Profit by investing in stocks that have hit their all time highs
We launched the All Star Portfolio last week along with our discussion on momentum strategies. It is a great way for investors new to momentum (or equity investing, in general) to follow along a systematic momentum portfolio. We like this particular strategy because:
Lower risk compared to other momentum strategies.
Go-to cash if there aren’t viable candidates.
A wide trailing stop-loss to exit outliers.
Works with top-300 stocks by market cap – doesn’t depend on small caps to drive performance.
Lower churn compared to other momentum strategies.
We start from 2010 and rebalance monthly. Observe the drawdowns and the relative out-performance of the All Star.
The reason for the lower drawdowns is the ability of the strategy to stay in cash when things are bad. While we can take up to 25 positions, the slots are not always filled. An equal weighted portfolio (4% per slot) with only 5 positions will have 80% in cash.
Moreover, the per-position max loss during the time frame has been less 10% in a given month.
By keeping a trailing stop-loss of 15%, we ensure that only the true outliers are caught by it and not the run-of-the-mill corrections that are bound to happen.