okay so hi everyone good morning saturday morning and we are back again with a very interesting topic momentum investing which most of you must be looking forward to and we have a couple of twitter spaces with viraj khatavkar and today we are having a session with presentation as most of you were asking that it is always good to have some uh visible output basis which you can understand more. So a little background of Viraj, he's a software engineer by profession and his entry to the market is more of a accidental entry. He was fascinated by the bull market in 2017. Like all the investors, he had made a lot of mistakes and learned from them.
During these times, he had done different strategies and Finally, he found out his niche, momentum investing, and he runs a very popular screener, momoscreener.in, wherein you can scan for momentum. And with that, I hand it over to Viraj to kickstart, and he can shortly add to his introduction, just in case anything is missed on my part. Welcome, Viraj.
Raj, you are on mute. Sorry about that. Yeah, thank you, friends, for this wonderful introduction. And first of all, I just wanted to say, like, how glad I am to be here.
And again, like, thank you for allowing me to, you know, giving this chance to actually present this in front of your audience and for your YouTube channel. Like, to be honest, I just wanted to... to say like prince has this really wonderful youtube channel uh and a twitter account uh the channel has like really really good videos around investing not just momentum but everything he has interviewed a lot of prominent hosts and guests where they provide a lot of insights i personally have found a lot of information and treasure from all those videos so i would just say like please go and visit that channel once i'm i'm pretty sure that you would like whatever you get from it So again, once again, thanks friends for this. And I think we'll just dive right into this.
Before going into the presentation, I just wanted to say a couple of things. What I'm going to do during this presentation is I want to go through the whole presentation from start to end. I'm not going to be taking any questions in the middle of the presentation. What we'll do is if you have any questions, you can store them for yourself right now.
You can write them down or you can put them in the chat right now. The meeting has a group. chat you can put them in there prince will be monitoring the chat and once i'm done with the presentation uh he can pick up those questions and can you know discuss those questions uh because there might be some questions which i might answer later in the presentation as well which you might have in middle as well so what i would do is i would like to go through this whole presentation first and then we'll go to q a uh it will take around 40 45 minutes at the most to go through this presentation and then uh we will see if if you have some time for q a as well so yeah today we are going to take a look at momentum investing uh more like just a good tagline here an eloquent way to grow your money so lately momentum investing has become much much more popular in india most of the people have a little bit of idea today like what momentum investing is like uh or you know buy what is going up something like that some form of that aspect everyone knows about it like like if something is going up just buy that and then sell whatever is going down Because of a lot of small cases and numerical mutual funds that have been, you know, launched by NSC and based on NSC indices, etc. Momentum investing has become a lot more popular than it was, you know, in 2018, 19 or even 2020, etc. So, yeah, I think we understand what momentum investing is basic at the very basics of it.
But we are going to dive a little bit more deeper into it. So let's just get started right away. So first, in first five minutes, I just want to and I just want to, you know, see what momentum investing is, how to build a strategy, etc.
But basics of momentum investing. So what is momentum in terms of investing? Basically, in a very crude way, it is buy high, sell higher, right? So what does this mean? Like in a typical scenario, we are very price conscious investor, right?
So in a traditional. value investing sense what we do is we buy low and sell high So whenever some stocks is out of favor due to maybe regulatory issues, due to some bad decision by temporary bad decision by management or something else, which is more of a discretionary way to identify. Like the company is still quality, but due to some something bad that might have happened, which might have a temporary effect, the stock price might have gone down a lot. And it provides, you know, a very good value opportunity for us to buy it. So that's one way to buy stocks.
Another option to buy. low buy low sell high is where there is a market-wide turmoil like what happens happened in 2020 2018 2008 2011 etc so that is one aspect of you know buying low and selling higher uh that's what traditionally we know value investing it is and it basically sits in our mindset right in our daily lives also we try to buy low and sell higher maybe it's residential maybe it is like even smaller things like you know if something is on a discount we tend towards buying it rather than something which is not on discount So traditionally we understand value investing because it is buy low sell high which is our general life's philosophy. While momentum is buy high and sell higher which is not our regular life philosophy. So it is a little bit difficult to understand that.
So it is very difficult to not just understand but also put real substantial amount of money behind a momentum strategy. Because we are already buying high which we correlate it to as buying expensive. Although just because we are buying high doesn't mean...
doesn't mean it is buying expensive it is just that the stock is making new highs or is very close to its all-time high etc so it it so it is really very confusing for us because we are not accustomed to that philosophy in our daily lives so that's what momentum is but it's difficult to you know behaviorally understand it uh from from our side because you are not accustomed to it uh you know in our daily life behavior uh So what does it actually mean a little bit more? So why do we buy high and sell higher? We understand this because we are buying low, there is some protection for us.
The stock has already fallen a lot due to its own challenges or maybe a market-wide turmoil. So it makes sense that we are buying cheap so that we have a lot of room for growth and we can sell higher. But why does momentum like buying higher?
Are we not proning ourselves to, you know? less protection around the stock's price. I mean, this is where the momentum philosophy comes in.
It assumes that the reason because we buy high and sell higher is because naturally, if a stock is going up, we can assume that it will keep on going up until it doesn't keep going down. Right. So this is like natural physics.
If something is in a motion, it will keep on going in that motion until an external object comes and stops that motion. The same philosophy we try to adapt into momentum strategy. Like if something is keeping on going up, it will probably keep on going up unless something else out of its normal trajectory comes and stops its upward trajectory.
So that's what the basic philosophy behind momentum investing is. There is no anchoring bias. In typical all other types of investing. so to say value investing or quality investing there is always an anchoring bias right because this company is an MNC because this company has this four brands which people know or because this company is cheap but has a lot more assets like there is always an anchoring bias what is anchoring bias anchoring bias is our bias creeps in where we assign a value to something because of xyz reasons right so that's what anchoring bias is in in very very layman terms So there is no anchoring bias in momentum. We are just following whatever the screen throws in, like whatever is going up irrespective of what the news is behind it.
We don't know why it is going up, but just because it is going up, we will buy it, right? That's what momentum is all about. While value investing, quality investing, all of them has anchoring bias, like it has a brand, it is a MNC, it is, you know, like, for example, Maggie is a very well-known brand, and it's difficult to, you know, take Nestle away from Maggie.
