Momentum Investing Portfolio: Our Experiment with Anomaly


Last updated on November 27, 2023

As an investment philosophy, momentum investing has gained attention in the last couple of years as a result of momentum portfolio outperforming benchmarks. There are several ways to make money in stock markets and this is just one of them. However, not many are aware about the specifics of this investing style and may confuse it to intraday trading or positional trading.

Momentum Investing Experiment Momentum portfolio

Momentum investing is diametrically opposite of value investing which entails diving deep in the company financials and study industry structure to understand where value lies. Some value investors go down the rabbit hole and perform scuttlebutt in order to have a better sense of demand, pricing, discount policies and management integrity from value chain intermediaries and end customers. Momentum investing makes an about turn on these parameters and gets all the intelligence primarily from the price.

Essentially, the premise is that the price factors in all the information. Another characteristic of momentum investing is that stocks which are going up tend to go up as long as their momentum is intact. Similarly, the stocks which are going down will continue to go down.

Some would be quick to point out that momentum investing is nothing but trading in the guise of investing and that wouldn’t be an unfair comparison as the churn rate in a momentum investing portfolio would be quite high. However, this investing style differs from intraday trading as the positions are carried forward for days and in some cases months also. Similarly, there is no price target on the stocks, so momentum investors tend to ride the wave as long as the wave continues to go up.

Even though many investors may say they are unfamiliar with this style, the truth is that most investors have already witnessed this phenomenon in one way or the other. Take for example the case of an index like BSE Sensex or Nifty 50. Most benchmark indices (at least in India) have performed reasonably well over longer timeframes of 5 years or 10 years. This is simply because an index periodically balances its constituents and removes the stocks not performing up to the mark and replaces them with stocks outperforming others. The results are in front of everyone to see.

Since the results are very promising, we thought of giving it a try ourselves. We are going to start a momentum investing experiment, keeping the basics of this strategy really simple.

Read Also: Undervalued Auto Ancillary Stocks in India

Momentum Investing Principles

Getting to the specifics, we took a very simple approach in constructing this momentum portfolio and looked at the price performance in the last 365 days or 12 months. The only other considerations for us were market capitalization and average trading volumes. We limited our universe to companies with market capitalization of over INR1,000 crore. Similarly, we limited ourselves to scrips whose average weekly volume was greater than the average monthly volume.

The final consideration in momentum portfolio construction was to remove all the stocks with pe ratio of over 100. This was done to reduce volatility at the portfolio level. The number of stocks was kept at 25 which means that every stock weights for 4% in the portfolio. Following this entire exercise, we get the list of high momentum stocks.

High Momentum Stocks for July 2022

  1. Monte Carlo Fashions
  2. Fiem Industries
  3. Voltamp Transformers
  4. Apar Industries
  5. BLS International
  6. Sobha Ltd
  7. Easy Trip Planners
  8. Radico Khaitan
  9. Carborundum Universal
  10. Rajesh Exports
  11. SKF India
  12. Blue Dart Express
  13. Phoenix Mills
  14. Solar Industries
  15. Minda Industries
  16. Coromandel Inter
  17. Cummins India
  18. CG Power & Industrial
  19. Tube Investments
  20. Abbott India
  21. TVS Motor
  22. Macrotech Developers
  23. Varun Beverages
  24. M & M
  25. Maruti Suzuki

We will keep an eye on the performance of the momentum portfolio and plan to remove any stock which declines more than 20% by the end of the month. Since the weightage of every stock is only 4% in the portfolio, the impact of 20% decline in one or two stocks is not likely to be severe at the portfolio level. Watch this space for more details. Meanwhile, if you are interested in going the DIY way, Wesley Gray is an authoritative writer on the topic and has written several books which can be helpful.

Performance after week 1: up 5.3%

Performance after week 2: up 5.6%

Performance after week 3: up 10.9%

Performance after week 4: up 11.6%

This experiment is carried forward to August as well and here is the performance of August momentum picks.


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