Primer Creation - The Recipe

Primer Creation - The Recipe

The secret sauce that adds flavor to the Tauro Wealth platform is a unique mixture of proprietary algorithms that have been developed in-house. After getting repeated queries from some of our advanced users who wish to understand how our systems work, we have decided to offer a bird’s eye view of the process that we use for building Primers.

The Tauro Wealth Primer catalog is segregated into three categories – Thematic, Persistent and Tracker Primers.

Thematic Primers

Thematic Primers are based on structural trends and macro news that can positively impact a specific set of companies, like those of a particular sector or those that are part of a common value chain. The first step in creating a thematic primer is to identify a valid theme or event that can generate a meaningful economic impact on a group of companies. Once a theme has been identified, research is conducted to identify stocks that are relevant to the particular theme. From this subset of our stock universe, we pick the strongest companies that stand the best chance of monetizing the trend over the next few years.

Persistent Primers

Persistent Primers are based on some of the most widely accepted and time-tested concepts of fundamental analysis. Over the years, a number of successful investors like Warren Buffet, Benjamin Graham and George Soros have developed extremely sophisticated rules and guidelines for picking high value stocks at cheap prices. Most of these rules can be reduced to a set of quantifiable rules that determine whether a company is a good investment or not. We use various combinations of these rules and others that have been developed in-house to build Primers which consist of stocks that are most likely to give high returns over the next few years.

Tracker Primers

This category consists of broader market and sector-specific index replications that are useful for investors who simply want to track the returns of the stock market or are interested in gaining exposure to a particular sector by investing in its largest companies. The initial set of stocks that are considered for inclusion in any Index Tracker come from the underlying index constituents. These stocks are then filtered using our proprietary rules to create Primers that will track the underlying index.

Portfolio Construction

One of the questions we are asked frequently is how we select the companies to create each Primer. As explained in the previous sections, the starting point for each Primer is identifying the subset of stocks that are relevant for that particular theme or set of quantitative rules. Once the relevant stocks have been identified, we run a proprietary algorithm to select the best stocks based on a number of different fundamental and technical factors such as price, average volume, market capitalization, revenues, net income, dividend yield and various financial ratios like P/E, P/B, Debt/Equity, etc. The selected stock are then assigned appropriate weights in the Primer composition. We also use different criteria to build Aggressive, Balanced and Conservative variations of each Primer to match their suitability to different investors’ risk appetite.

Portfolio Rebalancing

To ensure that each Primer is kept in line with changing market conditions, we rebalance the composition of each Primer every six months using the latest available fundamental and price data. We also keep track of all active stocks in our Primers to ensure that all corporate actions and economically relevant events are handled appropriately.

Data

The data used for building and back-testing Primers has been sourced from one the most reliable data providers in India. We use appropriately adjusted prices for historical data and include delisted and suspended companies in our analysis to avoid survivorship bias. We also take great care to avoid back-testing pitfalls such as in-sample testing, ignoring market impact, overfitting, look-ahead and other data mining biases during our algorithm development processes.