So that's our anchoring bias. I'm not saying again, just in this end, I'm not saying that value or quality investing is bad. They are very fine forms of investing. If you feel comfortable with them, you should probably do that. I'm not at all saying that value and quality investing are bad in any sense.
I'm just saying like what rates are necessary for being a good momentum investor versus what rates are necessary for being a value slash quality investor. don't assume that value and quality is bad in any sense of the way so yeah there is no anchoring bias in momentum when there is anchoring bias in quality and value it may be good bad we don't know the answer i personally am not able to get rid of my anchoring bias so easily So I basically never tried to go towards value and quality investing. I typically stick to momentum investing because of no anchoring rise.
Okay. Uh, yeah. So this is what momentum is all about.
Uh, now let's try to understand why does it work? Now we are just trying to find probability of why does momentum work and not, you know, understand, we don't know, like nobody actually knows why does momentum work? It is an anomaly. Even Eugene Farmer, who has said that markets are efficient, see that momentum is an anomaly, right?
The same way we don't know why momentum works. There are some reasons which we can assume people around the world have written papers over it, like why it might work, why it probably works. We just don't know why it works for sure, because it is an anomaly, right? So one aspect that everyone thinks contributes to the alpha of momentum investing is insider information.
So what is insider information? So basically promoters know their business, right? And there are many first related parties who know about the business, like, okay, what all orders are coming, how much growth the business is seeing in the current quarter, next quarter, over the year. So basically, insiders typically know what the business is going to look like over the next couple of years.
They're not always correct, but mostly they have an idea like. the investors out of those company who are actually running the company the investors were outside of that don't really know how how how the company's business might work however they may how much ever they read annual reports or how much ever research they do it is really difficult for us to know those things but insiders know that right so they know it and they will probably buy stocks if they know that the company is going to do well over the course of next year or two So we don't know that insider information. We have no idea, but they know it. So they will buy the stock and that's what contributes to stock keeping going up basically.
Another thing is slow dissemination of information basically. For example, typically analysts, typical stock analysts or retail like us follow a lot of stocks. And we know like some information about the stock.
But what we know is what grabs our attention. If some stock. goes up like you know 20 percent up 25 percent up in in an upper circuit or you know 50 100 percent up in a month itself that's what grabs our attention as an analyst or a retail and our coverage is biased towards those kind of stocks also towards the stocks which you know go down like 20 percent down in a month 50 percent down in a month so analysts and retail typically try to cover these extreme stocks a lot more they spend a lot of energy into covering the stocks which have extremes they either go extremely up or they go extremely down but a stock which is slowly disseminating information like it is a linear graph like this you know like this very slowly slowly going up it has no real very large moves like it doesn't have really really large of moves in the past year nor does it have large down moves as well in the past year it is just slowly very linearly very slowly going up this doesn't excite analysts sorry because there is nothing to do The business is just doing well. There is no extreme price information, no extreme orders, just, you know, doing good well month over month, year on year. So this low dissemination of information in price is basically neglected by the analysts and retail.
And because this dissemination is neglected, it shows in price, but most of the analysts or retail don't cover it and don't find it, you know, very useful as such. So that's why. That's what also is something assumed which contributes to momentum's performance. Like this low dissemination of information in price is captured by a technical momentum system, but usually neglected by our discretionary behavior. So that might also contribute to the alpha.
Next is underreaction versus overreaction phenomena. So, for example, if some company launches AI tomorrow and say Google gives it an order of $5 billion. So what happens here is everyone. starts oh this is a good thing for that company it will it's going to get a five million dollar order so its market cap will grow its profit will grow etc etc etc and that is called as an overreaction phenomena right so the stock will zoom up it will it will go through this overreaction phase where everyone is on that stock covering that stock etc etc while most of the momentum stocks are typically an underreaction phenomena they come in during an underreaction phenomena so for example Stocks might be going up because the stocks have, you know, small orders coming together. There is no big order.
There is small order. the P&L is going up a little bit, etc. So what happens there is, there is an underreaction because the company is not getting really big orders, etc.
So it is an underreaction phenomena to this low dissemination of information in price basically. So again, these are not the factors which everyone knows it works. These are some things which experts have identified might be contributing to Momentum's alpha. Now this is something that is not my original work.
I have... found this from you know a variety of papers and articles that i have read over the internet from practitioners who do a lot of research around momentum uh so if you want to read things like this there is a site called as alpha architect.com it is a site us-based website mostly run by wes gray and jack wogan uh they they they provide a lot of information on different factors like momentum low volatility value etc but a lot of information of momentum So I would say there is no one article where you will find all this information. But I would say if you go through a lot of articles around that website, you will find similar viewpoints basically.
Also, another thing that I have not mentioned here, which also contributes to momentum sulfide, it also goes through huge drawdowns. Momentum, first of all, I just want to say this, momentum is not a holy grail system. Momentum goes through humongous drawdowns almost equal to or greater than index, right? So it gives higher returns, but it also goes through huge drawdowns as well. So we have to be cognizant of the fact that momentum is not a holy grail system.
You cannot have the cake and eat it in a momentum philosophy. You will get humongous returns if you stick to the system, but you will also go through huge drawdowns. It is really, really difficult to avoid those huge drawdowns without letting go of the returns.
If you optimize your momentum system for, you know, letting go of like reducing the drawdowns. there is a very high chance that you will also reduce the returns by a very large factor so so that's why momentum is not an easy system to follow okay so this is this was just an introduction to what a momentum strategy consists of how does it why it might work uh why like what are the typical reasons that people assume that it might work so all those things are basically Next, we'll try to understand how to build a basic momentum strategy. Okay. Again, this is something that I will use my website to showcase because it is much not because I want to advertise it, but because it is much more easier to show and explain than, you know, just just explaining it through a presentation, etc.
So what we'll do is we'll just quickly go to my website. Yeah. So what we'll do is we'll just open a very simple screen and we'll understand how to build a basic momentum strategy. So the first thing that you need to understand, we are not going to go through all these filters. We are going to go through important filters here.
And later you can come and visit this website to understand what all filters are available. So basically, the first thing that you need to finalize on yourself is to identify the universe of stocks that you want to play your momentum in. So when you want to buy momentum stocks, it can be across universes. It can be an all listed, all NSE listed stock. So this is basically all the stocks that are listed on the NSE main board, basically.
