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How to beat the market with Momentum Investing
Posted: Aug 5, 2021 08:40
Photo by Harshil Gudka on Unsplash

Momentum investing is a system of buying stocks or other securities that have had high returns over the past three to twelve months, and selling those that have had poor returns over the same period. (Wikipedia)

Scholarly studies - some going back to the 19th century - have shown that momentum investing has outperformed the market indices comfortably. One of the best known studies was conducted by Narasimhan Jegadeesh and Sheridan Titman in 1993:
The Journal of Finance, Vol. 48, No. 1. (Mar., 1993), pp. 65-91 : Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency - Narasimhan Jegadeesh; Sheridan Titman

There is a study on its effectiveness in Indian markets as well, as from SSRN:
Social Science Research Network : Implementing a Systematic Long-only Momentum Strategy: Evidence From India

There are several theories about why it works, of which the tendency for investors to be attracted to fast rising stocks is certainly a factor. At the same time, it is difficult for funds to build momentum portfolios as their participation would drive the prices up even faster, increasing the risk of their topping out immediately. Momentum ETFs do exist - for instance Blackrock's iShares MSCI USA Momentum Factor Index ETF - but these are few and far between. They are not unknown in India either :
Mint : UTI Nifty200 Momentum 30 Index Fund launched. Key things to know

If you wish to try this strategy, you need to build a portfolio of at least 15 momentum stocks to reduce risk with diversification. The greatest risk a momentum portfolio faces is a sudden market sell-off, as stocks that have risen the most are often the ones that come down the hardest in a crash.

You should learn more about momentum investing before jumping into it. The following are a couple of book references.

While not calling it momentum investing, William J O'Neil's acclaimed best-seller How to Make Money in Stocks gives considerable weightage to Relative Price Strength Rating in his CANSLIM formula (the L stands for Leader or Laggard).

Note that O'Neill's Relative Strength is not related to the Technical Analysis RSI indicator. Nor does Momentum Investing have anything to do with the Momentum Indicator. Though it is based on price, Momentum Investing is not part of Technical Analysis.

You can find a brief review of the book on this page:
Investing and Trading books : How to Make Money in Stocks by William J O'Neil

Here's another good book which examines Momentum Investing more thoroughly:
Investing and Trading books : Dual Momentum Investing By Gary Antonacci

These books can be ordered directly from the links given above.

You can also learn and experiment with Momentum Investing in our course:
Online Course: Trading and Investing Strategies

The first few course batches have already done exercises in momentum investing, and as you can see below their results have comfortably outperformed the benchmark indices. You can join the course any time, and build and observe similar portfolios yourself.

You will also receive computational tools which you can continue to use for making momentum portfolios even after the course - at no additional cost.

Start Date Returns Sensex Nifty Nifty 500
Batch 1 - Portfolio 1 22 Jan 2021 +46.92% +10.12% +12.24% +17.59%
Batch 1 - Portfolio 2 26 Feb 2021 +43.65% +7.97% +9.28% +12.70%
Batch 2 - Portfolio 1 05 Apr 2021 +48.94% +9.49% +8.50% +11.70%
Batch 2 - Portfolio 2 12 May 2021 +17.03% +10.54% +9.76% +11.18%
Batch 3 - Portfolio 1 14 May 2021 +27.36% +10.45% +9.90% +11.76%
Batch 3 - Portfolio 2 11 Jun 2021 +16.61% +2.57% +2.10% +2.77%
Batch 4 - Portfolio 1 18 Jun 2021 +17.17% +2.27% +2.29% +3.71%

The returns have been computed by averaging the performances of some 100+ stocks from which participants built their portfolios, and are up to 3 August 2021. The returns vary by participant, but are similar to the ones shown above. The portfolios shown here have been left unchanged from the day they were constructed, while momentum investing does need a more active approach - where the worst performers are periodically replaced.

The latest portfolio mentioned shown was created in June, and so the table represents performances for 3-6 months from the start dates of the portfolios. The course now operates at the individual level - and not batches - so these tables will have to be redesigned to show later portfolios. We plan to do that fairly soon.

You can join the course whenever you wish, and begin learning immediately at your own pace. REGISTER NOW and master the market.

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