ORMI ® India Active


New Entries, Signal Quality and Sticking to the Model

ORMI Active is fast, has clear stops, focuses on cash conservation and hence comes with a noise. Moreover, ORMI deals with negative outliers which sometimes tend to be whipsawed like what we saw with Punj Lloyd recently. Nothing has changed with the respective stock, but the whipsawing price structure keeps testing this ORMI selection. This is why though the respective stock gets stopped out, it continues to fulfill the ORMI entry criteria, and makes it back as a new entry. For investors who are looking at a less noisy approach to investing the ORMI India Worst 20 offers a good choice. The Worst 20 is passive and rebalances every quarter. Coincidentally ORMI India Worst 20 has not selected Punj Lloyd still. And it remains to be seen what the ORMI India worst 20 selects in and out 30 Jun 2013.

Why is ORMI India Active 30 loading up? The index is running 17 components now and is 40% cash. This is up from 80% cash a few weeks back. Though we are on a constant quest to reduce noise and improve signal quality, this is an ongoing process which is going to have marginal improvements in the selection process. Because expecting ORMI India Active 30 to beat the 37% historical annualized from July 2006 is a tall task. The very fact that ORMI has delivered such a large return on both absolute and relative level suggests that it’s best to stick to the model and embrace the noise which comes with it. If the model knows when to go cash, it’s better to listen what it indicates. ORMI India Active 10 is all invested.

What is ORMI India Active 30 telling us now? It’s indicating increased allocations, but still not a complete lack of confidence to go all in. Sooner than later, the broad diversified approach is going to get you some large winners like it has done in the past. Bajaj Corp (93% booked) and Madras Cement (59% booked).

How are we improving signal quality? We are working on a framework to review signal from an exits, targets, and relative basis. How will this help us? This framework would suggest which exits are more effective, which ones we should discard and which new ones to include.

The current new entries for ORMI India Active are…

Indexing: The Orpheus Risk Management Index (ORMI) is based on proprietary algorithm.

The indices values that are disseminated today are broadly based on market capitalization methodology. Market capitalization methodology has been challenged globally for a few broad reasons. 1) As an asset strengthens it is given more weight 2) As an asset weakens it is given lesser weight. This on one side captures momentum but on the other side suggests investors to focus more on growth compared to value. This increases portfolio risk when market growth slows down or reverses, as has been the case since 2007. When markets contract, the erstwhile top performers push into red for extended period of time causing large drawdowns and emotional pain.

The ORMI Indices based on the above extreme reversion idea i.e. outliers tend to reverse, which suggests that investing is about value picking and extremes are prone to reversion. Our Index extends and fine tunes the idea first mooted by De Bondt and Thaler in their 1981 paper suggesting that 3 year worst losers portfolio tends to outperform the 3 year best winners portfolio.

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