Administration abstract:
“Navel gazing” alert: This submit doesn’t comprise any actionable funding concepts however slightly explores how I can enrich my very own funding course of sooner or later by incoprorating some measures of Inventory value and basic momentum.
Tour: My secret pastime
First I’ve to confess that for a number of months now, I do have a secret pastime: I’m watching frequently a Wikifolio (Wikifolio is a German/Austrian platform the place everybody can arrange a “fund” and different traders can take part) from an Austrian dealer with the title Richard “”Ritschy” Dobensberger.
Not solely has he managed to draw 160 mn EUR in investments into his portfolio however he has averaged 33% CAGR over the past 13 years, leading to an total efficiency of round 4000% which is basically actually outstanding and places him into the highest of any dealer I do know.
Ritschy’s technique is comparatively easy: He has a universe of some dozen well-known, comparatively risky/excessive beta shares and buys them once they appear go up. In the event that they proceed to go up, he retains them and even provides, in the event that they go down he sells them extraordinarily disciplined.
As soon as in a Podcast he mentioned one thing alongside the strains: “It’s like in soccer. A soccer coach selects the gamers which might be at present in nice form, not those who’re out of form”.
Not each commerce works, however people who work nicely (like Rheinmetall) transfer the portfolio huge time.
To provide Ritschy some credit score, though it sounds easy, it’s clearly not that straightforward to execute, nevertheless it clearly reveals one factor: Momentum as an element works fairly nicely, particularly since round Covid.
Don’t fear, I received’t flip right into a momentum investor anytime quickly as a result of I believe I don’t have the psychological set as much as run such a method, however I believe I’ve ignored inventory value momentum in my funding course of for too lengthy.
Ignoring momentum to date regardless of some noble intents
For the longest path of my profession I’ve both ignored momentum or really invested in opposition to (unfavorable) momentum. Prior to now, this has total labored fairly nicely, however I believe I left numerous return on the best way.
I had contemplated introducing momentum into my investing course of a number of instances. Right here for example is a devoted submit from 2012 (13 years in the past !!!).
This was my abstract again then:
That was a good perception, however sadly I by no means adopted up. I slightly did the alternative, comparable to documented on this submit from 2016:
So after pondering that I used to be all the time promoting too early, I offered the GTT place which grew to become a multi-bagger (~5x) and reinvested right into a inventory that turned out to be a worth entice.
Why didn’t I observe up on it ? To be trustworthy, I have no idea for positive however the principle motive is almost definitely that I outperformed my benchmark anyway for one more 6 years till 2019. Why change a system that works ?
Nonetheless, together with 2025 YTD, I’ve now underperformed in 4 out of the final 7 years.
The present market appears to be extraordinarily momentum pushed, which clearly is one issue of the latest underperformance of my portfolio as I’ve ignored it possibly for too lengthy.
Weaknesses in my present course of:
my newer actions, I recognized the next points:
- danger of ending up in worth traps
- including principally to positions on the best way down
- not including to place that work nicely
- promoting too early
- incorrect prioritization of watchlist by solely specializing in “cheapness based mostly on historic numbers)
- lacking out on a diversification angle
.
What does academia / statistics say
There’s numerous proof that momentum is a powerful “issue” in explaining inventory returns and particularly “alpha”. i.e. optimistic outperformance.
Here’s a abstract desk generated type ChatGPT after I requested concerning the 10 most necessary research:
What measure precisely is normally used as a proxy for momentum ?
The “Quant literature” normally mentions 6 month or 12 month momentum, usually within the type of “6 month -1 momentum” or “12 month -1 momentum” which excludes the latest month, i.e. wanting on the 6 or 12 Month efficiency 1 month in the past.
Why is that this ? It appears that evidently the latest month is statistically “noise” and even negatively correlated with subsequent inventory returns. So ignoring the returns of the final month in figuring out momentum appears to enhance leads to these research.
There was a latest fascinating submit on Klement on Investing that confirmed that utilizing each time intervals, i.e. 6 & 12 months momentum appear to be even higher.
