Smallcap momentum portfolio

Hi @visuarchie - would it be possible to provide us with the drawdown percentage during the march 14-25th down weeks?

@vamsi00797 For the week from 11th to 15th March, index was down by 5.95% and pf down by 8.95%.

As I did not do any rebalance the following weekend, for 18th to 28th March, index was up by 2.93%, the pf was up by 5.28%.

Typically, I do not share these numbers because for the same pf, people may have different returns due to longevity of the stocks in the pf and weightage.

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@ChaitanyaC @visuarchie

I am relatively new to equities and am certainly a follower (of VP forum only) obviously no expert at investing…so probably i may be far from knowing many things.

but

Vishwanath…i am trying to raise a doubt in order to strengthen the idea …Pls consider my comments in that sense…yes ?

As i’ve always been saying…the real test of momentum method is bear market or when the market is in sideways…why i am saying ?..

Since you’ve already answered it. let me ask follow up question…how this method can be improved/tweaked for bear market/sideway market.

I think many of us on here would agree, if i say “lots of newcomers i know have had more than 100% return in last ~2 yrs…they dont follow any valuation method/momentum method” …they followed good names/PSU/renwable/Defence…etc…so i tend to presume that the returns have been very good for most of the people only because small caps have been on a High and even exhibited animal spirit at a time (Nove-23 - Feb-24 ) ! :crazy_face:

I agree with you 100% here and we might be able to protect gains from being washed away completely…if we can identify the bear early on and if we dont rebalanc. ( just a layman’s idea )

If the market is getting weaker and we rebalance on weekly, Will we be taking hit every week ?..because my understanding is that we always be able to find relative strength of the names at any given time…pls correct me here if i am wrong.

@LarryWink

“let me ask follow up question…how this method can be improved/tweaked for bear market/sideway market.”

Momentum, by definition is following the trend, in this case, the automated approach helps in identifying the best among the lot.

In bear markets, when you get to the irrational extreme, it will be prudent to book out of momentum and chase good stocks whose valuations must have corrected.

Remember, there is a very thin line between momentum and trading. Momentum is a systematic trading whose gains can be fed into core portfolios when the valuations are reasonable.

Long answer short, donot try to perfect this method for bear markets, instead work to build on good watchlists which can give you a wide range of shopping options during bear phases

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@LarryWink I will answer as best as I can.

Many followers of Momentum investing go with either cash or gold during deep drawdowns. I do not like to go to cash and hence, I had not proposed that.

Catching the bear market early - one of the early indicators is when you find the fast moving average goes below the slow moving average. Example: 200 DMA (daily moving average) is crossing the 50 DMA from bottom. Here, we can use the smallcap (or microcap) index for this measure. We re-enter when 50DMA crosses 200 DMA from bottom. This could mean long duration of not participating in the market.

Rebalance: There are only two choices in a bear market. Go to cash (/gold) or choose the strongest of the stocks in the index. If you are ready to encash, then the 1st option is absolutely fine.
If you want to remain in the market, then rebalance with the strongest stocks. You might lose money, but it will less than what it would be if had remained with weaker stocks.

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thanks - any reason why rebalancing was not done the following week? apologies if you have already mentioned it in any of your previous notes - otherwise would be interesting to understand

@LarryWink

Momentum or I guess relative momentum here is to participate in stocks that are relatively strong compared to others, irrespective of the market. Yes, if the market is going down, there will be fewer and fewer such stocks, and yes, even these can fall.

On an opposite note, despite a bull market, some stocks which have shown relative strength may fall after we purchase, the initial buyers who are responsible for the momentum, which we have captured may have changed their view, and exit, so we too will have to do the same, if we follow a stop loss at individual level. Here, the draw down will not be more, as a strict SL exists.

If no such individual SL mechanism exists, and SL is applied at PF level, then there could be a big draw down, but this is part of the sysytem design, just like there is upper limit to profit booking, there is no manual intervention with losses too, exit entire PF at 30% loss, current loss is 29%, do nothing.

