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Momentum Investing!! is that an Oxymoron.

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Momentum Investing!! is that an Oxymoron.

  1. 1. Name: Manish Dhawan. Website: www.mysticwealth.in Model Portfolios MWM (momentum) MWV (Value, SS) Options
  2. 2. Momentum Investing. OXYMORON #trueStory.
  3. 3. Benjamin Graham, along with David Dodd, attempted a precise definition of investing and speculation in their seminal work Security Analysis (1934). “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.” BUT Y should I take his word for it?? #neverask a barber. #statinmanufacturer #commitment
  4. 4. That is All academic Mumbo Jumbo if you ask me. How many of you would continue to be VALUE INVESTORS, if it doesn’t make any money in any market. #Theory is as good as its practical applicability.
  5. 5. The bottom line is that we are ALL here to make money
  6. 6. And therefore the ONLY thing that matters is EDGE. As a Market participant……
  7. 7. Eugene Fama, Father of Efficient Market hypothesis he calls momentum the “biggest embarrassment to the theory” out there. #Noble Prize, #lifetime spent on a cause.
  8. 8. When stated in terms of lifetime dollar wealth creation, the entire net gain in the U.S. stock market since 1926 is attributable to the best-performing four percent of listed stocks, as the other ninety six percent collectively matched one-month Treasury bills. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447 FAT TAILS Something that has gone up 3x in an year is more likely to go up 10x rather than one stuck in range. #mostimportantslide. #winnertakesall, #anchorbias.
  9. 9. What about P/E ratios
  10. 10. For years, analysts have used P/E ratios as their basic measurement tool in deciding whether a stock is undervalued (has a low P/E) and should be bought, or is overvalued (has a high P/E) and should be sold. But our ongoing analysis of the most successful stocks from 1880 to the present shows that, contrary to most investors’ beliefs, P/E ratios were not a relevant factor in price movement and have very little to do with whether a stock should be bought or sold. Much more crucial, we found, was the percentage increase in earnings per share. William J. O'Neil. How to Make Money in Stocks (Kindle Locations 964-968). McGraw- Hill. Kindle Edition. Modelling of alpha (value/growth)
  11. 11. These findings strongly suggest that if you weren’t willing to buy growth stocks at 25 to 50 times earnings, or even much more, you automatically eliminated most of the best investments available! You missed Microsoft, Cisco Systems, Home Depot, America Online, and many, many others during their periods of greatest market performance. William J. O'Neil. How to Make Money in Stocks (Kindle Locations 976-978). McGraw- Hill. Kindle Edition. Indian story is not far from this fact either, growth is the way to alpha is a known fact
  12. 12. Primary consideration should be given to whether the rate of change in earnings is substantially increasing or decreasing. William J. O'Neil. How to Make Money in Stocks (Kindle Location 970). McGraw-Hill. Kindle Edition.
  13. 13. Xerox, which introduced the first dry copier in 1959, sold for 100 times earnings in 1960—before it advanced 3,300% in price (from a split-adjusted $5 to $170). Syntex,the first company to submit a patent for a birth control pill, sold for 45 times earnings in July 1963—before it advanced 400%. Genentech,a pioneer in the use of genetic information to develop new wonder drugs and the first biotech company to go public, was initially priced at 200 times earnings in November 1985. In five months, the new stock bolted 300%. America Online, whose software gave millions access to the revolutionary new world of the Internet, sold for over 100 times earnings in November 1994 before climbing 14,900% to its peak in December 1999.
  14. 14. Google’sP/E was in the 50s and 60s from $115 a share in September 2004 until it hit $475 a share in early January 2006. William J. O'Neil. How to Make Money in Stocks (Kindle Locations 1025-1031). McGraw- Hill. Kindle Edition.
  15. 15. Concentrate on stocks with proven records of significant earnings growth in each of the last three years plus strong recent quarterly improvements. Don’t accept anything less. William J. O'Neil. How to Make Money in Stocks (Kindle Locations 1040-1041). McGraw- Hill. Kindle Edition.
  16. 16. EDGE. What is it, and how do you define it. Win % * average win - Loss% * average loss. #road matters, not the speed.
  17. 17. #urge 2 be right. #upbringing defect
  18. 18. Baggage charges on Stock market flight are very steep. Travel Lite, Leave preconceived notions at home. Swami Manish
  19. 19. (43.70 * 9000) - (56.30 * 4000) Data from April 1, 2017 to 23 November 2017. RETURN: 31.50%
  20. 20. So Lets get down to business, shall we. Momentum can be broadly divided into 02 parts. Applied to Index. Rotation based on Relative strength. Gary Antonacci. Individual stock portfolio with Predefined exits/entry. #Read his book, #listen to our podcast
  21. 21. DUAL MOMENTUM Step 1. Check the preceding 12 month ROC of all your selected indices. Gary chose US equities ETF, Bonds and Emerging market ETF Step 2. Check if the preceding 12 month return of the top performer beats your Benchmark, lets say 8%. Step 3. If answer is YES to both above conditions, park your funds in that index else Move to cash. Step 4. REPEAT EVERY MONTH on a fixed date.
  22. 22. I applied this to the Indian context by selecting NiftyBees, goldbees and N100. Year 2005-2016. BUY AND HOLD RETURN Your 01 lakh would have become 3.63 lakhs giving you a return of 12.65% CAGR. to achieve this respectable CAGR, you had to go through a ditch of 59.67%
  23. 23. Dual momentum results A respectable return of 18.03% CAGR with a maximum drawdown of 29.92% during the same time period of 2005-2016.
  24. 24. While we improved the Buy and hold baloney by a considerable Margin, its still not good enou Remember, Return is NEVER calculated standalone, It is always RISK Adjusted. CAR/MAxdd >= 1 #Somuch for Mutual Fund Sahi hai.
  25. 25. I received the feedback that nobody in India invests in Indices and so I ran this System on DSP BLACK ROCK MICROCAP FUND. The 10 year period ended with funds current NAV of 61.003 which is a CAGR return of 19.29%
  26. 26. To achieve this respectable figure, our buy and hold client had to go through a Peak (16.5) to trough (4.90) journey of around 70% in the sub- prime lending crises of 2008.
  27. 27. I applied a simple rule of absolute momentum as a benchmark to say, We only buy DSP blackrock microcap fund if its last quarter return was more than our benchmark of 8% P.A. RESULT: a stellar CAGR of 30.5% with a drawdown of 25% Difference of 19% and 30% tantamount to a fortune.
  28. 28. Individual stock portfolio. Select your Universe. Decide your entry criteria Decide your exit criteria Position size Back-test. Paper trade. Execution automation. Develop the discipline to follow it blindfolded Walkforward Montecarlo Maxdd/CAR ROC/52whigh Fundamentals Trailing stop support ROC fall from grace Excel/amibroker, multi charts, R Python. Symphony etc.
  29. 29. Stress Test Delete the top performers. Increase the brokerage, transaction cost and slippage. Change in sample and out of sample ranges Change the Optimised parameters Change the entry exit decision dates
  30. 30. Return: 41% CAGR. Max DD: 31%
  31. 31. Books/blogs to read. How to go about it. http://www.followingthetrend.com/ http://www.aqr.com http://www.cxoadvisory.com/ Contact: http://www.mysticwealth.in/ info@mysticwealth.in