Or if you want to only run the momentum on top 500 stocks, then you can select the Nifty 500 as your universe or maybe top 200 stocks. Then you can, you know, select Nifty top Nifty 200 as your universe. It depends on what.
universe you are comfortable playing with right typically what i would assume is uh it's better to be in a larger or a broader universe like nifty 500 nifty 750 or all nse listed stocks i would typically avoid going to a universe which is around like you say you know nifty 200 or uh nifty 5 nifty 250 or something like that i would personally typically avoid running momentum systems on those typical on those universe of stocks the reason is there are better alternatives there in terms of mutual funds as well as uh there are there is not much alpha which will remain there because those are broad large cap mid cap large large cap stocks and large mid cap stocks so they are mostly most of the analysts are covering them there is high liquidity in them so most of the mutual funds buy them so there is no really alpha not major alpha pending there over the long term after the tax that you pay through STCG LTCG versus mutual funds etc so I personally would typically avoid choosing a nifty 200 or nifty 250 momentum but if you want to experiment sure or if you want to try you can go ahead but i would personally not do it i would only do a diy where you are actually doing a momentum system by yourself only on a universe of 500 stocks or more basically next you need to be able to rank your stocks right now there are a variety of ways to rank your stocks one very simple way is absolute return one year right so what is absolute return one year it basically means absolute return one year basically means that what is the return of the stock over the past 10-12 months right so that's what absolute return one year means so absolute return one year is whatever stock has given the highest return in the last one year will be ranked as first and whatever stock has given the lowest return will be ranked last so whatever stocks has the highest return will be ranked first whatever stocks has the second highest return will be ranked two and so on we will rank all the stocks from ascending order of their ranks. So the highest return stock comes as one. Other option is sharp return one year.
What is sharp return? In sharp return, what we do is we divide the absolute return by its one year volatility. Now, what is the reason for dividing by volatility?
So because we divide one year return by volatility, we are basically penalizing stocks which have high volatility, right? So if a stock goes up 100%, if stock A goes up 100% one year and stock B also goes up 100% one year, but say stock A does it at 25% volatility, but stock B does it at 50% volatility, then stock A will be ranked one because 100% return divided by 25% volatility is equal to four, while 100% return divided by 50% volatility is equal to two. So 4 is higher than 2, right, in terms of sharp return.
That's why 4 will be ranked 1 while 2 will be ranked later. That's why in sharp return, what we do is we penalize volatility of stocks. If a stock is going up a lot, but it is doing so at a very high volatility, we basically penalize the stock. That's what sharp return 1 year is about.
And then a median daily volume, right? So median daily volume is something that you need to figure out. Before going to median daily volume, you have to also, like there are a lot of other filters that you can rank.
So Sharpe return one year, if you want to rank on Sharpe return six months, three months, or you want to take an average Sharpe of 12, 6, 3, 12, 9, 6, 3 months, etc, etc. So a variety of ways to, you know, rank these stocks basically. Next, we need to also make sure that the stocks are liquid.
We don't want to just buy stocks with low liquidity. So. what is the median daily volume of the stocks over the past one year i typically keep it as one crore because that what makes sense to me uh it's up to you what you want to keep but typically anything about 25 to 50 lakh is must one crore is good enough uh you can go ahead with one crore median daily volume until you reach state 30 35 crs worth of you know your portfolio value it is fine uh next away from one year high so i typically keep it that 25 but you can keep like whatever you feel comfortable with so for example away from one year high is basically what does it mean is uh how much is the stock within 25 percent of its one year high or not that's pretty much it you can also click uh you can also figure out if you want to have an away from all-time high filter rather than a one year high filter etc so it's up to you both of them work quite nicely i prefer away from all-time high rather than away from one year high But it's up to you.
Mostly the performances seem across both the filters. Then if you want the stock to be about 100 day moving average or 100 day moving average, minimum one year return is annual returns greater than annual volatility. How much of the days in the past year are positive, like percentage of days which are positive in past year, six months or three months. Like we also want to exclude stock if they are currently in a lot of circuits, right, etc.
So there are a lot of filters here. We are not going to go through all those filters because it will just take a lot of time. But these are typical filters that you can use to form a form your system.
And once you rank those stocks, you can, you know, get get a list of stocks that you can invest in. Now, typically, what I would say is if your universe is Nifty 500 or say Nifty 750 or all NSL listed stocks, I would typically say like 25 to 30 stocks is something which is good enough. 25 to 30 even. uh for all listed in the ccap universe maybe 500 maybe 50 stocks are also good enough so it's up to you between 25 to 30 40 50 stocks is a good good enough number of stocks for a momentum portfolio basically and then how to run a momentum strategy right so if you're starting today what you will do is you will basically buy this top 25 30 40 50 stocks and then on the day of rebalance so what is rebalance right so rebalancing is something when you evaluate your system again okay which stocks have stopped performing and i need to exit them which stocks have top sorry which stocks have uh come up higher in the ranks i need to buy them and the stocks which have gone lower in the ranks i need to sell them okay so this is what we will do on january 1 i i uh let's say i i buy this 25 stocks let's say uh let's do one thing we'll go to my own momentum screen okay uh here so this is my momentum these are the exact rules that i follow my for my personal momentum system we'll come to that in a sec but let's suppose i start my momentum system on say 1 august 2024 so we'll take the stocks as of 31 july 2024 according to the rules that i have for my own momentum system so these are the stocks that were valid on 31 july 2024 according to my rules right so what i will do is i will buy the top say top 30 stocks from i will start buying from top first stock Suppose I have 30 lakhs rupees, so I will equally divide the money into all 30 stocks. I will invest 1 lakh in Cochin Shipyard, 1 lakh in Trend, 1 lakh in SBGLP, etc.
I will start from the rank 1 and I will invest 30 lakhs equally in all the 30 stocks. Now, suppose on 1 August, I do according to the ranking on 31st July, I buy all the top 30 stocks on 1st August. Now, on 31st August, I again see, okay, It's been one month.
So this is called as monthly rebalancing. From 31st July to 31st August, we don't do anything. We just let the system stay there. We don't exit any stock. We don't buy any stock, new stock.