Many ways to handle SLs, each perhaps with varying pros and cons.

Valuation has no place here, the stock selection here is based on momentum, like a screener, we are just chasing the price, no concern about value, and this is not investing either.

So unlike sector/trend following concentrated PFs which have given stellar returns, like you have mentioned, this momentum strategy continues in thick and thin, so XIRR/CAGR is perhaps a better calculation. There is no lookout for the next hot sector/stock, this is a basket approach.

As far as taking hit every week, I can say that, it is hard to predict what can happen next week, every time. If there are many results in the search, it essentially means that market is good, if the next week results exceeds the previous week’s results, then the market is very good, so on and so forth. One strategy that is mentioned is to allocate more when market is strong, and relatively less when market is week.

A momentum strategy may look simple, but I think there will be a few things that need to be tuned, in order to do it for extended periods, not to mention this is a work in progress.

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@vamsi00797 It was a short week of just 3 trading days; therefore, decide to skip any changes. And the index was also going to be rejigged end of March.

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Update for entry on 8th April 2024

Based on ranking:

  1. JAIBALAJI
  2. SIGNATURE
  3. ANANDRATHI
  4. SCHNEIDER
  5. INOXWIND
  6. MEDANTA
  7. MRPL
  8. EIHOTEL
  9. HUDCO
  10. ACE
  11. SOBHA
  12. COCHINSHIP
  13. TATAINVEST
  14. NBCC
  15. HBLPOWER
  16. SWANENERGY
  17. MOTILALOFS
  18. POWERINDIA
  19. HINDCOPPER
  20. BSOFT

Based on A → Z for easy tracking:

  • ACE
  • ANANDRATHI
  • BSOFT
  • COCHINSHIP
  • EIHOTEL
  • HBLPOWER
  • HINDCOPPER*
  • HUDCO
  • INOXWIND
  • JAIBALAJI
  • MEDANTA
  • MOTILALOFS
  • MRPL
  • NBCC
  • POWERINDIA*
  • SCHNEIDER
  • SIGNATURE
  • SOBHA
  • SWANENERGY
  • TATAINVEST

Exit:
CHALET and INTELLECT exit.

Entry:
HINDCOPPER and POWERINDIA enter.

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Hi, According to a paper by Victoria Dobrynskaya, momentum strategies can crash 1–3 months after a local stock market plunge. Momentum strategies involve buying past winners and shorting past losers. To reduce the risk of solely relying on momentum, you can opt for a portfolio that takes into account various factors. Multi-factor portfolios choose stocks based on factors like momentum, low volatility, quality, value, and more. By not solely depending on momentum, these portfolios aim for consistent long-term gains.

Do you agree with this if yes, how you are inculcating this sir.

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I can share my view.

Momentum strategies not necessarily involve only buying past winners, stocks which have just started to rise also come on the radar, and sometimes these could be big winners, which don’t lose their upward journey for months.

Pure price based momentum has its advantages, both w.r.t to capital and time. And, this can be done in many ways. For people who rely on pure systems, a lot of time is saved. Systems give results, no discretion involved, buy, book profits or losses as per the system. One can add factors that you have mentioned, but this can change the outcome. Perhaps when more capital is deployed, one can look at these factors, so as to not face bigger draw downs, and if this becomes a core portion of one’s investments.

Just like traditional/standard investing which can be done in many ways, this can be done in many ways too, and as with such investing, this too has a lot to offer w.r.t learning, experience, mistakes and of course profits.

You seem to be interested, if so, read this thread, this will give you a very good understanding of many things that pertain to doing this kind of investing, and much more, if you have not read already.

Read this in particular, from the above thread.

