Momentum Portfolio Model 2 By Anand Patel

Anand Patel November 01, 2020

What is momentum?

An Explainer on Momentum here.

What is Model2?

It is our flagship model within the momentum-based long-term investment portfolio. It uses an algorithm that identifies stocks based on predefined rules.

Stock Universe

This model picks stocks out of the NSE 500.

How does this strategy work?

It is a 10 stock portfolio.

We use a rotational strategy to choose which stocks to pick. Our underlying strategy is momentum, which means that based on a momentum 'score' the algorithm decides the top 10 stocks in the portfolio.

Unique features of this investing style/Model are position sizing and risk management for your long-term success.

    Difference between Model 1 & Model 2

It identifies the long-term momentum in the stocks and holds it for a longer time compared to Model 1. Also, it gives stocks a higher room to move.

This means there is a lesser no of transactions in a year, 25-30 in Model 2 vs 60 in Model 1. 

It's performance and payoff ratio are also slightly different. Read below to see.

Position Sizing

In this model we are allocating equally among stocks means 10% for each stock. 

For example, let’s say you are investing 100,000 in this strategy then each stock has an allocation of 10,000.

Risk Management

·    There are two levels of protection in this strategy

1)  Trailing stop loss: - Here we are using a 20% trailing stop loss that means approx. loss from the losing bet is 10,000*20%=2000, which is 2,000/100,000=2% of the overall portfolio. That means if your consecutive 15 bets are going wrong then your portfolio is still only down by 30%.

2)  Market Trend filter: - We have implemented an overall market level trend filter. If the market is trending down then this strategy sells all the stocks and sits on cash, which earns interest on that amount. For example, when the market changes its direction then our portfolio might lose 15% while the market will be down by around 30-40% (Like 2008 or 2020).

Algorithm Performance: -

This strategy has a win rate of around 55%. That means out of 10 stocks that we pick, only 5 stocks make money and the other 5 lose money.

Then how do YOU earn money using this strategy?

Here comes the important part. The payoff ratio. 

The payoff ratio = average winning percentage of the winning stocks/ average losing percentage of the losing stocks.

This strategy has a payoff ratio of around 2.52. That means if we lose x amount on losing stock then we gain 2.5x amount on winning stocks on an average.

Transactions: -

This strategy has around 25-30 trades in a year that means 2-3 trades in a month. 

Does that mean I have to monitor my portfolio constantly?

No. In fact, we have created this portfolio just for people like you, who don't have time to do fundamental research or constantly watch the market. You only need to spend 5 minutes a week.

We trade from Monday to Monday. That means you will get to know on a Saturday/Sunday what you need to buy & you can purchase it on the following Monday morning any time between 9:00-10:00 am.

You also don't need to worry about adding more money every time you trade. The new position size will be adjusted in your google sheet according to cash in hand balance.

Keys to success in this strategy:

Discipline - Just follow the steps that the model tells you. Don’t override algorithm decisions even though you have a 'gut feeling' that a particular stock is going to lose.

Patience - Stay aligned with the algorithm during the period when you lose money (drawdown periods). No one knows when the market will start giving good returns, which will compensate for the drawdown. In the long run, everything will average out.  

Link to check the live performance: -

https://public.tableau.com/shared/STDB3M2JP?:toolbar=n&:display_count=n&:origin=viz_share_link

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