But on 31st August, we again check. Okay, it's been one month since I bought the stocks for the first day. Now, what is it? Now, I will re-evaluate my system on 31st of August. Okay, I will see.
what all stocks that i bought on 31st july uh are ranking now on 31st august so what we'll do is we open this screen again here uh and we'll keep both of them side by side so let's go to 31st july back again okay so 31st july uh we bought this stock like coaching shipyard was ranked one now if i come here and i search for coaching shipyard where is it so coaching shipyard is not even coming into my list why We don't know. It may be because of circuit. It may be because of not being in, you know, within the high or some other reason. But for some reason, Cochin Shipyard is not in my rankings on 31st of August 2024, which I bought on 31st of July 2024. So I will exit Cochin Shipyard on 31st August 2024. What is the next stock that we had? Trend.
Let's see Trent. Trent is still ranked 1. So we will not exit Trent. Trent will still remain in the system.
Next was SBGLP. Is SBGLP still in the top ranks? Let's search for it.
So SBGLP is on 18th rank. So should we keep it or not keep it? Before SBGLP was in 3rd rank on 31st July.
SBGLP was in 3rd rank. While on 31st August, SBGLP is at 18th rank. So this is the rank change for all the stocks.
every month now what what we should do is there should be a concept of worst rank held so what is worst rank held when should it defines when should we exit a stock now what happens is we we bought this stock stop 30 stocks on 31st july 2024 now on on 31st august if any of the stock is beyond 60th rank we will exit it if it is not beyond 60th rank we will keep it This is the rule that we will follow. So to reiterate myself, whatever 30 stops we are buying, if any of the stock goes beyond 60th rank on 31st of August, we will exit it. If it is not going beyond 31st of August, if it is not going beyond 60th rank, we will keep it. OK, this way we will have some exits. And whenever we exit those stocks, we will have some more entries from here which are not there in our portfolio.
This is how a basic rebalancing of a momentum portfolio seem like. Right. now this is my momentum screen so we'll go quickly through it what my rules are so basically uh basically the index is all nse listed stocks i i prefer my index to be all nse listed stocks i rank them by average sharp of 12 6 and 3 ones highest to lowest my median daily volume filter is one cr i don't apply filters for away from one year high or away from fire high i have a within 25 percent of away from all-time high filter the stock should be about 200 day moving average and its minimum one year return should be 6.5 percent i don't apply any other filters except i don't buy b stocks i only keep stocks which are in the eq series of the nse necs2 series eq and be BE series is for those stocks which are in long term ASM stage 4, which are only trade to trade stocks.
So the liquidity is quite less in BE stocks. That's why I avoid stocks which are in BE series. Right.
So I avoid any stocks which are in the BE series. I also ignore the top beta stocks because basically what I've observed is top beta stocks typically underperform over long term in low beta stocks. So I typically ignore any stocks that is in top beta.
like the top percentile of the beta of that universe and there is no other filter i keep a market cap filter of minimum of 850 crores so basically any stocks which is below 850 crores in market cap i do not buy it so for me the minimum value for market cap is 850 crores so why 850 typically what i'm trying to do here is i'm trying to uh market up to 100 million dollars in value so 100 million dollars uh in us dollar terms is 850 crores in rupee terms right so that's why 1 million dollars is 8500 crores approximately with the conversion of you know us dinr uh while in so for me the breakup like the break of stock break of market cap uh is 100 million dollars you and that 100 million dollars when converted into rupees is 850 crores. That's why I keep this 850 crores as market cap filter and I don't buy any stock which is below 850 crores. These are the stocks that I have to do. For me, the total number of stocks that I keep are 50. My worst rank held is 100. So to reiterate again, these are my rules. I buy top 50 stocks and my worst rank held is 100 basically.
Any stock that goes beyond the 100th rank. I will exit it. That's pretty much it.
So these are my rules. These are the filters that we have available for a momentum screen, not just in terms of what is available in the screener, but in general, what you can typically apply. Typically, I would say a combination of these filters is fine. The more filters you apply, there is a very high probability that your returns will reduce, but your drawdowns will reduce as well, but your returns will also reduce. The lesser filters you apply, I would say your returns will increase and your drawdowns will increase as well correspondingly.
Typically, I would say in sort by, I would say avoid by absolute return. I will typically try to keep it around sharp return. Any combination of sharp return is fine.
Sharp return penalizes for volatility. And in general, in my backtest, what I observed is a momentum system rank from sharp returns typically outperforms than a momentum system ranked by absolute returns. So I would say.
sharp return is something that you should rank by any any kind of like sharp return one year sharp return six months three months or an average of them either way it is fine not an issue as such median daily volume as i said keep at least 50 lakhs one crore is preferable uh i would say away from one year high or away from all-time high either of them is fine if you keep away from one year high and not away from all-time high then you will get more of stocks like suzlon etc uh which may not have performed which may be very much away from you know away from all-time high but have recently started performing and within within its 25 percent of money rest it depends on what kind of mindset you want to have for the systems uh rest all things you can permit you can use your uh you know gut feeling or back testing to uh find like whether it works or not for you okay so yeah coming back this is what was a very because it's very difficult to like like i can do a whole one hour or two hour session on how to build a momentum strategy so it's difficult you know combining five ten minutes so i try to give you the basics of it what are the filters that you should typically use what are the pits for pitfalls and what how you should rebalance etc but obviously you can always ask me questions you can email me or you can talk about it later as well now i explained my strategy now i just wanted to walk you through the back test of my own strategy again you These are my current set of rules. In future, I may change my rules. There is a very high possibility that the rules might be changed for my system if I find something good. So don't take. This is not set in stone.
The rules that I have defined for my personal momentum strategy are not set in stone. The backtest is for the current set of rules that I do. One more set of rules that I wanted to identify. I don't invest in any stock which has greater than 20 circuits in the past year, basically.
Now, yeah, coming back. So we'll go through the backtest of my strategy quickly. The reason we are going to the backtest. is not because we want to see the returns of my strategy, but because we want to understand the characteristics of backtest.
We want to understand what all things we need to see in a backtest before identifying a good strategy, momentum strategy to invest in. So please don't just look at the returns and drawdown, but also look at the characteristics that I'm looking at for a momentum system, which will help you to define your own system, which you can stick to over a long time. Now, this is what the backtest was. So, I initially started with 50 lakhs.
