Tuesday, May 4, 2010

Short-term traders log 95% returns against 45% by long term in past 5 years:

MUMBAI: Short-term trading versus ‘buy and hold’ strategy in stocks has been a debate that has raged in the market for a while, with advocates of long-term investing mostly holding the edge. But now short-term traders have something to cheer about, if a recent study by brokerage IDBI Capital Markets is any evidence of their capability to generate superior returns vis-a-vis long-term investors.

In the past five years, short-term traders have churned returns of around 95%, while investors, who buy shares and hold them long, have got 45% returns, according to IDBI Capital’s Utpal Choudhury, who authored the report.

Mr Choudhury defines an investor as one who invests in Nifty over a period and a short-term trader as one who trades Nifty, as per the ‘buy’ or ‘sell’ signal given by the five-day moving average (DMA), a popular technical indicator to determine index or stock trends. The returns from trading includes transaction costs of 5 paise for every Rs 100 worth of trading.

“In a shorter investment horizon (less than one year), a trader, a hedger and a plain-vanilla investor generates almost similar return. Over a longer period of time, trading generates the highest return,” Mr Choudhury said in
the report.

However, other market participants — many of them were unwilling to come on record — were divided about which strategy is superior.

A fund manager with a private mutual fund agreed with Mr Choudhury over the increasing relevance of trading to churn better returns, but differs on the use of five-DMA as the key technical indicator.

“Every fund manager realises the importance of trading, while holding a portion of his portfolio in long-term assets, but using such short-term indicators (five-DMA) for trading is not recommended,” the fund manager said. “It can be very tiring and costly,” he said.

Analysts said the number of times that short-term traders need to churn the Nifty for five years, based on actions driven by the five-day moving average, will be ‘significant’, thereby driving up expenses.

Alex Mathews, head-technical and derivatives research, Geojit BNP Paribas Financial Services, feels the income from ‘very short-term trading’ will not be sufficient to cover the costs on an average.

“Moving averages like 200, 100, 50 or even 10 will give you lesser opportunities to buy or sell, but they are less risky and can even return handsome profits,” he said.

In recent years, many fund managers, especially of mutual funds, have started to book profits within days of buying in case of a sharp rise, as competition in the industry has forced them to be nimble-footed for better returns. Nifty’s sharp movements in a tight range of 4800-5300 for most of 2010 have also prompted investors to trade more often.

The use of Nifty as the benchmark for long-term investments, as in the IDBI Capital study, does not capture the real picture, said the chief investment officer (CIO) of a private mutual fund.

“Most multi-baggers (stocks that rise multi-fold) are outside the index... Looking at the Nifty alone does not require any particular expertise,” the CIO said.

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