Selection and Universe


Flammarion

Selection and Universe.

Selection comes before allocation and systems are needed to assist in this selection. Why systems? First; because there are many types of selection; manager, asset, region, risk, profile, strategy, or other constraints like liquidity. Second; systems are better equipped to handle a deluge of information. Regarding universe; selection is made from it. The universe is large. Do we know our Universe? Do we understand it? Or is the universe that matters just about popularity rather than a real character?

What is statistical character of a group? Example; what is the weekly performance ranking of Indian auto sector among the 30 sector indices in India on a scale of 0 to 100 percentile; near 0, near 50 or near 100 percentile? If you were buying an auto stock would your selection change if the answer is different? It should matter to you even if your investing style is momentum, reversion or just trading. It does not harm to trade in the direction of the larger trend.

Whenever you buy or sell, you rank your selection. This ranking could be conscious or subconscious, or have an opaque or transparent frame. Most of us rely on ranking heuristics, simple thumb rules, example behavioral finance talks about how high volume and high price as attractors. Many times entries and exits may not involve analyzing quarterly or annual performances. It may not be a common practice for an investor to look at a sector performance before buying a sector component. If you are not looking or analyzing the respective universe, the good news is that you are not alone. However, the bad news is that your portfolio runs the risk of underperformance.

Let’s substantiate…

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Mukul Pal, is a Chartered Market Technician, MBA Finance and a member of the reputed Market Technicians Association (MTA). He has more than a decade of Capital Market experience dealing with derivatives and global assets. He has worked for Bombay Stock  Exchange, multinational Banks and brokerage houses in leading research positions before starting on his own in 2005. He is the President of the MTA Central and Eastern European Chapter.


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