The backtest, before I go into the returns, let me explain you the parameters of this backtest. It is exactly similar to what I have written in the rules of my filter. The backtest is executed from 1st January 2007 to 31st March 2024. Okay, 1st January 2007. to 31st march 2024 uh is the period of the back test now as you can see uh i started the initial capital that i started it was with 50 lakhs and the ending capital has been 26 crores uh the annual return here is what the category is 25.90 percent so this is what our capital would have grown from 50 lakhs to 26 crores from you know 1st January 2007 to 31st March 2023 and the annual returns the CAGR returns would have been 25.90%.
Next winners so this is what I before going to draw down and everything I just wanted to tell you how a momentum system winners and losers look like right. So if you see out of the total stocks we bought or out of the total trades that we took only 46% of them were winning trades. So less than 50% of our trades were winning trades, right?
So 46% of the trades were winners, while 54% of the trades were losers. So all the trades that we took, higher number of trades were losers, while lesser number of trades were winners. But if you observe something, the average profit here is 48.90%, while the average loss is only 11.36%. Okay.
So what this means is even though our winners are lesser in percentage terms, the average profit of winners is much, much higher than the average losing percentage on losers. Why? Because momentum system quickly discards anything that is going down. If a stock is going below its ranks, we exit it, right? So this means we don't have a stop loss in place on a price basis, but we have a stop loss on the basis of ranks.
So a momentum system will quickly discard a stock which will go away from its ranks. Right. Yeah. So that's what and this is what the characteristics are going to be in a typical momentum system.
Like the average profit, the number of winners are going to be always lesser than the number of winners. But the average profit of winners is going to be much, much higher than the average loser on a losing position. So here, as you can see, the average profit is four times higher than the average losing position. So this is what contributes the overall alpha of the system, basically. Next, this is the year wise returns, basically.
Again, this is something that I just put in to understand the nature of the system. So as you can see, 2007 was a good year. 2008, we went through 38% drawdown. So.
The index went through something like a 50% drawdown, if I remember correctly. We went through a 38% drawdown. And these are the year-wise returns, like 9, 10, 11. Again, we went through a 14% drawdown.
In 18 also, we went through a drawdown. 22, which was a Russia war and the whole tech crisis, we went through a little bit of drawdown. 2023 was a really good year, etc.
Now, I just want to tell you, like, these are back-tested returns, right? So expect a higher drawdown than what you see in backtest. In backtest, everything is pristine, right?
We can entry and exit at whatever values we want, etc. While in a real system that we might run, we might not get fills on our exits. We might not get fills on our entries or we might get, you know, bad fills on our entries.
So those things we have to consider on a real system. So expect a little bit of a low returns on a on a actual traded system and a little bit of a higher drawdown in an actual system. So the drawdown chart I have not mentioned yet, but the drawdown here was basically around 42 percent for this whole system.
Basically. Right. So yeah, this was the backtest of my strategy. Now, there are a few things that you need to understand here before we go ahead, right? This is just one path of backtest, right?
This backtest was performed for a singular period that if we start on 1 January 2007 and 1 January 2007, we start and we end it on 31st March 2024. That was the only period this backtest goes to, right? We cannot really go back into past and, you know, put all our money on 1st January 2007 and exit on 31st March 2024. That's just not possible, right? So this backtest only gives us one pathway.
So we should not just trust one pathway of the backtest. We want to make sure that this will essentially perform nicely, even if we start at certain amount of time. Nobody puts 50 lakhs at one point of time in a system and then, you know.
runs it for 25 years or something like that not 25 years something like 8 15 18 years you probably put in more money over the time you do an sip into a system if you go in like you if you get a bonus from your job you put in more money if you get you sell something you put in more money you sometimes take out some money from the system because you know you have some needs out of it etc so you should never trust a back test uh on on you know just one uh on just one path that it has gone through a backtest needs to be taken needs to be looked at in a case of rolling return not just you know one pathway so what we'll do is we'll analyze the rolling returns of this system so what i will do is i will just zoom this a little bit so these are the rolling returns of my system uh three year five year and seven year rolling returns so this is what is very important for us so this chart explains how your returns would have been if you started at a certain point in time. So the first point data point here is sometime is January 2010. And the last data point is 31st March 2024. So why for 1st January 2010? It's for a three year return, right? So if you started your system on 1st January 2007, the first three year return or CAGR you will get was on 1st January 2010. That's why the data point here starts on 1st January 2010. So what is this graph?
Let me explain it quickly a little bit. So what this graph does is it takes all the data points in the systems. For example, if you started your system on 1st January 2007, how your three year rolling returns would have looked like. If you started your system on 2nd January 2007, how your returns would have looked like.
If you started your system on 3rd January 2007, how your system. returns would look like. So this rolling return charge, take this data point for all the dates that are available between 1st January 2007 to 1st January 2021, sorry, 31st March 2021 for the three-year rolling returns.
Then five-year rolling return, same way, the data point starts in 2012 because from 1st January 2007, the first five-year return will be available in 2012 and 2013. for a seven year rolling return. The first return will be available in 2014. Right. So these are the three charts that you see.
So as you see, if you started in 2007, after three year as well, your return will be would have been positive quite nicely. So this is all CAGR, not, you know, average or absolute return. This is CAGR chart basically.
So the three year CAGR, this is blue line represents the three year CAGR over different time periods, depending on when you would have started your system. So if you had started on the worst possible time, like the top of the 2008 bull market or the top of the bear market, then even after three years, your CAGR would have been slightly lesser than zero. So bear this in mind.
Luck also plays a lot of part in when you are starting your momentum system. If you started at the worst possible time, your three year CAGR would have been zero. The five year CAGR has always been positive.
There was not a single period. in five-year CAGR where it was negative and the orange or yellow line whatever you are seeing it is the seven-year rolling CAGR that has also been always been positive and almost always about 10% as well. So if you see one more observation, the three year rolling return line is very haphazard. It goes up, then it goes quite down and it again goes up, etc. Right.
Well, the red line is quite, quite flat. It is not like it does go up and go down as any system will do in return terms. But the variability of the red line is quite lesser than the blue line.
And the variability of orange line is much lesser than the red line as well. So what this means is. The more longer you stick to this system and this is this analysis is of my personal systems backtest. But this will be there for any momentum system.