Relying on the examine, optimistic momentum is then confirmed if the 6M or 12M value return is both optimistic or optimistic AND larger than the danger free price of return. Most research than make investments into the most effective decile momentum shares and brief the underside decile of the shares with the worst momentum.
Time horizons
Typical momentum methods require fairly frequent rebalancing in an effort to obtain their alpha, which is clearly not my purpose.
Below German Tax legislation, often realizing beneficial properties can also be not the most effective technique to maximise after tax returns. This facet is usually not lined in educational research.
To be trustworthy, even when a mechanical system would yield higher outcomes, I nonetheless get pleasure from being a inventory picker and I’m really ready to sacrifice some efficiency for the enjoyment of analyzing single firms.
However I believe I can enhance my course of by together with some elements of inventory value momentum.
The right way to embody inventory value momentum into my funding course of going ahead
As talked about in my Q2 Efficiency evaluation, I need to embody inventory value momentum on a extra systematic foundation into my funding course of.
My fundamental software for it is a spreadsheet which round ~100 most fascinating shares (together with all my portfolio holdings) that I’ll examine to one another based mostly on high quality (measured by some standards), valuation (i.e. low cost to my “honest worth) and momentum.
The elements high quality and valuation can attain a most of 14 factors. Momentum will get accounted for within the following approach:
I outlined a momentum rating that might be added to or subtracted from the full rating.. The Momentum Rating can go from -2 to +2 in increments of 1.
As a primary step, I’ll assign a rating of +1 if the 6-1 month efficiency is >5%, -1 if efficiency is <-5%, else 0
In a second step, I’ll add +1 if the 12-1 month efficiency is >5%, -1 if <5%, else zero.
So relying on momentum, a inventory can get a max of +2 added or max -2 deducted. This rating is clearly not based mostly on rigorous again testing, it’s extra a type of “intestine feeling” and it serves one fundamental function:
Assuming that each one different elements are equal (High quality, valuation) I’ll prioritize increased momentum shares to decrease momentum shares. This is applicable to each, shares I need to analyze extra deeply and shares I need to add to or that I need to promote for rising liquidity.
Basic momentum
As well as, I additionally replicate the basic momentum in my qualitative rating. I’ll give some extent if the final observable EPS quantity went up, zero factors in any other case (no unfavorable values right here).
That is the way it seems in follow:
That is an abbreviated snapshot type my sheet that reveals how this works in ideas with simply my portfolio firms:
I don’t use this sheet to slavishly observe the rating however slightly as a place to begin for additional evaluation. As an example, some individuals requested me if I might add to TFF. If I have a look at my mannequin, including to TFF is clearly not my prime precedence. Slightly the alternative.
GESCO for example doesn’t rating that nicely for the time being, however I see some potential for future enchancment. However nonetheless, I sized the place small because the rating isn’t that good.
However I additionally would nonetheless add (cautiously) to a unfavorable momentum inventory like Novo Nordisk if high quality and valuation appear to be engaging sufficient.
Am I 100% positive if this can enhance my (relative) outcomes ? I have no idea, however I do assume that including this extra perspective might assist me within the mid- to long run.
What ChatGPT thinks of my method
I uploaded this doc to ChatGPT (5) and requested it what it thinks about my method. That is the consequence:
The overlay technique that it advised within the subsequent step nevertheless is simply too difficult for my easy inventory picker thoughts. However the criticism as such is clearly legitimate.
Due to this fact I requested it for a less complicated algorithm handle the problems which it supplied:
To be trustworthy, I discovered these guidelines fairly useful and can attempt to implement them going ahead in addition to it mirrors my very own pondering fairly properly.
When requested concerning the dangers of including a momentum overlay to basic inventory selecting nevertheless, ChatGPT got here up with a number of factors which might be additionally price contemplating:
Last thought:
Whereas I don’t like to make use of LLM’s to create content material, I discover the dialog with these fashions usually useful if I ask them concerning the reverse case or dangers. This actually enriches an article for my part.
To be continued…..
