This chart is very interesting. it shows the risks of investing in small caps.
Out of 250 small caps in 2014, 3 became large, 43 became mid, and 93 fell to micro
It might be a worthwhile to test it out for 2018-2019 timeframe. Microcap universe corrected by as much as 45% and infact more than 50% if you include the Covid dip. Wouldnt have been easier to handle a DIY momentum portfolio.
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@sandeep17 ,
Rather this is a popular misconception. Rank based momentum portfolio protects you from such severe drawdown, as it gets you out much much earlier. Those who buy and hold, they are impacted more as they couldnot summon the courage to sell. When bear market happens, Quant based momentum strategy, lets you out of market in orderly fashion, provided you follow the rules and dont bring in human bias.
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@ChaitanyaC ,
The worry that I had about DIY momentum stratgey to generate sufficient alpha over Momentum Mutual funds, given the STCG tax scenario…I gave it a thought…And I feel we are ignoring the larger picture here.
In last 3-4 years, market has been in momentum and hence momentum mutual funds appear superior tax wise compared to DIY, but that is so because their 6 month re-balancing and DIY’s weekly rebalancing is currently in same direction. Once market starts going down, then the real value of weekly rebalancing and going into cash will be seen. That time momentum mutual funds who rebalance after 6 months and cannot go into cash will become inferior. That time has not come yet. Momentum mutual funds will appear helpless then, when all their momentum stocks are going down, and they are unable to do anything as rebalance day is 6 months far away or they have to stay invested. That will give edge to DIY momentum PFs.
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Well, I am quite aware of that - I have both backtested and am a practitioner of a momentum strategy myself ( only on Nifty 500 though). I am particularly referring to the microcap universe here where volatility was quite high in the 2018-2019 timeframe. While theory suggests the portfolio would have gone into cash, its not always that straight-forward. Not all stocks came down at the same time so one would have churned quite a lot before cash positions built up. Also, do keep in mind the pain of churning a large number of stocks at a loss - not easy.
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Quant Mutual Funds under-performing most other funds from last 6 months…Mostly due to cash holdings upto 10% and into such stocks like Reliance etc, mostly due to their safe calls…Most funds have given 20-25% returns in last 6 months, while quant funds have given 11% returns. Even it has underperformed Index funds like Nifty 50 as well as by large margin to Nifty Next 50…
Has time come to reduce the exposure in Quant funds? As it is its 1 year returns are also going to suffer due to this?
What are opinions of respected members???
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My opinion is that only Index can consistently outperform across market cycles.
Favorite one is Nifty Next 50 & Midcap
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After a long time, I will be updating the PF…My earlier ranking strategy, I have fine tuned with some other factors. Also sort of getting idea, what type of investor I am, so accordingly changing few things…
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No…Index cannot beat your direct portfolio.
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Waiting for your updated portfolio and strategy
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Combinations of strategies : -
- My stock universe predominantly remain from smallcap 250, Microcap 250 and some from Midcap 150.
- Momentum ranking stocks remain as selection criteria.
- But instead of selecting stocks based purely on momentum rankings, I am applying two-stage further screening criteria.
- First is that of Chart in stage 2 and also the linearity of chart. I dont want to enter into those stocks which are high in ranks but they are recent spurts and their previous chart has been all over the place. I want secular and linear chart like anantraj, PGEL etc.
- The second hygiene check that I do is…to check their fundamentals. I want increasing sales, Earnings, no/low debt, high promoter holdings and high ROE/ROCE etc.
- I am also trying to enter once the breakout comes on the chart…Some stocks I have entered quite late at extended price…I am trying to sharpen my entry…
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Thanks for sharing. 2Qs: How PEG ratio stands for each name? And, how do you handle sudden downturn in overall market, pulling all names down?
Actually this year I also wanted to increase my understanding on stage 2 and sectoral rotation
Thanks for sharing book
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My realisation about my Investing style :
I am not a trigger-happy trader, who would sell stocks for short gains but at the same time I am no longer a permanent owner type investor.
I would like to hold stocks till they are moving up ( I think , this is too obvious), in momentum, and if they start going down I will sell them, but not immediately…I would like to give them a small rope, before getting rid of them…
More of a positional trader/investor where I would like to hold my positions for more than a year or more than 18 months…and if they continue performing, I would like to hold them still longer. I cannot sell stocks weekly or monthly just because they have dropped in ranks or some short term criteria.
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@Surender , I am not giving too much attention to PE as well as PEG ratio. I do have a look at it once but it doesnt play much role in stock selection.
When overall market is down, those stocks which are in momentum but fundamentals are not backing them, they fall more. Thats the reason, I have applied additional Fundamental hygiene criteria too.
Earlier my exit criteria was :
- Going beyond Worst Rank Held(WRH)
- Going 20% below its ATH or 52 week High
- Going below 100 day EMA ( 20 Week EMA)
- Going into Stage 3 or Stage 4
but right now,
I am ignoring 1st criteria, keeping other 3 criteria intact…In last few days , I also studied Supertrend Indicator for exit and entry…but realised that Supertrend indicator is mostly lingering at 30 week EMA or 40 Week EMA and mostly around 20-25% below CMP…I am in two minds, whether I should allow the stock to go down 25% or no…
Meanwhile I read many books on the similar subjects…
Both Mark Minervini books advise early cutting of losses, but his strategy is more suitable for a short term trader, and for my nature I feel, allowing more leeway makes sense…
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For selection of stocks , I am also taking help of MarketsmithIndia. I have taken their subscription for next 2 years. I am observing their Blue Dot list, where stocks are recently breaking out. Fluidom , Shaily , and orchid pharma are the stocks from their blue dot list, which then i checked for other criteria of chart as well as fundamentals.
For rank momentum screener , I have already taken momoscreener subscription.
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@GRP,
For Stage analysis, you may need to read
- Stan Weinstein’s book
- Mark Minervini-Wizard book
- Mark minervini-Champion book.
The above book screenshot i shared is more useful for breakout strategies, but the author is more of a swing trader. I will not be adopting his style, as I dont want to go into swing or trading as such…I just wanted to study breakout strategies and how the chart forms during those stages. Just for that understanding…You may need to follow this J. Krishnamurty’s advice :
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Wow this is a completely different portfolio from earlier where i remember Polycab and KEI had 30% weightage. A lot of the names in your updated portfolio are 100 or 150 or even 200 PE and could easily correct 50-60% and still be expensive. Do you have any margin of safety built-in or do you plan to exit with strict SL?