrage” and “options related” strategies in India, (at least for now).

3. Rush into Cyclical Strategies and Crypto Type Investments

Do you feel Cyclicals would outperform for ever? do you think investing in Bitcoins now will be able to make even a fraction of returns that it made for some one who bought bitcoins a few years ago?
If your answer to either or both these questions is “NO”- you agree with my point that this too is not scalable.

But what is scalable?

The most basic example of the most common and most scalable investing is “Market Capitalisation weighted” investing or simply investing in the Index via it’s ETFs.

Similarly, most LargeCap and MultiCap portfolios are scalable but few are consistent. The Holy Grail of wealth creation, according to us is a portfolio which is both “Scalable and Consistent”.

The only way we believe the same is achievable is via a system. Inspired from Charlie Munger’s mention of mind maps required for an efficient living and investing career.

Using modern technology and the abundantly available data we have developed algorithms that work in the lines of “Mind Maps”

We designed algorithms to ensure scalable investments happen in a strategy and not selective handful of stocks, with frequent time based re-alignment to strategy allowing

  1. Diversification- Ensuring reduced concentration risk and unsystematic risk. Diversification also reduces portfolio volatility which in turn allows investors to keep holding on even during times of panic or high volatility.
  2. Dollar Cost Averaging- Investors can invest irrespective of how the market or the general economic scenario around them is, allowing for the magic of compounding to actually happen in time. “Time in the market is in fact greater than Timing the market”.
  3. Sticking to an Investment Plan- Since stocks are added and removed from the portfolio purely on the basis of a system incorporated in the algorithm at no point are “Roses plucked while weeds allowed to grow”. Each algorithm focuses on a certain aspect such that investors are able to generate alpha via what suits them the most (Momentum, Value & Quality).
  4. Freedom from Cognitive Biases- While we may not be able to account for “all”, at-least the few most common biases can be dealt with using our system.
    Since, the portfolio system is predefined reasons like “it’s going up”, “it has gone up enough”, “it has come down enough” etc are not good enough to trigger an action. Similarly, broad market shakedowns also do not get the best of us and most psychological fallacies are kept at bay.
  5. Ability to buy in dips- Each of the above reasons make our system-oriented portfolios “buy-in -dips” candidates which as the past year has taught us more than ever, is the most important weapon in the arsenal of a “Wealth Generation” focussed “long term” investor.

It’s only when the tide goes out that you discover who’s been swimming naked. — Warren E Buffett




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Craving Alpha

Craving Alpha

Leveraging Research and Data Science to create actionable investing strategies in the stock markets. All posts are educational | more on

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