Just take this chart as analogous to any momentum system. So the more you stick to a momentum system over long term, there is a very high probability that your returns are mostly going to be positive and in a similar range. So to keep out or, you know. take out the whole probability of losing money over a very long term it's necessary that you stick to the system over very long term and quickly seeing a couple of more things here this is something else so this has been the average three-year rolling CAGR median CAGR lowest highest so the lowest like if you started on the worst possible time the lowest three-year CAGR you would have gotten is minus 2.23 percent while if you had started at the best possible time the highest three-year CAGR you would have got got is 61 percent and similar this analysis is for you know uh lowest highest uh for five years seven year and 10 year rolling kager etc and this is like how many of the percentage of uh times you would have gotten at least five percent returns versus 10 percent returns versus 15 percent returns etc so over a 10 year rolling period all of the time you had gotten at least a 10 percent so if you stuck to momentum system for 10 years and seven years as well 100 of the times you had got at least a 10 percent cagger 93 of the times you had at least got uh you know 10 percent cagger over five year rolling over all the five year rolling periods as well so as as your time horizon increases uh the probability of your cagger being positive and above inflation also increases again one more thing that i want to point out this graph this uh the history of indian markets is very low us has history from 1920s etc so more than a hundred years of history so they can practice their system for 100 years through a variety and variety of economic cycles inflationary cycles recessionary cycles etc our history of stock markets is less than 15 18 18 15 18 years at the most right and i'm seeing good history like our stock markets were there from 1990s but there is no good data of stock available anywhere the stock data available proper stock data is available only from 2004 2005 right so the history for our stock market is very less around 15 to 18 years so it is very and most of this 18 15 18 period year has been a bull period majority of that period has been a bull period we did like most of the crashes have been you know flash crash like it goes down steeply and then it recovers fast like From 1994 to 2004, there was a very prolonged 10-year bull market in Nifty.
But we don't have stock price data to test how momentum system would have performed during those periods. So all the backtest that you see, take them with a grain of salt because our stock market history has been very minuscule. So I'm not sure how this will perform in prolonged inflationary or recessionary periods. So we have to take all of this with a grain of salt as well. As we become more mature.
hopefully over the course of 15 20 years we get we get a more robust history for our stock markets and we can do much better you know backtest as well yeah so going ahead we have seen the rolling returns as well and rolling returns is very essential to analyze in the backtest of a momentum system next we are almost coming towards the end so many a times i get question like diy versus mutual fund right so diy is do it yourself what it means is you know screening stocks by ourselves and then you know doing the whole transactions of buying and selling etc versus investing in a mutual fund NSE has recently launched a lot of momentum in my indices right so if I open this niftyindices.com website and I go to strategy indices there are a lot of momentum indices here as you can see so nifty multi-cap momentum nifty mid small cap momentum small cap momentum Then Nifty 200 momentum is yeah, Nifty 200 momentum, the new index Nifty 500 momentum 50. So a lot of momentum indexes has been launched by NSE and a lot of mutual funds are launching based on these passive indices, rules based indices as well. So does it make sense to do a DIY versus investing in a mutual fund? Right.
So this is a question that I get a lot and something that I want to answer. So there are two things here to see. First is plain calculation. And the next is how to look in terms of mutual funds versus DIY. So first, let's just take a look at this calculation.
Sorry. So this is a calculation that I quickly done. So let me explain what this calculation is.
So this calculation is on the NAV of Nifty 200 Momentum 30 Index. So there is this NSE Index, Momentum Index launched by NSE. The first of the Momentum Indexes launched by NSE.
It is on the 200 stock universe. So top Nifty 200 is the stock universe. And it takes the top 30 stocks as its top 30 stocks in the ranking. and worst rank held as 60 if i remember correctly so the nav uh taken for this calculation is for that nifty 200 momentum 30 index these are the returns that we see from 2005 to 2023 these are the annual returns of that and what i've done is i've calculated the mf nav so if you had put some money at the start of 2005 in mf uh and you know exited at the end of 2023 you The only tax that you would have to pay would be the LTCG tax, right? The new tax structure that launched in the recent budget.
So 12.5% of LTCG is what you would have had to pay on the overall gains that you have gotten after these many years. Then I considered a DIY system. And in a DIY system, what I've considered is I've considered the similar enemy.
Like suppose if I've gotten exactly the same returns, no difference, okay? exactly the same returns as i had gotten on the nifty 200 momentum 30 index the only thing that i did was i i did it through a diy where i bought the stocks manually in a brokerage account i exited them depending on its worst rank held you know every year and then bought sorry every month and then sorry every six months and then bought them again etc so if i had done that what my nav would have been the reason to do this is This will give us the break even right between DIY and mutual fund. This is not to analyze whether a DIY system with the similar returns will beat MF.
Obviously, it won't because you are paying taxes every year, right? So let me first explain the taxes. If you invest in a mutual fund, you only pay a 12.5% LTCG tax at the end of 2023 when you redeem your whole amount.
In a DIY system, you pay STCG almost every year. on the profitable exits that you do. Okay. So this would have been the CAGR.
If I have gotten exactly the same returns on a do-it-yourself system, my CAGR would have been 17.17% post-tax after assuming 20% STCG on this momentum system. While if I had invested in mutual fund, post tax which is after LTCG my post tax CAGR would have been 19.34%. So the difference is of 2.17%. So this becomes our breakeven. So how do you decide whether you should go to DIY or whether you should go for a mutual fund route?
The answer is this breakeven. If you think your DIY system can you know give you an extra alpha of more than two and a half three percent over a long period it's okay to go through a diy system otherwise stick to mf that's pretty much the like this is a very simple answer if you are confused here like if you are confident through your back test or your gut feel or whatever your active experience has been if you're confident that your diy system can beat the momentum mutual fund by two and a half three percent in alpha kager over a long term after tax after post tax that is very important not just you know absolute returns but after paying the stcg if you your system can break even by two and a half three percent then it is fine to continue with your diy system otherwise continue with a mutual fund basically this is what my answer is but again we have to keep these caveats in mind where indian stock market history is very very short Most of these NSE indices are launched recently and on the backtest which have been done from 2005 or 2006, something like that. None of these backtests have been done on prolonged bear markets like the one we... us have seen between 1994 to 2003 2004 from 2000 to 2003 nse had very very low liquidity bear market the market was it was not a flash crash it was you know steadily going down like just imagine for three years market is slowly going down not going up it was not a flash crash like 2008 or 2020 and then a quick recovery it was very slowly going down and down and down for three years so imagine a market like that will your system Maybe your system will go through 40-50% drawdown and it will come back in the bull market later. But will you be able to stick through that 40-50% drawdown in your system or not?
