What is Model 1?
Please refer to this link - Model 1
We have done thorough testing of Model 1 from 1st Jan 2008 to June 2020. We have chosen 1st Jan 2008 because that was the peak of the bull market and then the market crashed around October 2008.
This large time period has bull market as well as bear market data, which helps tune our model better to different types of market conditions.
Historical (Back-Test) Performance Comparison
When you look at the graph above, you may think this is too good to be true.
Well, to be completely honest, it isn't. It simply captures the power of compounding. Let's take a look at the raw numbers.
If you had invested INR 100 in the Nifty 50 Index on 1st Jan 2008, it would have grown to INR 283 on 24th Sep 2021, which translates to a 7% CAGR. The same INR 100, invested in Model 1, would have returned a whopping INR 2140, which is 25% CAGR.
Let us assure you first of all, that there is no mistake here. There are no incorrect calculations or assumptions. We have vetted our models with many research papers and with a few industry players who work on these models for corporates and we have clearly avoided the possible biases and slippages.
The most important bias that one encounters while doing backtesting, is survivorship bias. You can read more about survivorship bias here. And yes, we have adjusted our data to that as well.
Now, we can answer the question, how did we reach such a consistent return? And the answer may surprise you.
How to create and preserve wealth?
The most important part of investing in the market is not just to grow money, but also to preserve it. This means, against traditional advice, do not put your money in a stock and forget about it. You need to move it around from time to time!
The graph above had shown you the great returns made, but it is only possible because we could reduce the impact of downturns! The algorithm sells all shares and holds cash, to reduce the amount you lose when the market falls.
It's not a magic predictor that tells you when the market will crash. It just reduces the amount you lose (and yes you will lose) when the market is going down. But the true secret to wealth preservation is to reduce your losses.
The next section analyses the drawdown for Nifty 50 as well as Model 1 side by side.
Historical Max Drawdown % Comparision
Read more about Maximum Drawdown here.
If you have invested 100 on Nifty 50 Index on 1st Jan 2008 then it would have around 42 at the end of July 2008. That translates to the drawdown of 58%. Even during March 2020, your portfolio would have been down by 35% if you have invested in the Nifty 50 Index.
You lose almost 3/5th of your entire wealth when the market crashes like 2008. Let that sink in.
Instead, if you have invested the money in Model 1 then your portfolio would have been down by 30%. Also, for the 2020 market crash, you would have been down by just 9%.
Live Performance Comparision
We had launched Model 1 last year on 13th July 2020 (Live for around 15 months) and we are pretty pleased with the results.
Model 1 turned live from 13th July 2020.
Nifty 50 Index is up 62 % from 13th July 2020 to 1st Oct 2021. During the same period Model 1 is up 142%.
Bull markets are great for momentum-based algorithms to generate wealth. We can see that the model generated close to 2.3X return (142% in 15 months) in the same time frame.
In the long term, we are confident that these returns will compound and grow even more.
Risks and Downside: A Rolling Return Comparison
Read more about Rolling Return here.
This indicates the possible return you make (Minimum and Maximum) over any possible 5 year period in the data scope (2008 to 2021).
If you have invested in the Nifty 50 Index then it is possible that it takes more than 5 years to get back the capital. The minimum return in the index is -1.2% for a 5-year return. This typically happens if you had invested just before a crash.
In the case of Model 1, your money would be recuperated in about 3 years. That means even though if you have invested one day before a crash, your capital will be preserved if you stayed invested for more than 3 years. And in 5 years you would see a minimum return CAGR of 10%.
With that analysis, I hope we have given sufficient data points for Model 1. Please do let us know in case you need more information.
Happy Investing !!
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