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.
Historical Performance
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.
This looks impressive. Some questions:
1. How do you account for the survivor ship bias of the top 300 companies?Have you back-tested the results with unlisted companies as well?
2. How do you decide when to move into cash? Do you use any index filter to move into cash?
3. What if one of the stocks in the portfolio doesn’t move by 1-2% in the 3 months? What time frame do use to evaluate such stocks in your portfolio?
Hi Abhishek,
1) we used the current NIFTY 500 constituents to backtest. But the portfolio looks only at the top 300. We haven’t accounted for survivorship bias.
2) if we can’t find stocks have hit their ATH, that slot is moved into cash. There is no other filter.
3) we don’t. we feel its best to leave them alone. not sure if the opportunity cost is high enough to give them boot, given how most times its tough to find 25 stocks to fill all slots.
Thanks Shyam. Appreciate the quick response. I am going to share this in my network
what is the bare minimum capital required to construct portfolio for this strategy.
The portfolio can have a maximum of 25 positions. ₹10,000 per position is a reasonable minimum. So, an equal weight portfolio minimum would be ₹2.5 lakhs.