Those are all the questions that you have to answer for yourself. Nobody is going to answer them for you. You have to answer them for yourself.
Can you stick to it basically? So these are all the questions along the alpha as well as whether you can stick with the churning, stomach churning drawdown, gut wrenching drawdown. Then it makes sense to go through a DIY. Otherwise, it doesn't.
Another thing that I wanted to say is don't try to go through 10 different momentum systems through small cases or, you know, subscribe to maybe one small case if you want. If you like small case way of investing, because you pay fees for every small case and that eats up into your return. If you try 10 different momentum systems, your rebalancing will be higher across 10 different systems.
Your churn will be higher and churn or the transaction cost. And when I say transaction cost. It's mostly the STT that you pay, the exchange transaction fees that you pay, the GST that you pay on all these fees when you churn your portfolio.
That is also something which eats up into your returns. So try to stick to a monthly rebalancing than a weekly rebalancing and try to optimize around this. Even a 1-2% like saving 1-2% CAGR in costs. over a long term like 15 20 years adds a lot and lot of uh you know overall value into our system like one two percent seems lower but not in absolute terms but one two percent cagger over 15 20 over 15 20 years makes a humongous difference in the uh in the you know end value of the portfolio basically so think about all of these things before you decide diy versus mf what rules to decide the churning monthly versus weekly rebalancing etc etc etc there are a lot of decisions to take care of about here and please think of all these things before you decide on a momentum system lastly i want to highlight two books here if you if you are very new to momentum system if you understand the basics of momentum system like buy high sell higher we should buy because it goes higher etc and you understand the basic of the rules i would say no need to read a book etc But if you are a very newbie and want to understand the basics, very basics of momentum system, these are two good books.
So Quantitative Momentum by Wes Gray and Stocks on the Move by Andreas Klinau. Both of them are really, really good books. You can check them out. Wes Gray actually runs a ETF, a momentum ETF in the US market. It is called as QMOM.
QMOM is the ETF that he runs. you can check out that ETF as well. It has not been performing that well after Feb 2021. But anyway, you can check it out.
Andreas Klinau doesn't run any ETF per se, but yeah, he has quite a bit of good insights in that book as well. Again, I would say if you have a basic understanding of momentum system and understand how to identify like basics of the rules, etc. I would say no need to read these books.
They don't really offer anything great in terms of that. if you have a basic understanding of momentum systems but if you are a total newbie and don't know almost anything or very little then i would say these books one of these books is a good or both of these books are good basically so yeah i mean this is pretty much it uh i hope i have been valuable in explaining uh about momentum strategy like what is momentum strategy how it works how to build a basic momentum strategy how to perform backtest what are the characteristics to look at and how do you know so switch between like how to choose between a DIY versus a mutual fund etc. So I hope it has been valuable and if there are any questions I would obviously be open to taking it. Prince over to you.
Thanks Viraj really insightful and surely a great in the momentum part a lot of takeaways for our audience. So quick questions if there are any from our audience. five ten minutes we can see for that one two questions already in place uh surah is asking you bought the initial portfolio with equal weightages now when you go for rebalances weightages of all stocks would have changed so how do you manage the weightage of exits and new at entrance and secondly she's asking again you try to keep all stocks at same weightage but when then the cost of rebalancing won't be too high yeah so i don't uh equal weight stock after i have bought it so for example let me get to that example i invest i have 30 lakhs i invest in suppose top 30 stocks right example i'm taking this as an example one lakh in every stock on first of august 2024 obviously on 31st august 2024 uh the weights of the stock would have changed depending on any some of them might have got gone up some of them might have gone down etc right so what i do is i do not change the weight of the stocks what i do is basically if a stock has gone up in weight it's fine if a stock has gone down in weight it's fine as well what i do is There are two approaches to rebalance here.
One is if you are not putting any extra money in the system, then what you can do is whatever money you get from exiting the stocks which have gone beyond your worst rank held. So suppose you are selling five stocks which have gone your worst rank held and you might only get four and a half lakhs. You had invested five lakhs on first August, but you only get four and a half lakhs because you're mostly going to be exiting stocks which have gone down, right?
So you just divide that four and a half lakhs into... new stocks that are entering and equally divide that four and a half half lakhs equally into these new stocks that's pretty much it nothing else so this is one way to approach this is what i generally explain everyone to do it no need to add extra money etc if you have if you have already committed some amount other thing is if you are sipping into this momentum system add this sip money into this new stock so four and a half lakhs plus whatever sip money you're putting and whatever this suppose you're doing a 50 000 or 1 lakh sip four and a half lakhs plus plus one lakh as an sip five and a half lakhs a piece divided equally into the new five entrants and buy them basically that's pretty much it so don't try to re-equal like bring every stocks to equal weight in every rebalance it is not possible for us it requires a lot of money and goes and brings in a lot of transaction it's not worth it it doesn't really you know improve the performance of the system in any way so it's okay to not bring everything back to equal weight on every rebalance let your winners run that's totally fine uh yeah uh prince any other questions yeah one more question is from yes she's asking how did you come the rebalance dates and number of stocks why monthly by 10 or 20 stocks based on tech testing Yes. So basically what I've seen is if your universe is 500 stocks or more, typically less than 25 stocks, if there are less than 25 stocks, the drawdown increases quite a bit.
The returns are a little bit higher, but the drawdown increases drastically. So what I've seen around 25 stocks or more, the drawdown starts reducing by quite a bit while returns also reduce, but they don't reduce a lot. So this is how I have come to the number of stocks around backtesting. Like for our universe of stocks, which is Nifty 500 or more, 25 to 30 stocks is minimum. I personally have decided 50 stocks for my own momentum system because I'm very worried about drawdown.
I know that my backtest shows 40% drawdown, but in reality, I can get a 50% drawdown and it's gut-wrenching. So I don't want to go through a very huge drawdown. I'm ready to let go of some part of the returns.
for a lower draw the drawdown reduced from say 50 to 53 percent to 40 percent if i do like say from 30 to 50 stocks while the returns reduce from say 27 percent to 25 percent so i'm okay to let go of two percent of kager for a reduction in 10 percent of drone again this is a personal opinion this is something that you will decide for yourself because you might not have been fully allocated to momentum my whole equity allocation is allocated to momentum i don't do any other equity investing my whole equity allocation is uh allocated to momentum only that's why for me drawdown is an important aspect it might be different for you and for you maybe return is you know uh better for you and monthly weekly again sorry just one part of that question monthly weekly rebalancing against monthly has lesser churn weekly as i higher churn weekly definitely reduces the drawdown a little bit but the higher churn is definitely not something that i want to do so this is what i finalized by default i will be on a monthly rebalancing schedule But in very high volatile periods like say COVID or 2008 crash or something like that, I will switch to weekly rebalancing. But all other times, I will stick to monthly rebalancing. So two more quick questions. Punitri is asking, does your strategy beat Nifty 500 momentum 50 index post tax?
