The WHAT, WHY and HOW of Building a Momentum Portfolio
What is Momentum Investing?
Momentum investing is a strategy where you buy stocks which are growing. The fundamental idea is that stocks which have recently increased in value will likely keep rising, while those that have been decreasing will likely continue to fall. This strategy exploits the concept of “inertia” in the financial markets, implying that price trends can sustain over time due to influences like investor behavior, market psychology, and capital movements.
Let us see this with an example:
Below are charts of Bajaj Auto showing its movement in the last 6 months. Assuming the current day is 1st April 2024, figure 1 indicates a 15% up move in the last 1 month, in figure 2 the up move is 21 % in last 2 months, figure 3 shows an up move of 37% in the last 3 months days and figure 4 indicates an 82% up move in the last 180 days or 6 months.
This constant upmove in a stock is what momentum looks like.
Now that we have established what momentum investing is, we’ll dive into why momentum investing is our chosen strategy of investing.
Why momentum?
For us they are three key reasons to answer this question
1. Proven outperformance
Figure 5 shows a performance comparison of NIFTY 200 stocks and top 30 high momentum stocks of NIFTY 200 (rebalanced every six months) for 15 years, starting from the year 2005 to 2020.
The chart clearly indicates that the NIFTY 200 momentum 30 Index has outperformed the universe NIFTY 200 for 15 years. Infact the momentum index earned double the returns in comparison to NIFTY 200*.
*Note: This outperformance of momentum has been proved not just in India but across several countries through many research papers.
2. Simple to create
Another important reason is that a momentum portfolio is very simple to create and follow, as it doesn’t include complex calculations, formulas, jargons etc. and can be built by anyone.
3. Unbiased
All of momentum investing is rule based making it unbiased and leaves no room for emotions unlike in other strategies. Simply put if a stock is moving up we buy it, and if it is not performing we exit.
If it’s that simple, then how to build a momentum portfolio?
How to build your own momentum Portfolio?
Before we jump into building a momentum portfolio, there are three fundamental ideas one has to believe in (in fact these three ideas pretty much apply to most investing strategies).
1. Strong faith in the country’s growth story: That the country and the sector we are investing in will continue to grow. In our case, since we are investing in Indian markets, we should have faith in the Indian growth story, that markets will continue to grow and bounce back despite any crashes experienced.
2. Stocks moving up will continue to move up: a stock which is going up will continue to go up even further. Though it sounds counterintuitive, stocks which are growing have a scope and higher probability to go up further.
3. Cut losses fast: It be better to cut our losses sooner rather than keep running the losing stock(s). Why is that? Because it takes greater gains for a losing stock to recover (See figure-6 below; Read the complete article here: knowing when to exit).
In the next blog we will be covering four important steps in building a momentum portfolio:
Step-1: What to buy?
Step-2: How much to buy?
Step-3: When to enter?
Step-4: When to exit?
View this video in English
https://youtu.be/dtOBCxT7nt4
View this video in Telugu:
https://www.youtube.com/watch?v=T6UeflCViVQ&t=310s
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QuantX-Builder for Mastering Momentum Investing. 4 week comprehensive learning programme.
bit.ly/QuantX-MomentumLAB
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Important Links
Youtube: https://www.youtube.com/@MomentumLab_IN
Twitter: https://x.com/MomentumLab_IN
**Disclaimer:** We are not SEBI registered advisors. Any content shared on or through our digital media channels is for information and education purposes only and should not be treated as investment or trading advice. Please do your own analysis or take independent professional financial advice before making any investments based on your own personal circumstances. Investment in securities is subject to market risks; please carry out your due diligence before investing. And last but not least, past performance is not indicative of future returns.
