Insights on Momentum Investing Strategies

Sep 18, 2024

Lecture Notes: Momentum Investing with Viraj Khatavkar

Introduction

  • Topic: Momentum Investing
  • Speaker: Viraj Khatavkar, a software engineer who entered the market in 2017
    • Found his niche in momentum investing
    • Runs 'momoscreener.in' for scanning momentum stocks

Lecture Overview

  • Planned 40-45 minute presentation followed by a Q&A
  • Focus: Understanding momentum investing, building strategies, and related concepts

Basics of Momentum Investing

  • Definition: Buy high and sell higher
    • Contrary to traditional value investing philosophy (buy low, sell high)
  • Behavioral Challenge: Difficult to understand due to non-traditional approach
  • Momentum Strategy: Assumes stocks continue rising until a significant factor stops them

Why Momentum Works (Hypotheses)

  • Insider Information: Company insiders may know of positive prospects
  • Slow Dissemination of Information: Gradual upward trends might be overlooked by analysts
  • Underreaction vs Overreaction: Stocks may rise steadily due to accumulating small positives

Building a Momentum Strategy

  • Stock Universe Selection: Choose broad indexes (e.g., Nifty 500)
  • Ranking Methods: Absolute return or Sharpe return (return adjusted for volatility)
  • Liquidity Consideration: Median daily volume filter recommended
  • Other Filters: Consider proximity to 52-week high, moving averages, etc.
  • Portfolio Construction: 25-50 stocks are optimal
  • Rebalancing: Monthly rebalancing preferred

Personal Strategy and Backtesting

  • Viraj's Strategy: Top 50 stocks, worst rank held of 100
  • Backtest Period: 2007-2024
  • Key Metrics:
    • CAGR of 25.9%
    • Average profit from winners far exceeds average loss from losers
  • Observations:
    • Winners are fewer but larger in gains
    • Drawdowns are significant (up to 42%)
  • Rolling Returns: Positive over longer periods; short-term variability exists

Considerations for DIY vs Mutual Funds

  • NSE Momentum Indices: Various indices available but face liquidity risks
  • Cost Analysis: DIY might incur higher taxes due to frequent trades
  • Decision Factor: Additional 2-3% alpha needed to justify DIY over mutual funds

Resources and Further Reading

  • Books:
    • "Quantitative Momentum" by Wes Gray
    • "Stocks on the Move" by Andreas Klinau
  • Momentum Systems: QMOM ETF

Conclusion

  • Momentum investing requires understanding of market dynamics
  • Importance of sticking to chosen strategies despite drawdowns
  • Open to questions and further guidance through Twitter and website resources

Q&A Highlights

  • Equal Weighting: Initial investment split equally; rebalance without re-equalizing
  • Drawdown Management: Stick to long-term strategies; allocation diversification
  • Maintenance: Continuous evaluation and possible strategy tweaks based on evolving market conditions

These notes provide an overview of the concepts and insights shared during the lecture on momentum investing by Viraj Khatavkar. For continuous updates, follow the speaker on social media or visit his website.