So I haven't checked it. Nifty 500 momentum was launched very recently. I haven't checked it.
Also, this index, I just wanted to quickly say something. This index is Nifty 500 momentum 50. It also invests in small and mid caps. It is a backtested index.
It's very difficult. I'm not sure how it will perform in future. I'm a little bit worried about this index.
I'm not worried about the Nifty 200 Momentum 30 index because it only invests in highly liquid stocks. But this index I'm a little worried about because it also invests in small caps, which can have very low liquidity. And if the EM of this index goes like, you know, about 10, 15, 20,000 crores, I just don't know how it will perform, whether it can enter and exit properly or not.
So I'm a little bit worried about. only back-tested returns of this index i would wait to see how it performs for at least 10 years for multiple cycles uh but yeah i am i have a plan to you know compare my returns with the returns of that index i haven't checked it out yet to be honest all right so last question is from hss he's asking okay uh if we exit a stock day after two years and from one like investing as equal weighted portfolio now it is 1.5 lakh you Do we invest whole 1.5 lakh into the new entry or bring it back to 1 lakh or what to do with incremental 0.5 lakh? So, OK, so let me just quickly read it.
Yeah, ideally, I would basically. So I would typically what I would say is. So if 1 lakh was invested, say in a 30 stock portfolio, if 1 lakh was invested in a single stock and after two years it has become 1.5 lakh, it's fine to invest that in the new entrant. I don't see anything else.
But if you don't want to do that and want to bring only invest the original investment amount, you can invest 1 lakh into the new entrant and divide the 50,000 that is pending equally into the rest of the stocks as much as you can. That's pretty much it. But I would personally, if in a 30 stock portfolio. If I had invested 1 lakh in a single stock, so 30 lakhs in overall portfolio, I would typically exit and enter again with the whole amount that I got after exiting.
So Ragini has another question. So we can take these two questions quickly. So all the index on your website under screens, example, under sharp based momentum are survivorship biased and adjusted.
So I don't know what this means, but basically I take the index. from NSE website and I have them adjusted until like like the historical data you can only see from 1st April 2024 you cannot say historical ranks before 1st April 2024 so I update index indices every once every month so that's that's pretty much it right so Aman last question for the day so hi I want to know if my investing universe all stops return goes negative then what we have to do and the thing i mean if you have stick like if you have finalized with the system and if the return goes below zero it's what you have to stick with like like there is a very high chance that it might go to zero in a year or two like over a three year three or a five year period you can have like depending on when you start there can be periods where your CAGR might be zero percent or pretty much negative than zero percent or maybe you're asking if one of the stocks returns yeah basically my so there are two ways if your system CAGR goes below zero percent you have to stick with it there is nothing really you can do that is a part and parcel of the market and another aspect is if any of the stock in a filter goes below zero percent so basically in my filters i have a filter that minimum return of one year should be equal to six and a half percent which is basically our repo rate india government's repo rate so i would say uh if a stock returns goes below six and a half percent i will basically exit it i will not keep in my system right so questions are keep on coming but last question we can take still have two more minutes so how can we follow you or your portfolio would you be giving handholding or guidance in beginning for at least six months that is one and secondly how do you maintain conviction during the drawdowns yeah so you can follow me on twitter at the right viraj khatavkar same as my name v-i-r-a-j-k-h-a-t-a-v-k-a-r is my Twitter. If you subscribe to this Momentum website, the premium plan, it costs 399 per year.
You get access to the screener, obviously, but you also get access to a Slack group, a Slack group, which is only accessible to the premium members of this website. So I'm pretty much active there. You can ask me questions there, etc. So you can either follow me on Twitter or on the Slack group. Plus on my website, there is a tab, my performance, where I update the performance of my portfolio so you can keep a tab on that for how my portfolio is performing i'm not a registered investment advisor so i don't give any advice per se on which stocks to buy which stocks to sell or etc so there's that but yeah you can follow me here uh and what was the next question or was that it Hey Prince, you're there?
Okay, it seems Prince has disconnected or maybe gone. I will just take one more question that I can see in the group chat. How do you maintain conviction during drawdowns? To be honest, I haven't got through a very huge drawdown as you can see.
I started venturing into momentum around 2021. So as you can see, I'm I experimented with a little bit of money. I seriously committed to momentum only in 2023. Like I put all my equity allocation to momentum strategy only at the start of 2023. So basically, I haven't gone through a huge drawdown. So I really don't have an answer to your question.
Like, how do I maintain conviction? One way that I optimized myself is that overall, my equity allocation is only 50%. Okay. So my allocation is like this 50% to equity, 25% to gold and 25% as cash.
So all this 50% of my network, 50% is allocated to momentum and whole of this 50% is in equity. So my equity is equal to momentum. So that's how I am optimizing for my behavior, like 50% allocation to equity, which is wholly invested in momentum system.
That's pretty much it. So this way I can, you know, even if. even if I go through a 50% drawdown in the momentum system, I'm only on a 25% drawdown on an overall net worth level. So I'm going to be fine, more or less.
So that's how I'm trying to manage it, basically. I would say never invest more than 50-60% of your, you know, investment in the momentum system because it does go through huge drawdowns. So yeah, I mean, I don't see any more questions in the group chat.
I would say thank you for joining the session, asking the questions. I hope it has been informative for all of you. And obviously, do follow me on Twitter if you want to follow my updates or join this website.
Or you can also email me on viraj.momain-cleaner.in for any questions. I'm not very responsive on the email. I might respond to you after a couple of days.
But you'll receive a response for sure. It just might be a little bit delayed because I also have a day job, as you know. So, yeah.
So, but yeah, it was really wonderful talking to you and presenting to you all. I hope you all have a great weekend. And thanks again for joining this session.