The paradox of momentum stock picking is that it performs when it doesn't matter i.e when the rest of the market is already rallying.
Backtesting shows that any momentum strategy will have given 50% in the past 6 months, when the Index itself gave 82% from 7500 to near 13700.
Backtesting shows that any momentum strategy will have given 50% in the past 6 months, when the Index itself gave 82% from 7500 to near 13700.
Although 50% seems a lot in absolute terms, but in relative terms, it has still underperformed the Index in the same time frame.. THE INDEX; Not even comparing it with exceptional cases like Bajaj Finance.
This happens because the BUY signal will be generated on moving-averages crossover only after the initial 20% rally is missed, and the SELL signal will be generated at a trailing stoploss that is hit 20% below peak, so 40% of the rally is lost by design.
While you were busy catching the rally in high beta stocks, the quality stocks will've permanently appreciated. Once the rally ends, momentum strategy will no longer work until the next rally 5Y later & now you can neither afford quality stocks nor remain in the high beta ones.
This is the corollary to "losing little money in every stock in every sector". Here we are "gaining little money in every stock in every sector" but losing double the amount of money in opportunity costs from not owning the actual multibaggers over 10Y.
cc @KumarBhatia1806
cc @KumarBhatia1806
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