Administration abstract:
“Navel gazing” alert: This put up doesn’t comprise any actionable funding concepts however somewhat explores how I can enrich my very own funding course of sooner or later by incoprorating some measures of Inventory worth and basic momentum.
Tour: My secret interest
First I’ve to confess that for just a few months now, I do have a secret interest: I’m watching regularly 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 identify 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 general efficiency of round 4000% which is admittedly 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 the moment in nice form, not those who’re out of practice”.
Not each commerce works, however those who work properly (like Rheinmetall) transfer the portfolio large time.
To offer Ritschy some credit score, though it sounds easy, it’s clearly not that straightforward to execute, however it clearly exhibits one factor: Momentum as an element works fairly properly, 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 technique, however I believe I’ve ignored inventory worth 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 truly invested towards (unfavourable) momentum. Prior to now, this has general labored fairly properly, however I believe I left quite a lot of return on the best way.
I had contemplated introducing momentum into my investing course of a number of instances. Right here as an illustration is a devoted put up 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 somewhat did the alternative, corresponding to documented on this put up from 2016:
So after pondering that I used to be all the time promoting too early, I bought the GTT place which grew to become a multi-bagger (~5x) and reinvested right into a inventory that turned out to be a worth lure.
Why didn’t I comply with up on it ? To be sincere, I have no idea for certain however the principle purpose is probably that I outperformed my benchmark anyway for an additional 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 current underperformance of my portfolio as I’ve ignored it possibly for too lengthy.
Weaknesses in my present course of:
Taking a look at my newer actions, I recognized the next points:
- danger of ending up in worth traps
- including largely to positions on the best way down
- not including to place that work properly
- promoting too early
- improper 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 may be quite a lot of proof that momentum is a powerful “issue” in explaining inventory returns and particularly “alpha”. i.e. constructive outperformance.
Here’s a abstract desk generated kind ChatGPT once I requested in regards to the 10 most essential research:
What measure precisely is often used as a proxy for momentum ?
The “Quant literature” often mentions 6 month or 12 month momentum, typically within the type of “6 month -1 momentum” or “12 month -1 momentum” which excludes the newest month, i.e. trying on the 6 or 12 Month efficiency 1 month in the past.
Why is that this ? Plainly the newest 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 ends in these research.
There was a current attention-grabbing put up on Klement on Investing that confirmed that utilizing each time durations, i.e. 6 & 12 months momentum appear to be even higher.
Relying on the research, constructive momentum is then confirmed if the 6M or 12M worth return is both constructive or constructive AND larger than the chance free charge of return. Most research than make investments into the very best decile momentum shares and quick the underside decile of the shares with the worst momentum.
Time horizons
Typical momentum methods require fairly frequent rebalancing so as to obtain their alpha, which is clearly not my purpose.
Beneath German Tax regulation, steadily realizing good points can also be not the very best technique to maximise after tax returns. This facet is commonly not lined in educational research.
To be sincere, even when a mechanical system would yield higher outcomes, I nonetheless take pleasure in being a inventory picker and I’m truly 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 features of inventory worth momentum.
Tips on how to embody inventory worth momentum into my funding course of going ahead
As talked about in my Q2 Efficiency evaluate, I need to embody inventory worth momentum on a extra systematic foundation into my funding course of.
My major instrument for it is a spreadsheet which round ~100 most attention-grabbing 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 components high quality and valuation can attain a most of 14 factors. Momentum will get accounted for within the following manner:
I outlined a momentum rating that will probably be added to or subtracted from the whole 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 major goal:
Assuming that every one different features 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 growing liquidity.
Elementary momentum
As well as, I additionally replicate the elemental 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 unfavourable values right here).
That is the way it seems to be in apply:
That is an abbreviated snapshot kind my sheet that exhibits how this works in ideas with simply my portfolio firms:
I don’t use this sheet to slavishly comply with the rating however somewhat as a place to begin for additional evaluation. As an illustration, some individuals requested me if I’d add to TFF. If I take a look at my mannequin, including to TFF is clearly not my high precedence. Fairly the alternative.
GESCO as an illustration doesn’t rating that properly for the time being, however I see some potential for future enchancment. However nonetheless, I sized the place small because the rating is just not that good.
However I additionally would nonetheless add (cautiously) to a unfavourable momentum inventory like Novo Nordisk if high quality and valuation appear to be engaging sufficient.
Am I 100% certain if it will enhance my (relative) outcomes ? I have no idea, however I do suppose 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 outcome:
The overlay technique that it instructed within the subsequent step nevertheless is simply too sophisticated for my easy inventory picker thoughts. However the criticism as such is clearly legitimate.
Due to this fact I requested it for an easier algorithm handle the problems which it offered:
To be sincere, 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 in regards to the dangers of including a momentum overlay to basic inventory selecting nevertheless, ChatGPT got here up with just a few factors which might be additionally price contemplating:
Remaining thought:
Whereas I don’t like to make use of LLM’s to create content material, I discover the dialog with these fashions typically useful if I ask them in regards to the reverse case or dangers. This actually enriches an article in my view.
To be continued…..