Expert who coined the term Sensex doesn't like giving trading tips

With nearly 40 years of experience at looking at Indian markets, Deepak Mohoni talks about market evolution and interpretation of data

There are few individuals in Indian markets with the experience and expertise of Deepak Mohoni. A chemical engineer from IIT Kanpur followed by post-graduation from IIM Calcutta, Mohoni has made many contributions to the Indian markets.

Having coined the word Sensex — the widely followed index representing BSE — Mohoni is in a way responsible for popularising technical analysis charts in India.

Though not a huge fan of technical analysis himself, Mohoni likes to work with raw data and is coming out with a new package that will help in interpreting market information – both technical and fundamental in a more meaningful way.

In an interview with Moneycontrol, Deepak Mohoni discusses the way he looks at the information the market throws up and a simple but logical way of picking up good long-term stocks.

Q: Can you tell us the story behind you coining the word Sensex along with your background

A: I have an engineering background, a chemical engineer from IIT Kanpur and a post-graduation management degree from IIM Calcutta. I worked for some time in India and went abroad for 7-8 years. My field of work was software, those were early days for the software industry. It was much earlier than Infosys was formed, though TCS was around for some time.

For markets too, it was early days. There were few sources of information then. There were some weekly papers like Money, Rupee, and Profit.

A person from one of the papers approached me and asked if I could write for them on something that could give them charts for the paper. I did a small project for him and that is where I got access to the data – both fundamental and technical of the stock market.

Thereafter, I kept the database going. Manual entry was the only way to maintain data but later the stock exchanges started giving data on a floppy disk.

I used the Indian market data to work on an international charting software called Metastock which was made public.

Since I had worked on the initial project for publishers to use charts, I approached a business magazine called Business World to see if they would be interested. The editor of the magazine in those days, R Jagannathan, asked me to consider writing a column on technical analysis for the magazine.

This series of write-ups on technical analysis, I believe was one of the first articles on the subject in India. Later, I started writing for other popular publications.

In those days, while talking about the market sentiment people used to talk about the Bombay Stock Exchange Sensitive Index, which was quite a mouthful. As other stock exchanges across the world had a smaller name to represent their index I decided to coin one.

I asked Jaggi if I can use the word Sensex to represent the market index. He not only gave the go-ahead but also said that he would ask other reporters in the magazine who write on markets to use the word. I on my part also asked other journalists I knew to promote the word. That is how the word Sensex got popular. I, however, have a court case going on with the BSE on use of the trademark.

Q: Since you have written on technical analysis, do you also trade using it?

A: Not really. My focus has always been on the software side of the business, even the newsletter that I was writing depended very much on automated processes. I have a database package and I am working on a new package that will be released shortly.

But having said that I am more of an investor though I also trade occasionally, especially when markets are really down as they were in 2008. During this time the investment portfolio would not give returns so I trade in such markets off and on. I depend on my investments for giving me equity market returns. You need market returns to beat inflation. By putting your money in the fixed deposit you are not getting much of a return after taking into account inflation.

Market themselves keep up with inflation and if your stock picks are reasonably ok your portfolio will do better than inflation. I was able to get this return from my investment portfolio and I don’t touch it very much.

Only occasionally, I review the portfolio and if a stock is doing poorly for 5-6 months as compared to others, I would look to reduce exposure. I would also look at the ones that have shot up and are looking overpriced.

As for the recommendation part especially on the televisions, before 2007 the interviews were mostly on the broader analysis of the market and the economy rather than on stock tips. The 2007 boom gave rise to the business of giving trading tips. I generally do not like giving tips, I am reluctant in giving them. There are more parameters involved in a trade than just acting on a tip. One should look at their position size, what they want to do with the trade ones they are in the trade.

Q: How do you build your investment portfolio?

A: There are a number of ways to look at a stock, but there is one which few people use, though it is picking up. It's using the Sharpe Ratio for individual stocks. Now Sharpe Ratio is generally used in the mutual fund's industry but a lot of people are now finding it useful and have started applying on individual stocks.

Sharpe Ratio offers what a long-term investor is looking for. It is basically consistent returns that the stock has given in the past divided by the standard deviation.

A long-term investor looks for a trending stock where the chart is moving steadily from the lower left side of the screen to the higher right side. Now two charts may be making a similar pattern but their returns may differ, which is not visible on the chart. One chart may give a return of 20 percent while the other may have given just 5 percent. On the chart, you cannot directly see the returns and would be missing the story. You as an investor would be keen on looking at a stock that is giving higher returns consistently.

The key is to buy such a stock when it falls but at the same time, you do not want the stock to fall too much. You are essentially looking at a stock that moves in a persistent way and would like to avoid stocks that have sharp spikes down. This is exactly what the Sharpe Ratio captures.

Sudden spikes would mean a higher standard deviation. Two stocks with similar returns would have different Sharpe Ratio if the standard deviation differs. The one with a lower standard deviation, which is in the denominator, would give a higher Sharpe Ratio and would be a more favourable investment.

Q: Can you shed some light on the new package you are working on. Is it to do with some form of technical analysis?

A: No, the new package has more to do with data science than technical analysis. We are already present in the business of providing stock market data, however, the new project that we are working on is going to provide tools at the hand of people rather than tips.

They will be able to use a lot of parameters to trade or invest and not get stuck with 2-3 indicators. They will have more information in their hand to interpret the market.

I am comfortable working with data and am not a huge fan of technical analysis, though there are a few good things about technical analysis. In its most basic form, the technical analysis gives you an idea of where the market is going and one should avoid going against the direction of the market.

The other thing that technical analysis is good at is during a trade setup. After you have taken a position it gives you an idea of the points of where you want to exit. You can keep your stop losses at these points and if the trade is in your favor you can keep a trailing stop loss.

But in my view, technical indicators don’t really work. People delude themselves in thinking that it does base on some degree of success that they encounter.

At the end of the day, what are charts but a visual display of numbers/data? In fact, numbers are more powerful and you can see things in numbers that you cannot see in a chart. You have more flexibility in working with numbers than you have in working with charts.

There are more statistical tools that you can use with numbers, financial market theories can be tested on the numbers. Working with data is more scientific rather than working with technical analysis which is unscientific.

What we are working on is trying to produce more information from the raw data. It is up to the creativity of the people to profit from it. We will be giving more data points to work on.

There is something that I tweet every day, it combines the total value of trades on the BSE and NSE and then compares it with the 15 sessions average volume. Now volume per se on its own is not of much help, but here if there is a sharp rise in volume over a longer period it signifies unusual interest. There is something happening in the stock which would require further investigation by both the trader and investor.

The new package will have a combination of price and fundamental data and would be handy. We hope to come out with the package in the next few months.

Disclaimer:- The views and investment tips expressed by investment experts are their own. Ripples Advisory advises users to check with certified experts before taking any investment decisions.

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