Hello everyone , i am doing these momentum strategies for almost 3 years now , i wold like to share my experience

  • I run these strategies on cnx200 and smallcap 250 ,
    Pros
  • when market is in good swing , you make extremely good returns - ( this fy cnx200 returns are north of 80%)
  • There is not much to think and just follow a plain approach which does the job , already listed in the forum above
  • You automatically find the best sectors and ride the full trend without even looking at charts
  • position sizing and shifting from one stock to other is very easy as most of us are retailers here

Cons -

  • when the momentum ends we loose most of the gains - eg if we hold a stock at 5% initial then it can become 10 or 15 % of weight at some point of time … booking out the gains is very importat at that point as if this stock corrects it hits the portfolio the most
  • the bear and sideways markets , well i have spent a lot of time on this and my view is you should exit / partly exit in case of bear markets . Momentum portfolio will do extremely bad in these kind of markets , either take an technical exit or a exit based on market breadth or gold to equity ratio or find something which gives a exit signal
  • SIP vs lumpsum - i have had difficultly with when to add capital once a move starts and hence i advice people to go with lumpsum investment with these kind of portfolios , see if a stock moves 2x … why would i add to it ? , instead what i do is … i only add to the newcomers into the portfolio whenever i want to add capital . it helps with peace of mind
  • Tax - these are mostly short them investments and hence 15% tax rate we have to give every year despite reinvesting the profits . this makes a dent on overall returns compared to sip where only long term tax (10%) is taken

To conclude , momentum portfolios are good to support overall return of a portfolio only if you know when to exit . The last 10 years backtest has given me almost 4% additional cagr ( approx 19 to 20% ) compared to traditional investment like sip … also if you have exits the drawdown is pretty low compared to MFs .

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My learning (take home knowledge) from the discussion points
1.Momentum, means following the trend is not a trading so to say.
2.Momentum’s gain can be fed into core conviction names.(where we are confident on the growth for about an year or two or where we have a target)
3.Momentum, can not be perfected for sideway/bear market & it may do badly in sideway/bear market.

@visuarchie , Kudos to Vishwanath for his efforts and sharing updates, i am sure it has benefitted others as it did to me (i hold couple of names for ~2 years and this thread helps me identifying their momentum).

@Ninad_Divekar ,What i am keen to learn is exits;

I have never done right exits, most of time i feel the exits are either mistakes or too late. I feel exits can not be perfected but if there is a way and if it can be done in better way ?

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As a layman… how is it possible for person to make this type of portfolio who doesn’t know these types of calculation… ?

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Investing for long term and exiting them should not be compared to these kind of strategies. This is not long term, we don’t focus on any individual positions here, we don’t call them companies, we don’t mention the word business here. Here, the exit is based on a criteria, a rule.

An exit criteria that works here may or may not work with long term investing, one simple reason being valuation. What we think of valuation w.r.t investing could be perceived differently by other participants, looks overvalued to us, we exist, others think of it fair valuation, price may not fall, it can even go up, or time correction happens, price stays there, and the next leg our upward journey begins, and we may regret our selling decision, happens to the best too.

Here the selling does not make us regret, as there is a possibility of adding the next big one to the group always exists.

While there will be some overlapping of concepts and actionable ideas between long term and shorter term, there are some which are exclusive.

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@LarryWink It is evident that you are trying to marry momentum with fundamental investing. They don’t do together.

I had huge problems with exits and that is one of the main reason, I chose to go with Momentum investing. This runs purely on the basis of system; no emotions attached. If the system asks you to drop a scrip, you drop it because a stronger one takes its place.

If you are still looking for exit signals, you can look at 21 period EMA where as long as the price is above the EMA line, you are ok. Another signal could be PSAR.

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@Jitesh31 I have said it previously in this thread or the microcap momentum pf thread. Please look at message number 200. You could simply start with price change. Rank stocks on the basis of price change over a 1 year or 6 months. That’s it. You can start like this.

@Ninad_Divekar You said that you are doing momentum strategy on smallcap 250.

Is your list significantly different to mine?
Do you also do your rebalance on weekly basis?

Don’t you think that it would be risky at this level as you don’t get into cash if it underperform index returns?

Not sure I understand the question fully. Can you please re-phrase?