Have you ever wondered what the stock market’s sequential returns look like? To put it another way, if the stock market rose in the prior month, will it also rise this month? Or will it fail?
Similarly, if the market has declined during the past month, will the trend remain negative or will it reverse?
See, Alfred Cowles III and Herbert Jones conducted a thorough investigation to find out in 1933.
The ratio of sequences, or the number of times positive returns followed by other positive returns or negative returns followed by other negative returns, to reversals, or the number of times positive returns followed by other negative returns, and vice versa, was what they were interested in.
Cowles and Jones went above and above by analysing data spanning a significant 100 years. When the results were revealed, they in fact exceeded everyone’s expectations.
According to the data, there was a 63% likelihood that the market would go up the following month if it had gone up the previous month, or down the following month if it had gone down.
In other words, you would be better off buying after the market has increased the previous month and selling after it has decreased if you were hoping to profit from a stock price or market movement.
Betting on long-term trends rather than short-term reversals might have produced better outcomes.
A more thorough examination revealed that this was an important discovery, not just a chance occurrence. Sadly, not many fund managers and investors decided to take advantage of this discovery.
They were too preoccupied building portfolios using the contemporary portfolio theory and the efficient market hypothesis, or listening to Ben Graham’s value investing musings.
In fact, the rigorous research of Cowles and Jones did not receive a significant push until the early 1990s. But this time, there was no turning back.
A second pair of gentlemen, Jegadeesh and Titman, wrote their foundational paper on what would become known as momentum investing in 1993, which is when this technique started to see success.
This is an overview of their findings.
Over holding periods of three to twelve months, strategies that acquire companies with a strong performance history and sell equities with a poor performance history produce large positive returns.
A portfolio of companies made up of recent winners is a choice worth thinking about if you wish to outperform the market.
The momentum study by Jegadeesh and Titman opened the door for both research and investment based on this phenomena.
Soon, comprehensive publications that examined momentum across asset classes, regions, and time periods were published. The momentum effect was also seen in practically all of them.
Investing in previous winners pays dividends, and the inefficiency is significant enough to produce long-term returns that outperform the market.
You know, I’ve previously discussed the benefits of momentum investing in my earlier writings on the subject. I won’t say it again, for that reason. All I can say is that I’ve been studying momentum for a while and I’m impressed by both how easy it is to understand and how effective it is.
Do not misunderstand me; I am a devoted value investor who firmly adheres to the concepts of intrinsic value and margin of safety.
Yet, momentum investing has pleased me enough to admit that it should be your first choice if you want to devote a modest portion of your corpus—5–10%—to a speculative form of investing.
In fact, over the past few months, I’ve been back-testing a number different momentum strategies, and I think I’ve finally found one that does an excellent job of lowering risks without significantly reducing profits.
The strategy has produced returns of more than 8x between 2013 and 2021, or over an 8-year period, compared to the Sensex’s 3x and the BSE Small Cap index’s 4.5x gains.
Among the prominent winners are:
- Tata Elxsi: 357% growth in 15 months
- Increased 274% in 18 months for Navin Fluorine
- Increased 266% in 15 months for persistent systems
- Saregama Ltd.: 229% growth in 9 months
- Atul Auto: Up 216% in 21 months, among other things.
Once you make the decision to engage in momentum investing, the approach for finding these winners isn’t all that challenging.
All you have to do is look for companies that are showing significant momentum, check them for a few key fundamental indicators, and hold them till the momentum is still present.
I’m done now. Easy guidelines that release momentum’s strength and put you in a terrific position to outperform the market in returns.
All of these victors are now in fantastic health. What about the future, though? What momentum stocks ought to I buy to increase my chances of making multibaggers even if they don’t?
In this sense, I do have some positive news to give. I have discovered a collection of 20 equities that have been able to pass both my fundamental and momentum standards.
If you haven’t already, you can start your momentum adventure with any one of these 20 stocks.
So, while I am unable to disclose the names of these stocks because they are intended for a select group of individuals, I can certainly provide a brief description of them.
Defense and capital goods stocks make up the majority of my initial selection of 20 momentum stocks.
There are four stocks related to defence and five from the capital goods sector. If the plan is to invest 5% in each stock, these two sectors will make up about half of the corpus.
Please be aware that we are not using our own judgement in this situation. We are merely following Mr. Market, who appears to favour these two industries.
Along with stocks in capital goods and defence, there are also stocks in pharma, sugar, paper, and a few other industries.
Then there is a largecap, which has been one of the best performers lately and is predicted to keep going strong through 2023.
These are the first group of momentum stocks that have passed both our fundamental and momentum checks and have a decent probability of extending their impressive performance from the previous 12 months.
You must participate in this unique online event, which is completely free of charge, if you want to be a part of the select group of people to whom these momentum stocks will be revealed.
In any case, I’ll go into great depth on the momentum technique and how I’ll use it on the Indian stock markets.
And yes, I will also demonstrate how to take advantage of a unique offer to access my initial selection of the 20 most promising momentum stocks.
Disclaimer: This content is provided solely for informational reasons. It should not be seen as a stock recommendation because it is not one.