Common Sense, Sweet Investing v2.0
Welcome to the second part of the series. I believe in making everyone aware of Investing. To make it interesting, I keep on trying new things and I have landed up here with one more part of Common Sense Sweet Investing Series. It is a sort of swing investing/trading that is derived from Momentum.
Since childhood, we are taught to buy things at a cheap price and sell at higher prices by our parents. This is different as we will be buying expensive things and selling them at higher prices. Don’t get scared of buying high, diamonds are expensive :P. Yes, we will be using, Momentum, that p=mv guy which we used to learn in high schools. Let’s understand what is momentum first.
MOMENTUM
Momentum is a physics term; it refers to the quantity of motion that an object has. We will be using this simple definition to create a strategy to generate good returns. Our simple strategy is also backed by Newton’s First Law which states that a body will remain stationary or move at a constant velocity unless acted upon by a resultant force.
An example of taking advantage of momentum is like boarding a train which has just started moving instead of a train with a red signal one as you never know when it will turn green.(Warning: Don’t do it in real life. It is derived from my train journey experiences.)
MOMENTUM IN REAL LIFE VS MOMENTUM OF STOCKS
Momentum in Real Life =Mass * Velocity
Momentum in Stocks = Equal Weigthage *Past 12 months returns.
UNDERSTANDING STRATEGY
Most people get scared when their stocks fall and their portfolio gets a dent due to poor exit plan/allocation. In this strategy, we need to check our portfolio only once in 3 months. I will be applying this to the top 50 stocks of Indian Index NIFTY-50. I have picked the top 50 companies as our galaxy to pick stars as the risk of the heavy price drop in 3 months will be low in comparison to small/mid caps when we will be just busy with our day to day life##.
Step 1: Check past 12-months returns of 50 stocks. (Check Momentum)
Step 2: Sort them and pick the top 10 with higher returns. (High Momentum picks)
Step 3: Allocate 10% of capital to these winners and wait for 3 months. (As per Newton’s First Law, let these bodies move.)
Step 4: Enjoy life and keep doing the day to day activity/ work.
Step 5: Repeat Step 1 to Step 4 until you want to invest.
##: Please look at the portfolio if someday Nuclear War or Aliens landing takes place on earth :P
MOMENTUM IMPLEMENTATION
So, I had the data from 31st March’09 to 15th August’ 20. We will be implementing this from 31st March 2010 as we need 12 months' data to check momentum of our stocks. On 31st March 2010, I found these 10 stocks as our champion for next quarter,i.e, 1st April 2010 to 30th June 2010, on the basis of momentum.
Now suppose, you have 100 INR , just deploy 10 INR to each and wait for the next 3 months. The values which are visible in row are actually Momentum Indices.
MOMENTUM INDEX CALCULATION
Momentum Index = (Current Price - Price 1 year ago)/Price 1 year ago
Now, we did the same thing on 30th June 2010 and found new 10 stocks. We need to rebalance the portfolio as per the 10% rule again.
Clearly, 6 stocks are new in this list and 4 are the same. Now, we need to rebalance the momentum portfolio and deploy 10% capital to each again. This process should go on and on till we want to invest.
INSIGHTS
In the Indian stock market, mutual fund returns are generally compared to the broad market indices such as Sensex and Nifty. We will be comparing our Momentum Play with Nifty-50 as those fund managers do.
Let’s have a look at returns from 1st Quarter (April-June’10) to ongoing 43rd quarter (July-till data) of simulation.
QUARTERLY STATISTICS:
Maximum Drawdown** in Nifty-50: -29.34%
Maximum Drawdown** in Momentum Portfolio: -27.8%
Maximum Gains in Nifty-50: 19.8%
Maximum Gains in Momentum Portfolio: 24.23%
- ** A maximum drawdown (MDD) is the maximum observed loss from a peak to a trough of a portfolio.
- All these values are calculated at the end of the Quarters. Figures may vary if we stick to numbers on a daily basis.
What would have happened to our 100INR now, if invested from 31st March 2010 in both instruments?
BACKGROUND STORY
NUMBER OF TRADES: In roughly 10 years 5 months, we took 187 trades which is averaged at 4.49 trades every 3 months/quarter.
NUMBER OF STOCKS: We played with 60 stocks in the whole period of simulation/backtesting without even looking at anything about the company. Sounds amazing, isn’t it?
STOCKS WITH LONGEST HOLDING PERIOD IN MOMENTUM PORTFOLIO
WINNERS AND LOSERS
Funny Fact: Hindalco has gained just 10% in the past 10 years but due to momentum, we managed to buy and sell it at the right time.
Stocks like Maruti, Reliance, TCS, etc have been multi-baggers in past 10 years and we managed to ride some part of it.
Our goal was to beat Nifty-50 returns with some decent margin with a minimum of efforts/time. This seems a decent method as far as the past 10 years data says.
It hardly takes 15–20 minutes to pick 10 momentum stocks out of 50. So, roughly it took just over an hour in a year to beat Nifty-50 returns and the majority of Mutual Funds returns. That’s the beauty of System Based Investing.
No Emotions, nothing!
Common Sense Sweet Investing v1.0 is available here.
INSPIRATION:
The inspiration behind conducting this analysis is Gary Antonacci (Author of Dual Momentum Investing) and Alok Jain(Systematic Momentum Approach).
RECOMMENDATIONS :
One can try 6-month momentum instead of 12-month momentum to see if it beats these returns by some more margins.
For those who stay updated about markets, they can develop a parameter on when to sit on cash. The parameter can be like Nifty-50 trading below some DMAs.(Taken from Alok Jain’s theory )
One can apply this strategy on a monthly basis too but I did on a quarterly basis to reduce the number of trades and involvement in the market.
One can try this strategy on top 200, 500 stocks to filter the top counters. The allocation per stock should be very less as small/mid caps stocks are very volatile or one can pick 20–25 winners and allocate equal capital.
DISCLAIMER:
Don’t do it if you invest with emotions. It is a system-based approach.
Don’t invest specifically on the basis of this strategy, it has been working well for the last 10 years and one can’t assure the same future returns. I have used Yahoo Finance for stock prices. I’m hoping it doesn’t have any changes in comparison to NSE Data as YahooFinance has been a trusted API.
Nifty-50 stocks keep on changing on a semi-annual basis. I have used the annual change to pick momentum bets.
Brokerage Charges/STT /other charges have not been including while calculating returns.
NOTES:
I have used Python, Jupyter Notebook, YahooFinance, NSE annual Rebalancing report to perform this. Thanks to Vipin Joshi for helping in fixing storage/gathering data in the desired format.
Jupyter Notebook is available here.
I’m passionate about Investing and Trading. I love to play with data and build some simulation to beat benchmarks. Hit me up on my social handles for chats on these topics or for some doubts regarding this article.
Thanks a lot if you have come till here while reading this article. Feedbacks/Recommendations are welcome.
Source of Image: Google Images
